The salad days of the smartphone era are over, now stakeholders are fighting over pieces of red meat.
Apple is suing Qualcomm for $1 billion in damages from unfair patent practices. The suit filed January 20 in the U.S. District Court for the Southern District of California was widely reported by Reuters and other sources.
In a press statement quoted in a Forbes article, Apple said, “after years of disagreement over what constitutes a fair and reasonable royalty we have no choice left but to turn to the courts.”
Companies hate to go to court. It’s expensive and business details they would prefer to remain confidential get revealed to the public. But as growth slows, the pressure for profits rises so it was perhaps just a matter of time before royalties became a battleground.
Apple claims Qualcomm’s rates were exorbitant. “Despite being just one of over a dozen companies who contributed to basic cellular standards, Qualcomm insists on charging Apple at least five times more in payments than all the other cellular patent licensors we have agreements with combined,” it said in the statement Forbes quoted.
It claims Qualcomm withheld “nearly $1B in payments from Apple as retaliation for responding truthfully to law enforcement agencies investigating them.”
The Reuters story refers to those “payments” as “rebates,” a word that echoes money Microsoft allegedly paid to OEMs in the heyday of the PC. Those payments were said to be considerations for marketing programs promoting its Windows operating system.
The Qualcomm “retaliation” Apple alleges presumably points to the recent decision by the Korea Fair Trade Commission (KFTC) to fine Qualcomm 1.03 trillion won (nearly US$1 billion), after a two-year investigation.
"If that were not enough, Qualcomm then attempted to extort Apple into changing its responses and providing false information to the KFTC in exchange for Qualcomm's release of those payments to Apple," the Reuters story says, quoting Apple’s lawsuit.
Forbes added that the lawsuit Apple says “even upgrading something like the iPhone's memory -- from 128GB to 256GB -- would result in Qualcomm collecting a larger royalty.”
The Apple suit is the latest of several to land on Qualcomm’s doorstep.
Earlier this week, the U.S. Federal Trade Commission filed a complaint against Qualcomm, seeking a court order against what it alleges are unfair licensing practices for its cellular baseband patents. The complaint alleges among other things the company “precluded Apple from sourcing baseband processors from Qualcomm’s competitors from 2011 to 2016.”
The FTC’s action came less than a month after the KFTC fined Qualcomm, charging unfair patent licensing practices. The KTFC and FTC levied similar charges of failing to license standards-essential patents to competitors and forcing customers to agree to unfair terms.
In February 2015, Qualcomm paid $975 million as part of a settlement over patent disputes in China. The deal also cut royalty rates Qualcomm was charging in China. Regulators in other jurisdictions, including Taiwan, are also investigating Qualcomm, a Reuters report said.
Qualcomm has vigorously defended its positions in each of these cases. In its most recent response it said, “Apple has been actively encouraging regulatory attacks on Qualcomm's business in various jurisdictions around the world, as reflected in the recent KFTC decision and FTC complaint, by misrepresenting facts and withholding information.”
The court processes will take years and may never reach final conclusions about who was right or wrong. One thing clear to me is the industry no longer has the stomach for big royalty payments.
Gartner projects smartphones will grow 4.8% this year, their slimmest expansion to date. Most of the growth is in price sensitive mid- and low-end models, it said. An IHS forecast says local OEMs are on a tear in China, one of the world’s largest and fastest growing markets, where Apple’s market share was projected to decline about 5% in 2016 (see chart below).
Market watcher IHS forecasted Apple's share of the China smartphone market fell 5% in 2016. (Image: IHS)
I’m not faulting Apple or trying to litigate the case in the press. I expect even as these cases play out much of what really happened will remain secret. A review of the FTC’s complaint shows several redacted passages.
My point is that in good times Apple would not have brought this suit. But these are not good times, they are the start of very tough times that call for tough decisions.
The smartphone has become one of the single largest drivers of the semiconductor industry. But its days in that role are numbered.
Gartner’s forecasts the smartphones’ share of the semiconductor pie will peak this year at 25.4% and their overall amount of chip revenue will max out at $97.7 billion in 2018. This is a warning sign the party is nearly over for everyone in the supply chain invested in the mobile market.
The smartphone is a wonder, and it has given birth to a wealth of technologies that are among other things paving a road to the Internet of Things. Apple, Qualcomm and the other companies who helped create this segment deserve their due—and they have gotten much of it from a frothy market in the past few years.
Now they are fighting over the last few luscious scraps. It’s a fascinating and somewhat ugly battle.
— Rick Merritt, Silicon Valley Bureau Chief, EE Times