PARIS — Qualcomm Monday (Feb. 9) put an end to a nearly two-year patent fight in China by paying a $975 million fine to Beijing authorities.
China’s National Development and Reform Commission (NDRC) called the investigation “antitrust case.” But more accurately, it successfully haggled with Qualcomm to get the royalty rate cuts for Chinese handset vendors.
The financial community showed signs of relief after the settlement announcement, sending Qualcomm’s shares up 3 per cent in after-market trading.
Let’s do the math
Qualcomm's Chinese settlement calls for a 5% royalty rate on multimode 3G/4G devices (including multimode 3G/4G devices) and a 3.5% rate on other 4G hardware (including 3-mode LTD-TDD devices). The key change is that now rates will be derived from a royalty base of 65% of a device's net selling price, instead of an OEM’s full sales price. Qualcomm's royalty rates are typically based on 100 percent of the net selling price of a handset.
So, let’s do the math. The 5% royalty when multiplied by .65 equals an effective royalty rate of 3.25% for 3G. The 4G royalty is 3.5% of the net selling price of the device, which results in a net royalty rate of 2.275%.
Some analysts view the deal favorably as “an outcome that could have been worse.” After all, Qualcomm will be still receiving a 3.25% royalty rate on every 3G phone sold in China, and 2.275 percent for every 4G device.
However, Qualcomm’s existing customers outside China continue to pay a royalty fee based on 100 percent of the net selling price. What if Qualcomm’s non-Chinese customers starting asking for the same deal?
Qualcomm simply asserts that the resolution “requires no licensing changes outside China.”
Qualcomm’s assumption is that regulators in the US and the EU, where Qualcomm is under investigation for monopolistic practices, won’t interfere with pricing.
Maybe so, but it’s hard to imagine that Qualcomm’s customers outside China will quietly acquiesce to a double standard.
Curiously (or not so curiously), one company benefitting mightily from the Qualcomm-NDRC settlement is China’s largest foundry, Semiconductor Manufacturing International Corporation (SMIC) in Shanghai. As part of the settlement, Qualcomm has agreed to expand its partnership with SMIC. Qualcomm struck a deal with SMIC last summer covering the production of 28nm Snapdragon processors.
T.Y. Chiu, CEO at SMIC, in announcing Tuesday (Feb. 10) its fourth-quarter financial results, said, “We achieved our 11th consecutive profitable quarters, and this is the third consecutive year of positive earnings. And we are able to maintain a healthy utilization of 93%.”
During the earning’s call, Chiu also cited SMIC’s relationship with Qualcomm. He said, “We were happy to announce in December the successful fabrication of 28 nanometer for Qualcomm's Snapdragon 410 processor, which signifies the own time and the steady progress of our 28 nanometer product qualification. We continue to anticipate production to begin in Q2 this year, with revenue recognition in the second half.”
As a result of the Qualcomm-NDRC deal, Taiwan Semiconductor Manufacturing Co. (TSMC), up to now Qualcomm’s primary foundry, could lose some of its business – based on older processes – to SMIC.
— Junko Yoshida, Chief International Correspondent, EE Times