Despite numerous complaints about Qualcomm’s patent licensing practices over the past decade, few have ever got to court, and the actual details of its famous, and closely guarded, business model remained shrouded in secrecy – until a string of antitrust probes in various countries, and the lawsuits filed by Apple, started to shine a light on its system.
Nowhere has that been brighter than in an antitrust trial which got under way this month in Silicon Valley, close to Apple’s headquarters. The US Federal Trade Commission (FTC) is hearing allegations about unfair business practices, which are exposing Qualcomm’s methods to the world. Among the alleged violations which the FTC is investigating are a “no licence, no chips” policy, refusal to license standards-essential IPR to chip competitors, and an exclusivity deal with Apple.
The proceedings are putting on record some of the arrangements which Apple and others have previously just hinted at, or described unofficially – such as royalty levels, and the existence of an exclusivity pact between the two companies for iPhone modems after 2011. It also emerged that Apple allegedly asked Qualcomm for $1bn to move from its original iPhone modem supplier, Infineon, to the US firm’s chips – not just for the first CDMA iPhone (Qualcomm is virtually the only CDMA baseband supplier) but for the whole family.
The mobile chip giant is under intense pressure as the fundamentals of its highly profitable licensing business come under attack. It has compromised on royalty rates and other terms and conditions in order to come to settlement of key cases, notably the antitrust investigations in China. But the exchange of litigation with Apple – a significant customer – is opening Qualcomm up to scrutiny as never before, as well as casting more dark shadows over its future prospects.
The string of legal actions between the two companies has greater significance for the wider industry than the usual patent licensing disputes that erupt in the handset space. Apple is leading the charge to break Qualcomm’s whole licensing model – something other companies have wanted to do, but have lacked the resources, or had no viable alternative to Qualcomm’s IPR. If the iPhone maker succeeds, this – combined with antitrust settlements in China and elsewhere – could radically change the chip giant’s model, and its profit levels.
There are many claims and counterclaims in this dispute, which spans several key jurisdictions. Apple suspended royalty payments in 2017, claiming unfair business practices, and prevailed on some of its contract manufacturers, such as Foxconn (also a Qualcomm partner) to do the same. Apple has also been weaning itself off Qualcomm’s chip business, turning to Intel for the modems in some iPhone models, and reported to be looking to exclude Qualcomm entirely in future, possibly by introducing Mediatek for some handsets. And it has launched broader antitrust actions, attacking its new enemy’s business practices, not just its royalty rates or patents.
Qualcomm, for its part, has sued Apple for patent infringement, breach of contract and interfering in deals with third parties. It has also filed suit with the US International Trade Commission (ITC), which has the power to block imports of devices which are found to infringe on patents; and late last year it added accusations that Apple had illegally passed on its trade and technology secrets to Intel.
The FTC trial is just one of many actions ongoing in the USA, China, Germany and other territories but its proceedings are the most public so far and have involved big hitters from both companies.
One of these was Apple’s COO, Jeff Williams, who also led the first iPhone team. He testified that Qualcomm charges a 5% royalty, which equates to about $12 to $20 per smartphone, for its IPR, plus a large “CDMA tax”. As long as handsets require components based on CDMA technology – the basis of all the 3G standards – Qualcomm is in a strong position because of its dominance in that area (it was the first company to apply CDMA modulation to mobile devices and owned a vast majority of the patents underlying the technology). Its grip on smartphone IPR lessened when 4G and 5G standards were based on variations of OFDM modulation, not CDMA, but it still managed to develop or acquire large patent holdings which are fundamental to the newer standards, and to WiFi – and CDMA still features in some non-cellular aspects of mobile devices, especially in the low power arena.
According to Williams, Apple signed a deal with Qualcomm in 2007 to set royalties on iPhones at $7.50 per handset. In 2011, the companies renewed the arrangement and agreed to keep royalties at the same level while giving Qualcomm “short term” exclusivity as the iPhone’s cellular baseband supplier.
Williams told the court: “$7.50 may not sound like a lot, but it amounted to billions of dollars a year. It is not FRAND, in our view, compared to everyone else … Qualcomm charged more than everyone else together.” FRAND (fair reasonable and non-discriminatory) is the key guideline for licensing of any patents which are essential to standards, and dictates that all licensees must have the same rates, and these should not be so excessive that the patent holder damages others’ ability to do business. However, the actual definitions are open to interpretation and disputes over FRAND have been the basis of a wide variety of mobile IPR litigations over the past decade, including some elements of Apple’s long-running legal war with Samsung.
