Qualcomm wouldn't release modems as often without Apple's business

Apple is the only smartphone company that buys a standalone modem, CTO James Thompson testified in the FTC case Friday.

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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
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Qualcomm supplied modems to Apple's iPhones before their patent and licensing battles. 

James Martin/CNET

If Qualcomm didn't have to release standalone modems for Apple, it wouldn't invest the time and money to update them every year, the company's chief technology officer said Friday.

James Thompson, testifying on behalf of Qualcomm, said it costs Qualcomm about $250 million a year to tweak its modems for Apple. 

"Apple requires we come out with a new one every year," Thompson said. "But if you look at our other customers that use those products, for example data card businesses, they don't even want us to do a new design every year."

Having the fastest possible modem in a device lets all of us access websites or stream video much faster. Each generation of wireless technology gives us a bump over the previous generation. This year, 5G modems will start appearing in phones, providing download speeds between 10 and 100 times faster than your typical cellular connection today.

Apple designs its own application processor -- the brains of the iPhone -- but it relies on third-party chips for network connectivity. From the iPhone 4S in 2011 to the iPhone 6S and 6S Plus in 2015, the sole supplier for those chips was Qualcomm. The following year, Apple started using Intel modems in some models of the iPhone 7 and 7 Plus, but it still used Qualcomm in versions for Verizon and Sprint. Apple's latest phones now use only Intel 4G chips.

Watch this: FTC vs. Qualcomm: Why you should care

All of Qualcomm's other mobile customers use its chips that integrate its modem with its application processor onto one chip, its Snapdragon line, Thompson said. For Apple, Qualcomm takes the modem it embeds into its Snapdragon processors, wraps a different chipset around it and includes different software and other items to make it work in iPhones. 

If Qualcomm didn't have to build a new modem for Apple every year, it would update its modems less often, Thompson said. Instead, it would release a new standalone, high-end modem only every two to three years, he said. 

"If we didn't have the Apple business -- the customers we have for those, data card people, cars, they don't demand you upgrade it every year," he said. 

Qualcomm has been battling the Federal Trade Commission in a San Jose, California, courtroom since Jan. 4. On Tuesday afternoon, the FTC wrapped up its case against the company. The agency has accused Qualcomm of operating a monopoly in wireless chips, forcing customers like Apple to work with Qualcomm exclusively and charging excessive licensing fees for its technology.

Tuesday marked Qualcomm's first chance to present its own case. The company says the FTC's lawsuit is based on "flawed legal theory." It also has said that customers choose its chips because they're the best and that it has never stopped providing processors to customers, even when they're battling over licenses.

Wireless pioneer 

Qualcomm on Tuesday called to the stand a co-founder, Irwin Jacobs, and the senior vice president in charge of its 4G and 5G operations, Durga Malladi, to talk up Qualcomm's innovations in wireless technology. 

Jacobs, considered one of the pioneers in mobile communications technology, testified about the early years of Qualcomm. The idea to use code division multiple access (CDMA) technology for phones came to him while driving in San Diego, he said, and the company outfitted a fan with the technology to demonstrate how it could work. 

The voice networks of US wireless carriers still use either CDMA or GSM, two fundamentally different technologies Sprint  and  Verizon  use CDMA, while AT&T and  T-Mobile , along with most of the rest of the world, use GSM. Qualcomm holds most of the important  patents  related to CDMA, and the technology eventually enabled 3G networks that could also deliver data. 

Thompson on Friday also testified about the investment Qualcomm makes into CDMA and other wireless technologies. From 2011 to 2016, it spent $5 billion a year, over 20 percent of its revenue, on R&D, he testified. 

Qualcomm has gained a reputation for being ahead of the pack with wireless technology, but the company actually thought it was behind rivals when it came to launching 4G LTE. 

Samsung and LG showed demos in South Korea, Thompson said, which caused Qualcomm to scramble to catch up with a 4G LTE processor. 

"It was like a call to arms in the company, where we marshaled the resources we could around the company to try to catch up," Thompson said. "Clearly we had these demos we saw. There was a lot of evidence we were behind. We pulled out all the stops and eventually came out with product."

When Qualcomm finally launched its 4G LTE chip, it found it was actually the only company with a commercial product. 

"To our surprise, we were the only ones," Thompson said. 

Thompson also testified about a Qualcomm misstep in 2014. After Apple introduced a 64-bit processor for its mobile devices in late 2013, Qualcomm's customers put pressure on the company to do the same. Qualcomm wasn't prepared for 64 bit and scrambled to tweak its processor. The resulting chip didn't perform well and didn't take off with customers, Thompson said. 

Because that chip was so bad, Samsung, the world's biggest phone maker, ditched Qualcomm's Snapdragon processor and used its own Exynos chips. Other customers bought older chips or used lower tier processors, Thompson said. Ultimately, that modem had only a tenth the lifetime sales of its predecessor, he said. 

"We win or lose every single year," Thompson said. "It's not about a single technology. It's about a wide range of technologies, all the things that make a phone interesting. If you have a spectacular failure on one of those technologies, it doesn't matter, you're going to lose."

Licensing battle

The  FTC , aided by chipmaker Intel and iPhone vendor Apple , filed suit against Qualcomm two years ago. The US says Qualcomm has a monopoly on modem chips and harmed competition by trying to maintain its power. Qualcomm's "excessive" royalty rates prevented rivals from entering the market, drove up the cost of phones and in turn hurt consumers, who faced higher handset prices, the FTC said. 

The FTC in the trial has called witnesses from companies like Apple, Samsung, Intel and Huawei and called experts to testify about the alleged harm Qualcomm's licensing practices have caused the mobile industry. The trial has revealed the inner workings of tech's most important business, smartphones, showing how suppliers wrestle for dominance and profit.

Carl Shapiro, a professor at the University of California, Berkeley, and an expert witness for the FTC, testified Tuesday that while Qualcomm is an innovator, that doesn't mean it can't also be a monopoly.

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"Qualcomm should be commended for its technological achievements," Shapiro said. "But ... what's really important is that companies who aren't quite as good or who don't have the scale are not impeded from trying to catch and threaten and challenge the leader."

He testified that Qualcomm is using its market power and its monopoly power over chips to extract an "unusually high amount" for royalties for patents. That raises the cost for rivals, weakens them as competitors and fortifies Qualcomm's monopoly power, Shapiro said. 

Qualcomm has argued that its broad patent portfolio and innovations justify its fees. CEO Steve Mollenkopf, who took the stand a week ago, defended the company's licensing practices, saying the way his company sells chips to smartphone makers is best for everybody involved.

During cross examination Friday, the FTC presented an email between Thompson and Mollenkopf. In it, Thompson said if Apple was chipping away at Qualcomm's licensing business, Qualcomm should fight back when it's strong. His email said that without Qualcomm, Apple would struggle in parts of North America, China and other regions. 

First published Jan. 18, 10:21 a.m. PT
Update, 11 a.m.: Adds more comments from Thompson's testimony.
Update, 3:20 p.m: Adds more comments from Thompson's testimony.

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