Apple stops paying Qualcomm's patent royalties

Qualcomm's financial results will take a hit because of Apple's decision to suspend payments to iPhone contract manufacturers until a court can resolve their dispute.

Shara Tibken Former managing editor
Shara Tibken was a managing editor at CNET News, overseeing a team covering tech policy, EU tech, mobile and the digital divide. She previously covered mobile as a senior reporter at CNET and also wrote for Dow Jones Newswires and The Wall Street Journal. Shara is a native Midwesterner who still prefers "pop" over "soda."
Shara Tibken
4 min read
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The buck apparently stops with Apple.

The iPhone maker has stopped paying royalties to contract manufacturers for phone patents owned by Qualcomm, starting with devices sold during the March quarter. Those manufacturers, like Foxconn, then pay Qualcomm for the intellectual property that's essential for connecting phones to a wireless network.

The move, the latest in a heated licensing battle between Apple and Qualcomm, caused the chipmaker to cut its expectations for how much revenue and earnings it will make in its third fiscal quarter that ends in June.

"While Apple has acknowledged that payment is owed for the use of Qualcomm's valuable intellectual property, it nevertheless continues to interfere with our contracts," Don Rosenberg, executive vice president and general counsel of Qualcomm, said in a press release. "Apple has now unilaterally declared the contract terms unacceptable; the same terms that have applied to iPhones and cellular-enabled iPads for a decade. Apple's continued interference with Qualcomm's agreements to which Apple is not a party is wrongful and the latest step in Apple's global attack on Qualcomm."

Apple, meanwhile, acknowledged that it has stopped payments until its dispute with Qualcomm can be resolved.

"We've been trying to reach a licensing agreement with Qualcomm for more than five years but they have refused to negotiate fair terms," Apple said in a statement. "Without an agreed-upon rate to determine how much is owed, we have suspended payments until the correct amount can be determined by the court. As we've said before, Qualcomm's demands are unreasonable and they have been charging higher rates based on our innovation, not their own."

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Qualcomm is the world's biggest provider of mobile chips, and it created some of the essential standards for connecting phones to cellular networks. The company derives a significant portion of its revenue from licensing that technology to hundreds of handset manufacturers and others. Because Qualcomm owns IP related to 3G and 4G phones, any handset maker building a device that connects to the newer networks has to pay it a licensing fee, even if they don't use Qualcomm's chips.

In Apple's case, the iPhone maker pays Qualcomm's licensing fee through its manufacturers. Apple doesn't have a direct license of its own. The fee is based on the total value of the device ($650 in the case of the iPhone) versus the value of the chip (closer to $20), but it's capped at a certain level. Neither company has disclosed the limit, but it's lower than the actual $650 price of the iPhone.

Bernstein analyst Stacy Rasgon said Qualcomm's lower financial estimates indicate the impact of Apple is about $10 per phone net royalties. Analysts estimate Apple sold about 50 million to 55 million iPhones in the March quarter. The iPhone maker will announce its financial results Tuesday.

"One has to wonder what comes next (will QCOM go nuclear themselves? Seek an injunction? Take other actions?)," he noted. "We suspect this is going to continue to get uglier."

Financial hit

Apple in January filed suit against Qualcomm in the US, alleging the wireless chipmaker didn't give fair licensing terms for its technology. Apple also said Qualcomm sought to punish it for cooperating in a South Korean investigation into Qualcomm's licensing practices by withholding a $1 billion rebate. Apple wants a court to lower the amount it pays Qualcomm in licensing fees, as well as order the return of the $1 billion. The iPhone maker said in its suit that Qualcomm should be paid royalties based on the value of its particular contribution, not for contributions from other patent holders.

Qualcomm maintains that no modern handset would have been possible -- including the iPhone -- "without relying upon Qualcomm's fundamental cellular technologies." In its response to Apple's filing, the company made some counterclaims of its own, including breach of contract. It also asked for an unspecified amount in damages and said Apple had interfered with its relationship with contact manufacturers.

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The company on Friday said it's excluding royalty revenue from Apple's contract manufacturers in its forecast for its fiscal third quarter, which ends in June. "The contract manufacturers may make some form of partial payment, but initial indications are that any payment would likely be insignificant," Qualcomm said.

It now expects to report revenue of $4.8 billion to $5.6 billion, down from its earlier forecast of $5.3 billion to $6.1 billion. It also projected per-share earnings of 67 cents to 92 cents compared with its prior estimate for 52 cents to 62 cents. A year earlier, Qualcomm reported revenue of $6 billion and earnings of 97 cents a share.

"This was always a possibility ... and it makes strategic sense for Apple," Raymond James analyst Tavis McCourt noted. "The good news for Qualcomm shareholders is that this action may force more aggressive legal action ... The more financially meaningful this lawsuit gets in the near term, the faster it may come to a conclusion."

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