The COO went on: “The alternative was that it defaulted to the contract manufacturer’s rate of $17 to $18. If we pursued them legally, we wouldn’t have access to chips … we would risk getting our brand-new iPhone enjoined.
The $7.50 royalty “didn’t apply to CDMA phones or iPads,” said Williams, characterizing the additional fees as “roughly a $250m CDMA tax.”
He insisted that “Qualcomm represented $7.50 as the average price paid”, but that Apple found this unfair. Apple has led the charge, in recent years, to change the industry norm of charging royalties based on the price of the whole handset, to a system based on the price of the chip or system-on-chip. This has started to become common practice, under pressure from vendors and operators, which need handsets to be affordable to drive uptake of new technologies and to keep the upgrade cycle short.
As the essential standards element of the handset – mainly the modem – becomes a smaller part of the total device, the argument for per-handset licensing has weakened. Qualcomm has agreed to per-chipset licensing in some areas, notably China, but Williams argued that the firm has clung to it elsewhere.
“We led the charge to add a lot of NAND memory … but if we put an extra $100 in NAND, they would get $5 of that even though they didn’t have anything to do with it,” he said. Apple spends “an extra $60 in stainless steel enclosures, and Qualcomm would collect an extra $3. That didn’t make sense to us, and it still doesn’t today,” he added.
In the 2011 negotiations, Apple initially proposed that it pay $1.50 per baseband chip used. Under the final deal, Apple’s contract manufacturers, such as Foxconn, paid Qualcomm its usual 5% royalty under their own existing patent deals – Apple reimbursed them, and Qualcomm reimbursed Apple. This enabled Apple to avoid a direct patent agreement with Qualcomm.
Apple avoided striking a patent deal directly with Qualcomm under the arrangement.
It also emerged, from this testimony, that Apple asked Qualcomm for $1bn, during the 2011 talks, to move away from Infineon basebands, which it had used for the early 2G and 3G iPhone models.
“They wanted exclusivity,” Williams said. “We proposed that we’d give them 100% sole-sourced for the short term. In the long term, that wasn’t our plan … but long term [exclusivity] provisions wound up in the agreement … and made it prohibitively expensive to work with someone else.”
Qualcomm CEO Steve Mollenkopf had first revealed, in his own testimony, that his company paid Apple $1bn over three years for an iPhone exclusive. Judge Lucy Koh challenged Qualcomm lawyers about releasing the $1bn figure since she has agreed to conceal many other specific figures related to royalties, often at the defense’s request. “Are you doing this for the media? Because I’ve been sealing a lot of your royalty numbers” at the request of Qualcomm and third parties, she asked.
Qualcomm may have thought this particular deal highlighted Apple’s own power in the market, but it is also being used by the FTC to strengthen its arguments that the chip supplier acted as a monopoly by insisting on an exclusive deal.
Mollenkopf put his own point of view on the deal, saying: “Apple came to us and wanted to go with us in a big way — they wanted to use our chip for 100% of their iPhones, but they wanted us to pay them $1bn dollars to get that opportunity…it’s typical to ask for money to move to a new platform, but it was not a typical amount.”
However, he said the arrangement had “worked out for both parties” and was profitable for Qualcomm. He added that a second three-year deal, struck in 2013, had a similar structure of incentive payments from Qualcomm on a fixed schedule. Under both agreements, if Apple used another supplier’s baseband, Qualcomm would be entitled to “claw back” some of its incentives, as it did when Apple started introducing Intel chips to some models in 2016.
“Apple had leverage because there was a lot of volume business at stake… we didn’t want to pay an incentive and not get the volume…Qualcomm needed to get the volume we needed to make the deal work,” the CEO continued. After the second deal expired in 2016, Qualcomm continued to ship chips for existing Apple products, but “we haven’t had any new business” although it has continued to seek design wins, he added.
Of course, at most stages of the iPhone’s life, Qualcomm’s baseband offerings for high end handsets were superior to those of any competitors, and Apple is still taking on considerable risk by cold-shouldering its erstwhile partner, especially when it comes to having the most advanced 5G products. For instance, under cross-examination, a Qualcomm attorney recalled that Apple gave Qualcomm a “moonshot challenge” to deliver a single-chip LTE baseband for the iPhone 5, which at that device’s launch, was acclaimed by Apple’s then-CEO, Steve Jobs, as “one of the real breakthroughs” of the product.
