Additional Notes on Qualcomm and Apple Settlement

Yesterday’s note got quite long, so I saved some talking points for a follow-up today. I’ve also had several discussions with investors focused on Apple and Qualcomm which helped me flesh out a few more thoughts as well.

The FTC Case Still Lingers
There is an ongoing ITC case as well, but I’m going to focus on the FTC case for now.

I wrote up my thoughts overall on the FTC case, which was heavily lobbied by Apple. It was fascinating actually to see Apple’s opening statements in the short-lived trial in San Diego earlier this week. Their entire argument and main points were nearly identical to the FTC’s when trying to paint a monopolistic picture of Qualcomm.

At this point, while a settlement is a possible outcome of the FTC and Qualcomm, I think it would be tough for the FTC to rule against Qualcomm. Their entire argument did center around Apple as the prime example. As a part of this settlement, Apple has just signed a license and essentially agreed to the very thing they thought was abusive and illegal.

Hopefully, you can see where the issue may lie bot in public perception but also in the total case the FTC tried to make when your prime example settled and signed a license and agreed to drop all litigation. If Qualcomm’s business model was as illegal as the FTC purports then why would the biggest, strongest, and most innovative company in the world agree to sign up to their business model? I understand it isn’t quite that simple, but in the court of public opinion, it is that simple.

Is Qualcomm’s Licensing Business Model Finally Justified?
Qualcomm undoubtedly felt their business model was under direct attack. And ultimately, the idea of patent holders being able to get fair value for their inventions was similarly under attack. There was significant investor concern that should some of the litigation and regulation go unfavorably for Qualcomm their entire business model could be in question.

However, with this settlement, and the fact that Apple was the largest and strongest force against Qualcomm’s business model, I lean toward the opinion that Qualcomm is now justified as a part of this settlement. Meaning, the fear of further litigation or direct attacks on their licensing business model should be gone.

Which is probably why I heard from friends who work at Qualcomm that mood at the company was buzzing and as optimistic as ever. It even inspired a tweet from Qualcomm President Cristiano Amon.

Not only is Qualcomm’s business model now justified but so is also their position as an innovator.

Apple’s Influence
Interestingly, and this directly speaks to the massive influence Apple has on the supply chain and the market, but this settlement and Apple now a direct licensee of Qualcomm will make it harder for all other licensee’s to complain or file suits against Qualcomm. I had heard from many of my sources in the supply chain that this effort by Apple had given them hopes they would all be able to acquire more favorable license terms in the future and thus acquire a better financial position.

Now with Apple settling and essentially establishing a baseline of a licensing deal, it may actually reverse that leverage and give more back to Qualcomm as they go forward with their partners and licensees. What I mean is, say a licensee comes to them when their contract is up and says we want a better deal. Qualcomm will have the license deal with Apple as a way to counter in those negotiations. This is why, as a part of the settlement, I think Qualcomm fought for a higher license fee and then gave Apple more favorable terms for the cost of components, lump sum payment, and possibly royalty rate.

I’ve seen four different buy-side financial models that estimate the licensee deal to be in $8-9 which is right in line with Qualcomm’s range and much much higher than Apple originally wanted. This potential impact on the competition is one of the more interesting parts in my mind.

As I stated before, Apple would be vulnerable competitively if these efforts were a success and their legal pursuits ended up giving their competition a window to negotiate better rates on license and Qualcomm IP. Imagine OnePlus or Xiaomi, already gaining significant share in markets Apple wants like India (which are insanely price sensitive), the ability to offer even lower prices on their devices using the latest innovations from Qualcomm. Apple would have enabled this if they were successful in damaging Qualcomm’s business. If you follow my logic, then realistically, the best thing Apple could do competitively is to agree to a higher license fee and then work a better deal in other areas. Doing this would guarantee their competitors could not get a better licensee fee and thus use that savings to lower prices. Similarly, Apple would be granted a discount in other areas where their competition cannot use leverage, like scale, to negotiate a better price deal. All in all, what just transpired makes it much harder for Apple’s competition to go downstream with their prices and still make some money than if Qualcomm’s business model was hurt.

Many of Apple’s competitors at the lower price tiers live on very slim margins. To those competitors, every penny counts. Penny’s countless to Apple, to a degree, but their deal with Qualcomm makes it even harder for Apple’s competitors to pinch those pennies.

80,000 Patents
Lastly, I want to make the last point on Qualcomm’s patent portfolio. Whether Apple uses any of Qualcomm’s patents, which come as a result of its license, isn’t necessary. However, having access to this portfolio enables a few interesting things competitively. Firstly, Apple would have access to any innovations Qualcomm creates in the same way their competition will. We all know Apple is great at innovating but what if Qualcomm created something that enabled Apple’s competition (nearly all who have a Qualcomm license) to have some technology that further differentiates them. A Qualcomm license evens the playing field with all of Apple’s competition in the case Qualcomm had some real breakthroughs in the works.

Second, whether or not Apple uses any of Qualcomm’s latest innovations, the reality is most of Apple’s competition relies heavily on Qualcomm’s innovations to compete (Google, Samsung, OnePlus, Xiaomi, etc.). At the very least Apple now has a clear eye on all the things their competition has at their disposal.

Lastly, while Apple is a first class innovator, Qualcomm is no slouch either. Qualcomm likes to say of themselves; they are the R&D resource for the industry, and this is mostly true. In a phase, where Apple may be looking to be cautious in their R&D spending to save costs during a period of slowing growth, leveraging Qualcomm as an R&D resource via access to their patents is not a bad strategy. And there are several things Qualcomm does better than Apple and may have some useful technology as Apple seeks further to enter new categories like AR head mounted displays and beyond.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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