With Qualcomm’s appeals against a US import ban pending, it continues to play hardball with adversary Broadcom, rejecting a patent settlement proposal of $6 per handset. The rejection of the suggested deal, which it says would have cost $1.5 billion to $2 billion over three years, shows how vital it is to the Qualcomm model, and investor confidence, to defend its IPR to the hilt – which means no compromise that might open floodgates to other actions like Broadcom’s and even weaken it in its ongoing licensing battles with Nokia. It also reflects the likelihood that Qualcomm, working with Sprint Nextel, has already arrived at a workaround for the patents that Broadcom allege have been infringed in Qualcomm’s 3G chipsets, a claim that was upheld by the US International Trade Commission. This led to the threatened injunction against imports of new 3G handsets based on the larger chipmaker’s technologies. This would mainly affect CDMA2000 EV-DO models, and so has been fiercely opposed by CDMA carriers and handset majors, including Verizon, Sprint, Samsung and LG.
While all these factors are enabling Qualcomm to maintain a resolute stand, at least until appeals against the injunction are exhausted, the company is not being entirely inflexible. It has offered Broadcom a settlement, far more financially modest, but suggesting it is prepared to accept the ITC ruling and recognize its rival’s patent claims, in order to get this issue off its plate and leave it to focus on the more critical dispute with Nokia. Whatever the rights and wrongs of the patent claims on both sides, Qualcomm does need to strike a balance between defending the IPR on which its market position depends so heavily, and not attracting further antitrust attention by being perceived to be too obdurate. While shareholders will be very shaken by any major concession on the IPR front, which could set dangerous precedents in other technologies and disputes, including those with Nokia, they will also be made nervous if they see Qualcomm pursuing a route that could engage it in even more lawsuits and official probes.
Qualcomm rejected Broadcom’s proposal of $6 per unit, but said it had offered to pay its rival $100m for rights to the disputed patents, which concern power saving in handsets. It also offered Broadcom a royalty-free license to use Qualcomm’s patent portfolio. On the surface, this appeared to represent a huge concession and a major financial saving for Broadcom, and is a technique Qualcomm is increasingly using to promote some of its new technologies like MediaFLO and sweeten the pill of its hard line in its core technologies. However, these royalty-free licenses, under Qualcomm’s system, do not exempt the chip partner’s customers from payments, and Broadcom said accepting the offer would have left its phonemaker clients liable to Qualcomm royalties. It said it only made its $6 offer after Qualcomm had refused a royalty-free settlement that would also include handset makers and other chip customers – an almost impossible demand, since it would effectively wipe out the CDMA giant’s royalty revenue stream, if extended to other and larger customers such as Nokia.
It is very unusual for the precise figures in such licensing negotiations to be made public but a letter from Broadcom on June 25, and Qualcomm’s response, reached certain carriers. Broadcom’s general counsel, David Dull, suggested that Qualcomm pay $6 for every broadband capable handset that included the disputed battery life technology, when sold by a US carrier. Qualcomm executives said the fee would translate into a royalty rate of 30% on its chips, far above the industry average, and general counsel Louis Lupin claimed Broadcom’s real motivation was to “destroy Qualcomm’s business model”.
“Broadcom’s prospective customers are already paying us a royalty,” Lupin told the Wall Street Journal. “There is no double dipping here.”
Of course, the issue could potentially go away completely if Qualcomm can find a workaround for the disputed patents. Sprint Nextel is said already to be testing a software patch from Qualcomm that would get round the threatened handset import ban. Since the ban would not seriously affect carriers until Q4, there is a little leeway to get a workaround to market. Qualcomm said it is working to provide its customers with a technical solution while emphasizing its commitment to the appeals process.
Like Verizon, Sprint Nextel is also backing Qualcomm in its call for a presidential veto on the ITC decision, and the operators would rather this succeeded than rely entirely on patches. ‘We’re working on legal challenges and all technical actions possible to prevent an ITC ban on new handsets,’ Sprint said, but a spokesperson added: ‘There’s no software patch free of technical, procedural and legal uncertainties.’ Qualcomm would also, clearly, prefer legal vindication since this would preclude any settlement costs over these patents and would be a serious display of its litigation power in the US, potentially deterring other assaults.
However, failing this, a credible workaround could pull the rug from under Broadcom’s feet, reinforcing the view that the smaller company, while it has certainly attracted attention to the battle against Qualcomm royalties, has picked the wrong battle. By focusing on patents that Qualcomm can relatively easily work round, and fighting its case in the US, where the CDMA giant has the most powerful allies, notably Verizon Wireless, it has little prospect of long term victory. It runs the risk of emerging as something of a fall guy for Qualcomm’s fiercest challengers, particularly Nokia and Ericsson – making their case for them in the US, but without gaining any real commercial advantage from it, while the Scandinavians focus on battles where Qualcomm has far fewer weapons.