Apple capitulates to end war with Qualcomm

Qualcomm and Apple agreed to settle all the ongoing litigations with the iPhone maker paying the chipset maker an undisclosed amount and signing a six-year licensing agreement.

On Monday, Qualcomm and Apple went to court over the allegation that Qualcomm has been abusing its monopoly position to over-charge for its chips. The stakes could have run up to tens of billions of dollars, with the OEMs Foxconn and Pegatron already demanding compensation of $9 billion dating back to 2013. The case at the Southern District Court of California in San Diego was meant to last for five weeks.

On Tuesday, the two companies released a brief statement to announce a settlement. “Qualcomm and Apple today announced an agreement to dismiss all litigation between the two companies worldwide. The settlement includes a payment from Apple to Qualcomm. The companies also have reached a six-year license agreement, effective as of April 1, 2019, including a two-year option to extend, and a multiyear chipset supply agreement.”

This is definitely good news for the two companies especially for Qualcomm, and good for the industry and consumers. Specifically, for Qualcomm it means its business model will remain intact and the company can put an end to a multi-year legal saga; for Apple, in addition to avoiding the punitive $31 billion penalty, this settlement will be able to quicken its steps to launch a 5G iPhone, making up the gap already expanding between itself and the leading pack.

A few hours later, Intel announced that it intends “to exit the 5G smartphone modem business and complete an assessment of the opportunities for 4G and 5G modems in PCs, internet of things devices and other data-centric devices. Intel will also continue to invest in its 5G network infrastructure business. The company will continue to meet current customer commitments for its existing 4G smartphone modem product line, but does not expect to launch 5G modem products in the smartphone space, including those originally planned for launches in 2020.”

It must have been a blow to Intel’s mobile ambition, especially after it announced only late last year that it would bring the launch of its first 5G modem forward by half a year to the second half of this year, an act to prove the doubters wrong. That originally planned 5G modem to be launched in 2020 referred to in the announcement, presumably a second generation, was supposed to power the first 5G iPhone, after Apple all but officially declared that it would enter into an exclusive relationship with Intel.

Putting the two things together it may be reasonable to infer that Apple agreed to settle after it had realised that it does not have other options than coming back to Qualcomm for the supply of 5G modems (assuming Intel had updated Apple about its imminent decision to withdraw from the market).

In addition to leaning in on Intel, Apple has also been reported to be strengthening its in-house modem development capability, ultimately aiming to rid itself of reliance on external suppliers. Based on the terse announcement released together with Qualcomm, it looks Apple does not believe the home-grown modems will be good enough to compete with Qualcomm in the next few years. Huawei is another supplier that has launched its own 5G modem, but it may be safe to estimate that the chance of Apple going for Huawei chips is slim.

In keeping with the normal practice of settlement cases like this, the companies did not disclose the amount Apple will pay. However, Qualcomm updated the SEC shortly after the settlement announcement was made, as the settlement would have material impact on the earnings. The company expected an EPS incremental of about $2 “as product shipments ramp” without giving a specific timespan. As a reference, in the quarter ending 30 December 2018, Qualcomm delivered an EPS of $0.87 on the back of a total revenue of $4.8 billion. Therefore, assuming Qualcomm’s operational efficiency remains largely constant, the payment Apple will make could run into the $10 billion range.

Payment aside, there must be some soul-searching going on inside Apple, including by Tim Cook, the CEO, who came from a supply chain management background: how could Apple have let itself be cornered so badly in the first place? It’s hard to view this as anything other than complete humiliation for Apple, especially when you consider how aggressively it pursued this case.

On top of the millions it will have paid to lawyers Apple’s negotiating position in arriving at this settlement, considering what was widely assumed about its 5G modem situation, must have been very weak. So it’s quite possible Apple has ended up paying considerably more for Qualcomm’s chips than it would have if it had never initiated this war. Having said that, Apple’s share price seems completely unaffected by the news, probably indicating offsetting relief that it’s back in the 5G game. Qualcomm’s share’s however, surged 23% on the news.

Intellectual property and 5G: 2019’s culture clash

Telecoms.com periodically invites third parties to share their views on the industry’s most pressing issues. In this piece Pio Suh, Managing Director of IPCom, looks at intellectual property law in the context of the 5G era.

2018’s Unwired Planet v Huawei Court of Appeal judgment in the UK highlighted the complexity of patent licensing, and demonstrated the need for flexibility, transparency and a level playing field when it comes to negotiating intellectual property (IP) licenses in the telecoms and technology sectors.

It signified what we’ve predicted – and hoped for – for some time: a turning of the tables, and a re-balancing of the power traditionally held by some multinational corporations. Rather than the complexity, cost and time of Unwired Planet having to negotiate multiple patent licenses for every patent bearing country, for example, the case confirmed that setting worldwide licence rates is FRAND (fair, reasonable and non-discriminatory). No matter their financial standing, power has also traditionally lain in the hands of the licensee. This party often has the upper hand in licensing negotiations, as they are able to either refuse to take a licence or stall the development of negotiations; known as ‘hold up’. Licensing IP in a FRAND manner, however, allows a licensor to confer the benefit of their technology on an implementer while being efficiently and fairly reward for their R&D efforts and IP.

This year, 5G mobile technology will be the catalyst for a range of innovations, which will have far reaching impacts across a broad range of sectors, including automotive, healthcare and manufacturing. Fair recognition of 5G R&D and innovation is going to be crucial in the success of the new mobile technology, and businesses will need to understand the complexities in IP licensing, to ensure their innovations are rewarded.

