Verizon has reached for its checkbook to solve the problem of not being able to import recently developed CDMA handsets, after chip supplier Qualcomm was found guilty by the US International Trade Commission of infringing on Broadcom patents. It has promised as much as $200 million to Broadcom to allow it share of chips into the country.
Verizon has decided to pay Broadcom $6 for each device that it imports which uses the power saving patents that were at the heart of the dispute and it has said that this payment will top out at $40 million a quarter, or a lifetime maximum of $200 million. That implies a potential shipping rate of something close to 6 million devices a quarter, or 2 million a month.
While it is true that new touch screen devices such as the LG Electronics Prada phone are included among the currently blocked new handsets, competing with the iPhone from AT&T cannot be the only thing at the heart of the Verizon agenda, and reaching for a $200 million pay out, smacks of desperation.
Our thoughts are that this is more about the shiny new EV DO Rev A data network that Verizon is trying to light up around the US, which much of its future customer acquisition depends upon. Verizon just has a handful of new handsets which it has been importing into the US, typically it sources one from Samsung and another from LG at the start of a new cycle and then fills them out with a wider variety of models. The way a consumer would see this type of new network is through the advertising of new data services ‘ video, music, VoIP – which such a network will support. When these services do not materialize, because there are no devices to put them on, then assumptions that Verizon has made about acquiring new customers, will be wrong and targets will be missed, along with its quarterly guidance.
And that’s why we think Verizon is citing such a high number of devices and is prepared to pay such a large penalty based royalty on the new power saving patents, not just because it is panicking over the iPhone, but also about a network sitting idle despite $billions of capex already spent. On the flip side of this, other networks such as Alltel and Sprint don’t seem ready to accept Broadcom’s terms and if that continues there will be some pretty disappointed customers out there for Verizon to pick up, so the payment also represents an upside opportunity.
Perhaps even more importantly Verizon now appears to be siding with a company that is antagonizing its main chip supplier and which has designed almost all of the technology in its networks. Does this signal a change of heart for Verizon in the long term? Many in the UMTS world would hope so, but that’s not possible, it’s just too committed.
Other handset makers will be less than pleased with the outcome. Broadcom’s case with the US International Trade Commission had echoed many of the complaints about Qualcomm business practices that Nokia and its supporters are pushing in front of the European Commission.
But by dealing directly with Verizon, Broadcom shows that its own actions were about little more than royalties, since it has effectively endorsed the high fee levels and ‘double dipping’ (taking payments from both phonemakers and operators for the same patent) which has been a singularly Qualcomm style of practice. If Nokia had hoped that a Broadcom victory would set valuable precedents for Europe, and its campaign to fix a ceiling on total handset IPR burden, it will be disappointed. ‘We are assessing this outcome, but certainly don’t see it as all positive,’ said a typically circumspect insider at the Finnish company.
Officially, Qualcomm was welcoming its customer’s decision, saying in a statement that this was a ‘positive development’ that would ‘reduce the risk of disruption’. It added: “The agreement’ has removed uncertainty for Verizon Wireless and its customers by ensuring that Verizon Wireless will be able to continue to sell wireless broadband products powered by Qualcomm’s chipsets and software.”
Some analysts, too, chose to look on the bright side, seeing the deal as an insurance policy for Qualcomm, guaranteeing it sales to its largest customer even if its appeals fail (somewhat cold comfort, one might think). We must assume that Verizon will be getting its $200 million back, by hook or by crook, from Qualcomm, through horse-trading in other areas of its supply lines.
Initially many of the US financial community see Qualcomm as invulnerable and the Broadcom deal as ‘irrelevant,’ many of them are changing their position and Qualcomm shares have certainly taken a turn for the worse since the announcement.
Qualcomm says it will continue to fight the ITC ruling, including calling for a presidential veto, which has been hinted at as unlikely to come, and it says that it is testing a software workaround to the Broadcom patents, codeveloped with Sprint Nextel. Given that the Broadcom patents are all embedded in chips, any software only work around is likely to come under intense scrutiny, and unlikely to convince the ITC of its validity, so it might delay the problem rather than eliminate it.