Apple Sues Qualcomm Over Licensing Practices -- 2nd Update
January 20 2017 - 8:31PM
Dow Jones News
By Tripp Mickle
Apple Inc. sued Qualcomm Inc. alleging the chip supplier
demanded unfair terms for its technology, escalating long-simmering
tension between companies at the heart of the global smartphone
industry.
The suit, filed Friday in federal district court in the Southern
District of California, claims that Qualcomm leveraged its monopoly
position as a manufacturer of baseband chips, a critical component
used in cellphones, to seek "onerous, unreasonable and costly"
terms for patents, and that Qualcomm blocked Apple's ability to
choose another supplier for chipsets.
The complaint seeks $1 billion in rebate payments that Apple
says Qualcomm has withheld as retribution for Apple's participation
in an investigation by South Korea's antitrust regulator. The
Korean agency last month an nounced a roughly $853 million fine on
Qualcomm for alleged anticompetitive patent-licensing practices --
a decision Qualcomm disputed and vowed to fight.
San Diego-based Qualcomm long has been a dominant supplier of
chips that let handsets and cellular networks communicate, and has
developed a trove of patents around that technology that account
for most of its pretax profit. Its licensing practices have rankled
competitors and customers for years, analysts say, though the
discord was generally kept behind doors.
Apple said in a statement that it sued Qualcomm "after years of
disagreement over what constitutes a fair and reasonable
royalty."
Qualcomm General Counsel Don Rosenberg called Apple's claims
"baseless." In a statement, he said, Apple "mischaracterized"
agreements and negotiations and failed to acknowledge "the enormity
and value of the technology" Qualcomm invented.
"We welcome the opportunity to have these meritless claims heard
in court where we will be entitled to full discover of Apple's
practices," Mr. Rosenberg said.
The Apple suit comes three days after the U.S. Federal Trade
Commission sued Qualcomm alleging it engaged in unlawful tactics to
maintain a monopoly on a type of chip used in cellphones. That suit
highlighted Qualcomm's dealings with Apple. Devices sold by Apple
and rival phone maker Samsung Electronics Co. account for nearly
half of Qualcomm's revenue, which totaled $23.5 billion in the
company's latest fiscal year.
Qualcomm said earlier this week that it would fight the FTC's
suit, which it said is based on inaccurate information and was
rushed out ahead of the change in presidential administrations.
Qualcomm said it has never withheld or threatened to withhold its
chips to gain unfair licensing terms, and that its longstanding
licensing model benefits the industry and is the most efficient
approach for everyone involved.
Patrick Moorhead, president of market-research firm Moor
Insights & Strategy, said the legal dispute with Apple will
help determine what is fair pricing for patents that Qualcomm
invested heavily to develop. "There's nothing clear-cut about this
case," he said.
The iPhone has been enormously profitable for Apple, bringing in
$136.7 billion in revenue in Apple's latest fiscal year, and,
according to investment bank CLSA, accounting for three-fourths of
its $84 billion in estimated total gross profit. Apple is on track
to have sold more than $980 billion of iPhones in the decade since
it went on sale in June 2007, said Horace Dediu, founder of market
research firm Asymco.
In its complaint, Apple says Qualcomm requires manufacturers to
agree to license its patents to get Qualcomm chips. By making its
chip supply contingent on paying patent licenses, Qualcomm was able
to secure royalty terms that manufacturers "would not otherwise
accept," the suit says.
For Apple, those terms gave Qualcomm as much 5% of the average
price of an iPhone, which sells for anywhere from $400 to nearly
$1,000. Qualcomm's cut stayed the same even as Apple added elements
that increased the iPhone's value, such as sophisticated cameras
and displays.
For example, Apple charges about $549 for an iPhone 6s with a
4.7-inch display and $649 for a iPhone 6s Plus with a 5.5-inch
display. Though much of the higher price is associated with the
larger display -- not Qualcomm's chip -- Qualcomm would collect the
same royalty percentage and therefore a larger dollar amount,
according to terms outlined in the suit.
Apple says Qualcomm also required it to exclusively use its
chips in iPhones from at least 2011 to 2016 -- a claim also
contained in the FTC complaint. Apple received what it called
quarterly rebates under the agreement, but its suit says Qualcomm
began withholding those last year after Apple met with Korean
regulators. The suit claims Qualcomm told Apple it had forfeited
the nearly $1 billion in rebates by responding to the Korea Fair
Trade Commission.
Apple says Qualcomm's practices deterred Apple from switching to
chips made by competitors like Intel Corp. That changed last year
when it introduced Intel chips into a portion of its iPhone 7.
--Ted Greenwald contributed to this article.
Write to Tripp Mickle at Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
January 20, 2017 20:16 ET (01:16 GMT)
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