Published in Mobiles

Not only Apple, but Huawei and Samsung may benefit from the FTC’s actions

by on03 March 2019

One arm of the US government is helping Apple, China, and Korea

The FTC and a coalition of tech giants, led by Apple, Huawei, Samsung, Intel, and LG, are fighting Qualcomm, more specifically, against the chipmaker’s licensing model and business practices.

The judge will rule on the case on later date, but we cannot shake the feeling that although one arm of the US government is trying to help Apple to save a few nickels, it is also inadvertently helping Chinese and South Korean mobile companies’ interests. As a matter a fact all large OEMs that use other companies’ technology IP will benefit. If US-based Apple pays less, Huawei and Samsung will also get to pay less (for Qualcomm’s IP).

The motivation for the FTC case is rather clear, or at least the big picture is: Apple wants to pay less for Qualcomm’s technology. Instead of the ~$13 that Apple should be paying for IP, it claims it had a sweetheart deal to pay just over half of that (factoring in incentives from Qualcomm), as revealed during the FTC Trial. Essentially, this “discount” was not enough, so Apple tried to negotiate a deal at $1.50 per phone instead of the $7.50 it estimated it was paying.

Intel struggled in mobile from missteps, not Qualcomm’s anti-competitive behavior

While Apple’s objective in instigating this trial is clear, its leverage of Intel against Qualcomm’s licensing and modem businesses is a bit more cynical. Prompting the FTC to plead that Intel was at a disadvantage due to Qualcomm’s anti-competitive behavior is ironic at best and shaky at worst.

Apple twisted Intel’s arm to participate in the trial despite the fact that Intel has a long and somewhat sordid history with the FTC (see “AMD”). Intel’s now departed head of modems, SVP and Chief Strategy Officer Aicha S. Evans, was one of the key FTC witnesses.

After buying Infineon in 2010, Intel didn’t invest enough money in modems, and it stumbled due to poor decisions about when and how much to invest in CDMA and LTE, choosing instead to try to steer the industry toward WiMAX. It took the company many years to make a decent modem (the one that is now in all 2018 iPhones).

Intel spent billions of dollars playing catch-up before winning any Apple deal in 2016; and despite having an inferior product, it finally got all of Apple’s 4G modem business in 2018, rendering the FTC’s argument almost moot.

Apple tried to use Intel, and the threat of losing modem business, to pressure Qualcomm to agree to a better licensing deal. When that didn’t work, it pushed the FTC to file suit to get a better deal that way. In 2017 when the FTC complaint was filed, Intel wasn’t nearly as strong in the modem market. Ironically, who controls 100% of Apple’s modem business today? Clearly not the company on trial.

Intel’s previous management also missed its opportunity to enter the mobile application processor market in any meaningful way, and lost that market to ARM-based processors. Years and billions of dollars invested ultimately came to nothing: Intel’s mobile strategy did not work-- it’s as simple as that.

Apple going after Qualcomm’s “no license no chips” policy and licensing rates

Apple (and Intel) want to challenge Qualcomm’s “license first, chips after” policy but this policy makes sense and is legal. Why should Qualcomm help a company build phones that violate its patents? (All phones use Qualcomm’s cellular Standard Essential Patents, or SEP’s.) Selling chips to a company without a license would be self-defeating. Qualcomm said this restriction was never applied to companies renegotiating their licensing deals in good faith (including Apple), so it never resulted in leverage in license negotiations.

So, what’s the probable motivation behind Apple’s opposition to this policy? Qualcomm’s approach (that results in solid licensing revenue) is essentially helping vendors produce sub-$400 phones. This includes practically every smartphone maker on the planet except Apple.

The Qualcomm Technology Licensing (QTL) model charges licensees a fee equivalent to 3.25% - 5% of the phone selling price (capped at $400), depending on whether the OEM wants to license Qualcomm’s SEP’s or its entire portfolio. The maximum any OEM would pay would be $20, even on phones selling for more than $400.

Apple wanted to pay $1.5 USD for iPhones, per Jeff Williams’ FTC Trial testimony, which translated to about 5% percent of a $30 phone, which was clearly far short of Qualcomm’s expectations, and a ludicrously small fraction of the cost of an iPhone. The previously negotiated licensing fee amounted to ~$7.5 was already less than half of what Apple should have been paying.

One of the reasons behind QTL’s proportional royalty is Qualcomm’s desire to enable customers to profitably make less expensive phones. For example, OEMs like Samsung, LG, Moto, Lenovo, Huawei, and Xiaomi that make entry-level ~$100 phones end up paying a $3.25 - $5.00 royalty on them.

Without a “no license no chip policy”, Qualcomm would have to try to find a different way to recoup the cost of a lot of technology it has developed (and that all smartphone makers use). One way would be to include a fixed technology royalty in the price of chips. This approach would force customers making cheaper phones to pay too much for modems and SoC’s… and would give Apple a leg up, as it would reduce profit margins of OEMs making cheaper phones.

