Apple-Qualcomm billions put at risk as phone alliance frays
Qualcomm Inc.’s countersuit against Apple Inc. threatens a relationship that helped both companies rake in billions of dollars as leaders of the smartphone revolution.
The acrimony in Apple’s suit and Qualcomm’s response late Monday raises the prospect of Qualcomm losing a big portion of the revenue it gets from one of its biggest customers. For Apple, it suggests doubt about the iPhone’s ability to remain a prestige product without the chipmaker’s wireless technology.
“The war between the companies appears to be growing,” Sanford C. Bernstein analyst Stacy Rasgon wrote in a note to investors on Tuesday.
Apple says Qualcomm uses market dominance to illegally overcharge for its wireless technology while Qualcomm argues the iPhone maker is just trying to pay less. The dispute is already threatening Qualcomm’s earnings because contract manufacturers that make the iPhone and pay Qualcomm on behalf of Apple are holding back payments, Rasgon noted.
Qualcomm fell 2.1 percent, the most in more than two months, to $55.35 in New York. That extended Qualcomm’s loss of market value to almost $14 billion since Apple filed its complaint Jan. 20. While Apple has surged in the period on optimism about new iPhones coming later this year, the stock slipped 1.1 percent to $141.63 on Tuesday.
While the iPhone was taking the world by storm, the partnership served both well. Qualcomm revenue reached $24 billion last year, from $15 billion when it first began supplying chips to Apple in 2011. In that year, iPhones generated $46 billion in sales for Apple. That soared to $137 billion by Apple’s latest fiscal year.
But in 2016, iPhone unit shipments dropped for the first time, making the company focus more on profitability, not just growth. Apple pressured suppliers more to save money, and its battle with Qualcomm is the toughest of these tense negotiations. The two companies accuse each other of lying, bullying and other allegedly illegal practices. Underpinning it all is a dispute over licensing fees that make Qualcomm one of the world’s most profitable chipmakers and shave a few percentage points off Apple’s iPhone margins.
“Apple has built the most profitable company in the world, relying heavily on Qualcomm’s patented technologies,” Qualcomm wrote in Monday’s court filing. “Apple achieved its success without contributing much, if anything, to the innovations at the heart of cellular communications.”
Apple says Qualcomm is abusing its strength as the major provider of smartphone chips and related patents to suppress competition and extract billions of dollars in licensing fees it doesn’t deserve.
While Apple usually taps multiple suppliers or makes components itself, the modem — a chip that performs the crucial function of connecting a phone to the network and the internet — is Qualcomm’s preserve. Until 2016, Apple had used the San Diego, California-based company’s parts exclusively for several years.
Becoming reliant on Apple has been a tough lesson for some companies. Dialog Semiconductor Plc’s shares fell the most in more than 16 years on Tuesday after an analyst warned Apple will cut back on the use of the company’s power-management chips. Earlier this month, Imagination Technologies Group Plc shares plunged as much as 69 percent after the U.K. chip designer said Apple will stop using its intellectual property in new products. When Samsung Electronics Co.’s Galaxy phones became the main rival of the iPhone, Apple switched manufacturing of its processors from Samsung to Taiwan Semiconductor Manufacturing Co.
Shedding Qualcomm may be harder. When Apple put the iPhone 7 on sale last year it tried to muzzle its main modem supplier, according Qualcomm’s filing made late Monday. The reason: some versions of the flagship smartphone weren’t using Qualcomm modem chips. Apple worried that comparisons between Qualcomm iPhones and ones using Intel Corp. modems would cause problems.
Apple told Qualcomm to avoid public bake offs between the two flavors of the phone, threatened to use its marketing muscle to attack Qualcomm, and warned that its status as a supplier would be in doubt, according to Monday’s filing.
In November, Bloomberg News reported that Apple’s decision to use different modems for the iPhone 7 caused the Intel version of the device to perform worse than the Qualcomm model. Apple said at the time there was “no discernible difference” in the wireless performance of any models.
Qualcomm, which owns patents that cover the fundamentals of modern mobile technology, charges phone makers a slice of the selling price of handsets, regardless of whether they use its chips or not. Apple whispered in the ear of regulators around the world, accusing it of misusing this powerful market position, Qualcomm said in its Monday suit. That resulted in antitrust cases, from South Korea to the U.S., that threaten to curtail this licensing business.
According to Apple’s own suit, filed in December, it’s owed billions of dollars it was overcharged in “Qualcomm’s illegal scheme” to control the market for mobile phone chips. On Tuesday, an Apple spokesman declined to comment beyond earlier statements on the suit.
Qualcomm sees the fight as a commercial negotiation over licensing fees, but on legal steroids. It still thinks that there’s another way, if Apple acknowledges the role of its technology and pays up.
“The second way things like this are resolved is through discussions and business resolutions,” said Qualcomm General Counsel Don Rosenberg in an interview. “We’d prefer not to have disputes.”
No comments yet