Qualcomm CEO fires back at Apple: Bring it on

Steve Mollenkopf says lawsuits and government actions against his company "are at their core driven by commercial disputes."

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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
6 min read

Qualcomm CEO Stephen Mollenkopf shows off the company's new Snapdragon 835 chip at CES 2017.

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Bring it on, Apple -- at least, that's what Qualcomm's top executives seemed to be saying Wednesday.

Qualcomm CEO Steve Mollenkopf and Derek Aberle, head of the wireless chipmakers's licensing business, fired back at lawsuits filed over the past week by Apple in the US and China. Those suits, they said, are all about the money, an effort by Apple to squeeze as much money as possible from its supplier.

"Apple's complaint contains a lot of assertions, but in the end, this is a commercial dispute over the price of intellectual property," Mollenkopf said during a call with analysts about its quarterly earnings report. "They want to pay less for the fair value that Qualcomm has established in the marketplace for our technology, even though Apple has generated billions in profits from using that technology."

While the value of Qualcomm's patents have "tangibly and meaningfully increased over time," it has never raised its royalty rates, Mollenkopf added.

"If you peel apart all of the arguments Apple's making, we believe firmly they're all without merit," Aberle said. "At the end of the day, they essentially want to pay less for the technology they're using. It's pretty simple."

Qualcomm plans to keep supplying chips to Apple even as they battle in the courts.

"I'm confident we'll address and get through the legal challenges underway, as we have done many times in the past," Mollenkopf said.

The legal challenges he's referring to included one filed last week by Apple in the US and two others filed this week by the iPhone maker in China. The US Federal Trade Commission also has accused Qualcomm of forcing Apple to use its chips exclusively in exchange for lower licensing fees.

Qualcomm spent the first 20 minutes of its hourlong call talking about Apple's litigation. Many of the questions from analysts also focused on the lawsuits.

Apple referred CNET back to its comments and lawsuit from Friday. Its statement said, in part, that "Apple believes deeply in innovation and we have always been willing to pay fair and reasonable rates for patents we use. We are extremely disappointed in the way Qualcomm is conducting its business with us and unfortunately after years of disagreement over what constitutes a fair and reasonable royalty we have no choice left but to turn to the courts."

Apple v. Qualcomm

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 handset manufacturers and others. Apple designs the processors in its iPhones and iPads, but it buys chips from Qualcomm to connect to 4G LTE and other cellular networks. Under Qualcomm's licensing structure, Apple, through its manufacturers, pays it a fee for its chips and another fee for the intellectual property utilized in the chips and mobile phones. Most components suppliers bundle the IP cost in with the chip sales price.

For the iPhone 7 and 7 Plus introduced this year, Apple also started buying 4G LTE chips from another supplier, Intel. Because Intel's chips use some of Qualcomm's essential technology, Apple pays Qualcomm a licensing fee for those processors, as well, which is based on the total value of the iPhone ($650) versus the value of the Intel chip (closer to $20). (Like most licensing terms, this gets complicated pretty quickly, but essentially, Apple bears a cost for using Qualcomm technology in its phones, whether or not the chips it includes are directly from Qualcomm.)

Apple's lawsuit filed in the US on Friday alleges the wireless chipmaker didn't give fair licensing terms for its processor 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.

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Apple wants a US court to lower the amount it pays Qualcomm in licensing fees, as well as order the return of the $1 billion. The company 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. Currently, Qualcomm's royalties are based off the selling price of a phone, rather than what portion Qualcomm's technology enabled.

In one lawsuit filed in China, Apple alleges that Qualcomm "abused its clout in the chip industry," a violation of China's anti-monopoly law. Apple seeks 1 billion yuan ($145.32 million) in damages. A second accuses Qualcomm of not making its cellular standard essential patents available broadly and cheaply. It asks the court to determine the terms of a patent license between Qualcomm and Apple.

Aberle said Qualcomm has been collecting royalties based on a phone's selling price for decades and said there's no legal precedent to suggest royalties should be collected based on a chip.

"This is well understood, a well laid out concept," Aberle said. "It's consistent with the way not only Qualcomm has licensed in our own industry for decades but virtually every other patent holder seeking to collect royalties on their intellectual property."

He added that Qualcomm offered Apple the same terms as its other licensees in China. It refused, he said.

Qualcomm has come under scrutiny in recent years for alleged monopolistic practices. Two years ago, it paid China nearly $1 billion to end a 14-month antitrust investigation in that country. Then, in December, South Korea hit Qualcomm with a $850 million fine following a three-year investigation. The South Korean Fair Trade Commission accused the chipset maker of having an "unfair business model" and creating a monopoly with its practices. The US FTC also has accused Qualcomm of illegally dominating the cellular chip market.

Aberle said Qualcomm plans to appeal the KFTC ruling. And he accused Apple of making "false and misleading" statements to regulatory bodies around the globe. "Apple has been actively driving regulatory attacks on Qualcomm's business in jurisdictions around the world," he said during a call with analysts.

Lots of chips

On Wednesday, Qualcomm reported its fiscal first-quarter net income attributable to shareholders dropped to $682 million, or 46 cents a share, from $1.5 billion, or 99 cents a share. (That $850 million fine was a factor in the loss.) Excluding acquisition costs and other expenses for the quarter ended December 25, per-share earnings jumped to $1.19 from 97 cents. Analysts polled by Yahoo Finance projected earnings of $1.18 a share.

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Revenue climbed 3.9 percent to $6 billion, slightly below Wall Street's forecast for $6.12 billion. Revenue from Qualcomm's licensing business increased 10 percent to $1.86 billion.

J.P. Morgan analyst Rod Hall estimates about a third of Qualcomm's earnings are tied to Apple's royalty payments. If Apple stops paying royalties, Qualcomm's full-year earnings are at "material risk," he said. Qualcomm said during its call with analysts that about 40 percent of its revenue comes from selling chips and licensing its technology to Apple and Samsung, the two leaders in the phone market.

For the second quarter, Qualcomm expects per-share earnings of $1.15 to $1.25 on revenue of $5.5 billion to $6.3 billion. Analysts polled by Yahoo Finance projected earnings of $1.20 a share on sales of $5.9 billion. Aberle said Qualcomm doesn't expect a financial impact from the litigation in the second quarter.

Qualcomm shares slid 3.2 percent to $55.09 in after-hours trading. The company's stock has lost about 14 percent of its value since Apple filed its lawsuit in the US.

Update at 1:35 p.m. PT: Adds Qualcomm financial information.

Update at 2:30 p.m. PT and 2:50 p.m. PT: Adds comments from earnings conference call.

Update at 3:05 p.m. PT: Adds Apple comment.

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