Consequence of chip-level licensing: more or less competition?

One of the FTC’s complaints was that Qualcomm did not license its SEP’s to chip competitors. It’s an odd complaint, because Qualcomm claims licensing device vendors for the entire phone means that chip vendors don’t need a license, and don’t need to pay royalties.

Exploring the motivation behind such a request-- if Qualcomm were forced to license chip competitors, it could potentially help three players, Apple, Huawei, and Samsung, reduce the royalty they pay. These three vendors not only make phones, but also make SoC’s and/or modems (Apple doesn’t yet make a modem but has announced plans to do so).

In theory, if Judge Koh ordered Qualcomm to license cellular SEP’s to these three vendors at the chip level, they could (try to) reduce their royalties by claiming that they only owe a percentage of the chip price. Such logic would be faulty however, because the IP they’d be paying for would extend beyond the chip. Even cellular SEP’s apply to many components in the phone beyond the modem, as well as to systems beyond the phone.

Such an outcome could also be bad for Samsung and Huawei, because they also own many cellular SEP’s. They would also potentially be forced to license their SEP’s at the component, and to competitors as well.

The other logical flaw of this pursuit of cheaper royalties, is that these three vendors would still owe additional royalties for Qualcomm’s other (non-SEP) technologies in phones they build. It’s not clear that there would be any cost savings overall.

In the end, these three players’ objective may simply be to make it so difficult for Qualcomm to license IP, that either its profits are impacted (increased overhead and difficulty collecting from more vendors), or it remains tied up in litigation for years with uncertain outcomes.

The net results of such a scenario would be: 1) reduced Qualcomm licensing revenue and consequently, also R&D spend, 2) less technology IP available to the rest of the mobile ecosystem, and 3) increased competitive advantage and market share for these large, vertically-integrated companies that can afford to own all of the IP.

Bear in mind that three big players, Apple, Huawei, and Samsung, generally keep as much of their technology in-house as possible for competitive advantage and differentiation . Though there are some minor exceptions, these three players usually don’t license most of their phone technology to other vendors, or sell their flagship application processors (or modems) externally. A rare exception is tiny Meizu, and a few even smaller Chinese brands, that made a few smartphones based on Samsung Exynos processors.

For $15, Apple is discarding a much-needed partner in Qualcomm

Apple tried to charge Samsung $30 per phone and $40 per tablet in 2012 for a number of slide-to-unlock patents. It’s understandable that Apple would want to charge for IP it spent money developing. It’s ironic (and comical) though, that Apple calls Qualcomm’s wanting $15-$20 for far more valuable patents “extortion”.

Another great irony is that Apple needed Qualcomm’s IP and engineering help to enter the smartphone market in the first place. Years later, Apple was desperate to bring LTE to the iPhone, and needed Qualcomm’s help again, as Qualcomm was the only vendor capable of meeting Apple’s requirements. And now, Apple desperately needs a reliable option to bring 5G to the iPhone before the rest of the ecosystem leaves it behind.

Apple also desperately needs to integrate a modem into its SoC to remain competitive with arch-rivals Samsung and Huawei. Qualcomm could help it do this. Apple’s insistence on getting Qualcomm’s latest 4G modem source code resembled an effort to better “learn” how it works, to “inspire” its in-house team to develop a “work-around”. Intel’s stint as Apple’s sole modem supplier is a short-term marriage of convenience likely to end in a messy divorce… just ask Imagination Technologies or many other past Apple “partners”. Apple wants all key technologies in-house, and in the wireless domain, it is lagging behind Huawei and Samsung.

5G Crystal ball predictions

Huawei has a decent 4G LTE modem, as does Samsung, and both are working on 5G modems. Samsung seems willing to use Qualcomm’s modem for its initial 5G Galaxy phones (acknowledging that Qualcomm is the best choice, at least for now).

An FTC Trial ruling against Qualcomm would hurt US-based 5G development, and would be a catalyst for companies in mainland China and South Korea to increase investment to further their 5G leadership ambitions. China is the key benefactor here, as Huawei has close ties to and the financial backing of the Chinese government, a relationship that has repeatedly made it the target of US and other government authorities.

The transition to 5G is so important, because it transcends the mobile industry: this is the digital enabling technology that will profoundly shape the 2020s. G8 and G20 countries recognize this and will massively invest in it.

Europe has Nokia and Ericsson as its 5G technology champions, while China has Huawei and ZTE; the US only has Qualcomm, and the outcome of the FTC Trial threatens to change this balance.

How will the result of this trial shape the future of the mobile and other industries for years to come?  We leave the conclusion up to you… this is just an analysis of current state of affairs.

Last modified on 04 March 2019
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