A few months back, yours truly met with Qualcomm Technology Incorporation, a licensing and royalty part of the company, to learn a bit about the licensing standards and how the company works. In a now public document Qualcomm reveals that the Smartphone royalties cap at $400 selling price. Apple refuses to pay a previously agreed royalty claiming that it is too much - neglecting the fact that Qualcomm has the same price based on the selling price of device, with a cap for everyone. Well, Apple wants a special deal and to pay less attacking QTL's base business model. Qualcomm said to to mighty Apple and Apple decided to go after its blood.
What that means is that an OEM gets 3G/4G/5G multi-mode SEP rates when it pays 3.25 percent royalty of the device price. On $100, a manufacturer has to pay 3.25 USD royalty. A $200 phone will end up with $6.50 royalty. Qualcomm decided to keep the cap, maximum amount for SEP licensing at $400.
This means that Apple, which sells its cheapest latest generation XR iPhone for $749 pays a royalty based on a $400 device selling price cap. If you do the math, 3.25 percent x $400 selling price is $13.
Apple needs to pay $13 for $1449 iPhone XS Max 512 GB
Apple is obliged to pay $13 for $1,449.00 iPhone XS Max 512 GB as the cap is $400. To put things in perspective, OnePlus pays the same royalty for OnePlus 6T as Apple is supposed to for a phone that costs almost three times (300 percent) more. The other example we took was currently cheapeast iPhone listed on Apple.com the iPhone7 32GB that still cost $449.
Apple thinks that this is too much, and to be honest we think that Apple overcharges its customers with $1449 phones. Things are even worse for European customers who pay 19 to 24 percent in VAT on top of that price.
Intel is filling up the gap offering Apple a modem alternative. It took intel a few generations to offer the minimum which Apple needed in order to cover the worldwide market. Intel didn’t have support for CDMA something that is a pure necessity in order to make the phone works in China, Japan or Verizon in the USA. No doubt the Intel modem is improving, but Qualcomm can offer two times faster performance compared to its competitor, but Apple most likely pays Intel way less than Qualcomm.
Apple needs to pay $13 for $449 iPhone 7 32GB
Apple is upset about this 3.25 percent and $400 cap as even the cheapest phones it sells are over this cap and based on the last financial conference call Apple sold 46.9 million in its Q4 2018 (normal people’s Q3 2018).
If you multiple these numbers, you realise up just in the last quarter Apple could end up owing Qualcomm $609.7 million or close to two billion dollars a year, give or take. According to Statista, Apple sold 216.76 million iPhones and if we assume that all sold at more than $400, Apple’s tab to Qualcomm could be as high as $2.8 billion, probably a tad less since some discounters offer ancient iPhones below $400.
Things will get tougher for Apple with 5G, as transition to a new G always brings a big fluctuation and new possibilities to the market. Nokia was the king of phones once, but it isn’t now. Things change.
We just wanted to embed your mind with that $13 out of $1449 phone and that is what this fuss is all about.