Published in Mobiles

Apple stops Qualcomm royalty payments

by on30 April 2017

Analysis: Qualcomm issues profit warnings

Apple has  decided to stop  royalty patent payments to Qualcomm claiming that it wants to wait until a court decides what is the right amount.

Qualcomm has warned its investors that its profits might be lower than expected since Apple has refused to pay a license for the millions of iPhones it sells. The big part of Qualcomm's profits lie in licensing business, and the company has so many patents that if you want to make a smartphone, you need to get a licensing pack from Qualcomm. Apple's belief that it should use Qualcomm' patents for free for happened a few weeks after Qualcomm filed a counter claim to Apple's suit

While some outfits don't like licensing business models, Qualcomm has tens of thousands of engineers and staff around the world who work hard to earn these patents. It costs you a lot of time and a pile of cash to file a single patent and there is a chance it will not get granted.

Accusing Qualcomm of being a bully in this case is like accusing Microsoft for dominating the market with Windows or Office or accusing Intel for starting its CPU story more than 40 years ago. It would be the same as going after Nvidia and ATI (now AMD) for making GPUs – it is just ridiculous.

Apple is not winning or losing, yet

Here at Fudzilla we had our mind blown by the conclusions of some of our colleagues. Without pointing any fingers, some came to the conclusion that because Apple decided not to pay anymore means that Jobs' Mob is certain that it will win. Well, it doesn’t.

Qualcomm executive vice president and general counsel Don Rosenberg said in a statement:  
 “Apple is improperly interfering with Qualcomm’s long-standing agreements with Qualcomm’s licensees. These license agreements remain valid and enforceable.”  

To simplify. It is not over until the fat lady sings, it will be a US judge who will make the decision. The final conclusion is not whether Apple should pay at all, it is all about how much.

This is starting to sound like the case of going to court with your landlord, while still living in the property and protesting that the rent is too high. The one major difference is that Apple doesn’t have an alternative, as Qualcomm has the patents everyone needs to build phones, so they are stuck with each other.

Apple strong-arms Qualcomm for a better deal

If anything, you can draw two conclusions from this aggressive action. The first is that Apple wants to twist Qualcomm's arm and get better second sourcing pricing on the modem side. This is a standard practice that anyone who was involved in any business in the world is called negotiation. In case you can't see how this process works, you should go back and watch the reality TV star Donald Trump on his Apprentice TV show. Of course, when negotiating you want to get the better end of the bargain. The President of the USA is good at business negotiation, at least on 'reality' TV.

Apple profits and innovation on a decline

The second piece of the puzzle is that Apple is having a hard time to get people excited about its products lately. The  iPhone 7 was not a great product and the iWatch was only marginally successful. 

In late 2016, Apple reportedly captured 91 percent of all global smartphone profits worldwide.

It is hard to get any higher than that and in corporate America, that is a big problem. Apple is facing a decline in iPad sales. Apple sold 13.081 million iPads in Q1 2017, down 19 percent compared to Q1 2016. This generated revenue of $5.533bn, down 22 percent on last year.

In Q1 2017 Apple sold 5.374 million Macs in Q1 2017 (up 1 percent on Q1 2016) and this made $7.244 billion, up seven percent on last year.

Apple sold 78.29 million iPhones in Q1 2017, generating revenue of $54.378 billion. Both figures are up five percent on the same quarter a year ago.

Without getting lost in Apple's finances we just want to make the point that despite incredibly good sales, Apple is losing market share and making tiny one to five percent gains. This is not what Wall Street wants from Apple, they need it to grown even further, and this is mission impossible.

The best action is to reduce your own margins and go after the company that takes most of your margin from the 78.29 million iPhones in Q1 2017 you sold in royalites – Qualcomm.

Dangerous path 

Alienating people you must work with is never a good idea. This is a very dangerous path. 

Numerous people remember Qualcomm lost a lawsuit in Korea so they assume that there is no smoke without fire.                                        

The Korean Fair Trade Commission (KFTC) announced in the last days of December that some of Qualcomm’s business practices violated Korean competition law. It wanted to get 1.03 trillion South Korean Won (approximately $865 million). Qualcomm claims that this ruling lacks a coherent theory of competition law violations, lacks any evidence of harm to competition, which is robust among chip and handset suppliers because Qualcomm’s business model promotes competition and has a few more good points.  

Without getting any deeper, don’t you think it is suspicious that the home of Samsung fines Qualcomm, one of Samsung’s biggest competitors in many fields for bad business practice? Currently Qualcomm is appealing the decision.

Numerous people don’t realize that Apple might end up paying much more if it loses the case, as the money it is currently withholding will include some court ordered interest too.

We will have to wait and see the outcome but we just wanted to make you aware of these points. 

Last modified on 01 May 2017
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