FRAND and the re-balance of power

It’s a given that negotiations and decisions regarding IP licensing should be dictated by FRAND terms. Relying upon appropriate comparable benchmarks will facilitate open, amicable negotiations; and, in many cases, it will encourage dialogue, offers and counter-offers, avoiding the need for litigation.

However, we may have been too optimistic, too soon. The ongoing battle between Apple and Qualcomm demonstrates how expensive, and convoluted IP licensing can be. The latest in the saga? Qualcomm has successfully sued Apple for infringement of patents. This has resulted in both China and Germany banning Apple from selling some models of the iPhone. However, the ban does not extend to resellers, meaning these models are still available, at least for the time being. The immediate impact on Apple will be negligible, both in terms of sales in these regions and public perception – if I can still buy an Apple handset, will go the thinking, then surely the brand can’t have done wrong?

We’ll be keeping a close eye on how this rather complex situation develops through 2019 – and we shouldn’t be the only ones. It’s no longer solely technology companies – such as Apple, Qualcomm and Huawei– which need to understand the lay of the IP licensing land. The gradual arrival of 5G has welcomed many new sectors into the communications and technology industry, all of which will need to get smart on IP.

5G and the new culture clash

While earlier communications standards focussed primarily on connecting mobile devices to the internet and to each other, 5G is about unlocking significant opportunities in vertical sectors. Automotive, healthcare, mining, agriculture, manufacturing – it’s these industries where the more compelling business cases lie, and which are driving the development of technologies.

This has been great for these sectors while business cases were purely hypothetical. However, 2019 will see innovations come to fruition, and with them the issues and complexity of how to license crucial components of connected products. Major car manufacturers will need to consider every chipset, function and feature of their connected car; researching, negotiating and obtaining necessary patent licenses.

We’ll therefore witness a major culture clash in 2019, in which vertical sectors hoping to capitalise on 5G and the IoT will suddenly have to become technical experts and, as a result, know their stuff about IP. Failure to successfully navigate the IP landscape and ‘dance the FRAND dance’ could stifle progress and result in litigation.

An education in IP

Many of the vertical sectors now entering the IoT field are behind some of the most innovative ideas which, when realised, could bring huge socio-economic benefits. Think of the rapidly-growing market for connected wearables in the healthcare industry, for instance, or the productivity and efficiency gains promised by connected fleets of vehicles.

Many parties in vertical sectors will be dealing with situations they’ve never experienced before and will require guidance, education, and a clear-cut route to licensing and lawfully using IP. In order to encourage innovation and allow for these ideas to come to be developed, it’s important that all stakeholders work together to decipher and determine new rules around IP licensing and management. This will involve education, new partnerships and the exchange of knowledge. FRAND must continue to underpin these, and help to create a just, amicable business environment for all, and a fertile ground for 5G.

 

Pio Suh IPComAn attorney and member of the German Bar since 2006, Pio has over a decade of legal experience specialising in intellectual property rights and communication technologies. He has worked in-house for a number of multinational Fortune 500 companies – including Qualcomm, Oracle and Philips – to implement patent enforcement strategies on a global scale. Since July 2018 he is assigned as the new Managing Director of IPCom.

Qualcomm’s business model hangs in the balance as FTC case concludes

The US Federal Trade Commission accused Qualcomm of abusing a monopoly two years ago. Now a judge is set to decide if it was right to do so.

The original accusations coincided almost exactly with the commencement of hostilities between Qualcomm and Apple, with the latter saying the former was getting away with overcharging for its mobile chips thanks to having a monopoly in that market. The FTC case pretty much echoed that claim, with accusations of FRAND patent abuse thrown in for good measure.

It apparently takes a couple of years for this sort of thing to play out and the respective parties delivered their closing arguments recently. The FTC doesn’t seem to have made a formal announcement on the matter but credit to Cnet which has actually done some old fashioned reporting and sent someone into the court room.

Here’s the Cnet report from 15 Jan, which covers the FTC side of the case. The core of it seems to be that forcing companies who want to buy its chips to also take out patent licenses is wrong. It also claims that this process prevents other chip makers coming into the market and thus harms competition. Unsurprisingly a couple of Apple execs turned up to support the FTC case.

Among the FTC’s closing arguments is the warning that, if Qualcomm isn’t stopped, it will abuse the 5G market as it has previous once. But Apple’s own shift from Qualcomm to Intel chips would appear to contradict that assumption, as does Huawei’s recent launch of a 5G modem. These are also unhelpful in its bid to claim Qualcomm has a monopoly.

“The FTC hasn’t come close to meeting its burden of proof in this case,” said Qualcomm General Counsel Don Rosenberg in a press announcement. “All real-world evidence presented at trial showed how Qualcomm’s years of R&D and innovation fostered competition, and growth for the entire mobile economy to the benefit of consumers around the world.

“Our licensing rates – which were set long before we had a chip business, and revalidated time and again – fairly and accurately reflect the value of our patent portfolio. Qualcomm’s technology has been the foundation of a thriving, competitive industry.”

Now Judge Lucy Koh, who’s a veteran of this sort of thing, needs to weigh up all the evidence and arguments, and make a call one way or the other. The stakes are pretty high for Qualcomm as a decision against it would effectively be a decision against a big part of its business model. Expect Qualcomm’s share price react strongly either way when the decision is announced, which Koh warned might take a while.