But Williams said the prolongation of the exclusivity deal prevented Apple from working with Intel on a mooted baseband for an iPad Mini in 2013, and restricted its usual strategy of dual-sourcing. (Of course, Apple is even more keen to bring key components under its own control as it has done with the apps processor, graphics processor, power management and other elements, often with dramatic consequences for the previous suppliers. There are persistent reports that Apple will design its own baseband.)
Apple did introduce some Intel basebands at a later stage, but the breakout of hostilities with Qualcomm in 2017 made it hard to stick to the original plan of working with both US chip providers. Williams said his firm had “been unable to get [Qualcomm] to support us on new design wins since . This has been a challenge.” That forced him to go to Intel’s then-CEO, Brian Krzanich and say “I was sorry, but instead of 50%, I need 100%” of iPhone basebands. “He had to scramble and go to his board to get almost $1bn in capital to support us.”
Meanwhile, he added, Qualcomm “is suing us in court all over the world on non-essential patents. They are trying to get a hit in any one of those courts with an injunction to cause enough pain to make us pay tens of billions of dollars in their ransom.”
Tony Blevins, Apple’s VP president of procurement, recalled a “watershed meeting” in late 2013 with Qualcomm’s now-president Cristiano Amon. At the time Apple was seeking to reduce the cost of its Qualcomm baseband chips by conducting an analysis of manufacturing costs at TSMC, which makes some chips for both companies.
Blevins testified that Amon “finally leveled with me. He said, ‘I just came back from an investors’ conference and I am under intense pressure to monetize [our technology] and I will have whatever the market can bear and Apple can afford to pay this — we don’t need to talk about costs and margins’.” After this, Blevins claimed, Apple “kicked off a new project to find an alternative supplier” called Project Antique, which led to the deal with Intel.
He also reiterated claims of the practice of double-dipping – at the heart of criticisms of Qualcomm for years, but something the firm has always denied. Blevins said he became aware, in 2005, of the alleged use of a unique linking of patent licensing deals to chip sales.
“In a substitute of samples, we got this letter” asking for a patent licence first, he said, adding: “In 20 years in this industry I had never seen a letter like this…Our interpretation was ‘no license, no chips’.” He said Qualcomm also asked for a cross-licensing deal for Apple’s IP. “We were taken aback. We knew we would not cross-license our IP back to them, we were just going to buy a chip.”
But a Qualcomm attorney noted that, in agreements in 2007 and 2009, Apple agreed to pay Qualcomm royalties although it did not buy its chips then.
On Qualcomm’s side, co-founder Irwin Jacobs and CEO Mollenkopf were among those testifying. Jacobs set out his firm’s take on its policies in the opening of the case for the defense. Then an FTC attorney showed Jacobs documents suggesting that the firm reduced CDMA royalties for China Unicom in exchange for a pledge to use its chips worldwide. And he showed an email from Jacobs to a Samsung executive promising a royalty reduction if the South Korean giant continued to purchase an agreed percentage of its W-CDMA 3G chips from Qualcomm.
“They were a good customer, purchasing a large percentage of chips from us, and we wanted to encourage that,” said Jacobs, who was CEO until 2005 and on the board until 2012.
In a 2004 letter, Qualcomm told an LG executive that it would have to stop purchase orders and shipments of W-CDMA chips if LG did not agree to pay royalties.
“This was for 500 and 6,000 [test] units, not production quantities … Chips for CDMA continued to ship during this dispute without any disruptions,” Jacobs insisted. “They claimed if we shipped [the W-CDMA chips], they would have no responsibility to pay royalties for those or other chips … I don’t know what the resolution was other than we continued to do business with LG,” he went on.
Other similar emails were produced, and Jacobs – with clear recall despite his 85 years – had an explanation for each one. But an overall picture of a near-monopoly player in the 3G patents space, using its power to put customers under pressure, was clearly painted by FTC prosecutors. Monica Yang, an IP attorney for Taiwan’s contract manufacturer Pegtron, testified about the “high time pressure” it was under in 2007 to sign a CDMA2000 licence with Qualcomm – essential to win deals to assemble iPhones.
“When I negotiated, I knew you had to sign the [royalty agreement] to get the chipsets … We were in a position where we didn’t have much to bargain with,” Yang said.
Marvin Blecker, VP of licensing for Qualcomm until 2014, noted that the company sometimes offered incentives to get OEMs to adopt 3G rather than WiMAX, the Intel-backed technology which was put forward as an alternative to LTE – but, as it came to market before LTE, was often competing with 3G in device deals.
Mollenkopf insisted that Qualcomm has never cut off or disrupted supplies of chips to a handset maker to enforce a licensing deal, denying testimony to that effect from some OEMs. “We have the right to do it, but we don’t do it…It’s bad business, it isn’t good for the customer relationship and it’s hard to be a top-tier supplier like we want to be if supply is disrupted,” the CEO said.
He also denied the idea that Qualcomm was close to being a monopoly because, in 2012, he judged there was “not enough standalone modem business for rivals without the iPhone slot”, which made it highly strategic for all players. He pointed to the risk, to Qualcomm, that Samsung would make most of its own basebands, and go “more vertical and hostile”; and previous fears that the other CDMA supplier, Via Tech, might be acquired by Intel or Broadcom and become a viable competitors; or that Mediatek could get “over the quality threshold” and become a major challenger at the high end.
But a procurement executive from the Motorola division of Lenovo said he had “never seen such a significant fee tied to another IP we licensed” as that for a Qualcomm baseband. Today, alternative baseband suppliers are available but not as effective in high end products, and so Motorola still pays Qualcomm per-device royalties on CDMA of 50 cents to $1.
“The adder has declined but I still pay an adder,” said the executive. “I’ve been working almost six years to bring up a premium tier competitor to Qualcomm and have never been successful, and quite frankly my product roadmap today is 100% all-in with Qualcomm. There are too many barriers to bring up an alternative.”
That will not change with 5G, in his opinion. “Qualcomm is ahead of Samsung a fair number of months. Verizon is really pushing us for products this year and we can only do it with Qualcomm,” he said in a deposition taken in early 2018.
Judge Lucy Koh – who also presided over the landmark, and almost never-ending, battle between Apple and Samsung in Silicon Valley – will rule on the case after January 28. In April, a separate case between Apple and Qualcomm is set to begin proceedings in San Diego, Qualcomm’s home city.
Key milestones in the Qualcomm-Apple dispute:
January 2017 – Apple files a $1bn lawsuit, accusing Qualcomm of charging excessive royalties for its technologies and demanding fees for technologies it did not develop, such as Apple’s Touch ID. Apple claims it has been “overcharged billions of dollars on Qualcomm’s illegal scheme”. It withholds royalties and later says that its manufacturing partners, which pay many of the iPhone-related fees, will do so too.
April – Qualcomm countersues, claiming that Apple “breached” and “mischaracterized” agreements with the chipmaker and interfered in deals with Qualcomm licensees.
June – Apple claims Qualcomm’s business model is “illegal” and that some of the patents at issue are invalid.
July – Qualcomm files suit with the US International Trade Commission, asking it to block imports of iPhones and iPads accused of infringing its patents. It accuses Apple of illegally importing and selling iPhones “that infringe one or more claims of six Qualcomm patents covering key technologies that enable important features and functions in iPhones.” The company also files a second suit petitioning the ITC to block Apple’s imports of phones and tablets that do not include Qualcomm’s components.
Apple files to invalidate four Qualcomm patents.
Qualcomm accuses Apple of “a multiyear campaign designed to steal Qualcomm’s confidential information and trade secrets”. It alleges that Apple used information from Qualcomm software development tools to improve the performance and market readiness of “lower quality modem chipsets”, including Intel’s. This goes a lot further than another suit, filed last November, in which Qualcomm alleged that Apple passed its confidential information to Intel – but accidentally.
November 2018 – Chinese court issues injunctions on sales of a wide range of iPhones models.
January 2019 – German court in Mannheim throws out Qualcomm’s latest patent suit against Apple, though an earlier trial in Munich issued an injunction against iPhones for infringing another patent – that still stands though is subject to appeal.
January 2019 – US Fair Trade Commission (FTC) trial begins, hearing accusations of antitrust against Qualcomm in the US District Court in San Jose, California. This is separate from investigations by the ITC.