Breaking the Qualcomm tax

By Rene Ritchie
last updated

Apple A7
Apple A7 (Image credit: Apple)

The FTC is investigating Qualcomm, and Apple is suing them. Tim Cuplan, writing for Bloomberg, follows the money:

According to iSuppli, Apple's iPhone 7 has total component costs of $219.80 for the model with 32 gigabytes of storage. Assuming a licensing fee of 5 percent, Qualcomm receives $11 for every model Apple sells regardless of the fact that three of the most expensive items are the display (which Qualcomm doesn't make), the Apple-designed processor and the radio chips whose suppliers include Intel Corp., Broadcom Corp. and Skyworks Solutions Inc. If Apple were to increase the storage to 128 gigabytes, Qualcomm's revenue would increase accordingly despite the fact that it doesn't even make storage chips. Increase the display size (and thus the cost), Qualcomm collects. A better camera: You guessed it, more money to Qualcomm.

I heard similar a few years ago. Basically that you (Apple) pay, and pay a lot, regardless of whether or not you need the technology. For example, CDMA outside Verizon or Sprint. If you ever wondered why there was a $130 surcharge for iPads with cellular radios, that's the primary reason. Think about what that would translate into for a $3,000 MacBook Pro... and maybe why we don't have that MacBook Pro.

Either way, there are issues of standards-based FRAND technology patents, reasonableness, abusive practices, and the future of wireless to contend with here. Qualcomm — and CDMA — have arguably been holding us back for years.

Depending on how the FTC investigation and lawsuits turn out, that could finally be over.

Rene Ritchie
Rene Ritchie
Contributor

Rene Ritchie is one of the most respected Apple analysts in the business, reaching a combined audience of over 40 million readers a month. His YouTube channel, Vector, has over 90 thousand subscribers and 14 million views and his podcasts, including Debug, have been downloaded over 20 million times. He also regularly co-hosts MacBreak Weekly for the TWiT network and co-hosted CES Live! and Talk Mobile. Based in Montreal, Rene is a former director of product marketing, web developer, and graphic designer. He's authored several books and appeared on numerous television and radio segments to discuss Apple and the technology industry. When not working, he likes to cook, grapple, and spend time with his friends and family.

8 Comments
  • I am one of those people that wondered about that $130 price hike. What's described here is not justified for using a patent. It will be interesting how this plays out. I think a lot of initial opinions will change with more information.
  • According to that quote, the surcharge to add cellular to iPads should increase with the cost of the iPads, which doesn't, and never has; adding cellular to an iPad has always been $130. It is +$130 to add cellular for a $269 iPad Mini 2 (32gb). It is +$130 to add cellular to a $999 12.9" iPad Pro (256GB).
    Either this a misleading or misinformed quote, or the same rules don't apply to the iPad and the article gives a bad example.
    You could also conclude that it should cost no more than $130 to add cellular to a laptop.
    On the other hand, Apple has always, and will always, charge a huge premium for memory which they did not design or invent, both RAM & storage, for every type of product. They usually use the best available for either, but it's designed and made by others, with an unusually high margin. Now they have been modifying industry-standard connections of storage to a proprietary connection, and have been soldering in RAM for years & now soldering in storage. I assume this is so users cannot buy a cheaper model with less RAM & storage then upgrade later, thus monopolizing & consuming that market.
    I assume, and always have, that it is Apple controlling the price of adding cellular to the iPads. I have no proof for or against this assumption other than the previously stated high margins and proprietary practices.
    I do question why no Apple laptop, nor any (maybe very few?) non-Apple laptops have cellular built-in. Especially since there are $999 Apple laptops, not only $3,000.
    I'm fine with Apple paying royalties to any technology which they use; it should be a fair share for both companies, and ultimately the customer. I don't work for free and I would fight tooth and nail if Apple ever "stole" from me or "cheated" me out what's a fair payment. I'm not saying that's exactly the case here, I don't know the exact agreements.
    I am saying that Apple doesn't need to hurt another company only to make a higher profit from their toys. They make and have enough money to operate their faltering company without stepping on and suing everyone in their wake. I highly doubt any reduction in cost to Apple will translate to a reduction in price to Apple customers.
    To claim this is to push towards the next generation of cellular tech is questionable. If Apple has the courage to remove a headphone port from the world's most popular phone (partial sarcasm) surely they can push the cellular industry to the next generation of connectivity, but only if it's a technology from which they can increase profits (not sarcasm). Sent from the iMore App
  • So Qualcomm operates similarly to Apple in that they segment their prices/royalty fees on something that doesn't have a direct correlation to the cost of their contribution, to obtain an average fee that they are targeting? Much like when you explained why Apple segments their pricing by storage capacity? Got it. My question though is, why it this practice demonized when Qualcomm does it but deemed acceptable when Apple does? Sent from the iMore App
  • You can't possibly think the two practices are remotely similar. Qualcomm is abusing FRAND patents. They should be charging a set rate per phone sold. They should not get more money for the same patent because Apple puts more storage or a larger screen in a phone and sells the phone for more money. It is the exact same Qualcomm technology in both phones. Sent from the iMore App
  • But, isn't it the same? Apple adds in 32GB to memory, and the phone magically goes up $100. I guarantee the difference in the cost of the memory chips isn't $100. So, you are essentially paying more for the rest of the phone (which is exactly the same as the phone with less memory). Sounds pretty similar to me. I'm no expert, but is sounds more like Apple needs to improve their negotiating skills/position when working with Qualcomm on licensing their technologies/patents. If Apple agreed to Qualcomm's terms of a percentage of the price of the SKU rather than a flat fee per SKU sold, then that is Apple's fault. Qualcomm should have the right to charge whatever price structure they want for their patents. Just as Apple has the right to try to negotiate the price or develop their own competing technology if they don't like Qualcomm's terms.
  • I wasn't defending Qualcomm's royalty and licensing fee business, just making a point that Apple is also in the business of charging more without giving more. Another example is that as far as I know, Apple takes a percentage of app revenue, not a flat rate for simply hosting the app. Credit card companies use a similar model too. They don't charge a flat rate to a merchant for processing a payment, it's a percentage of the sale, despite them not doing any additional work for processing a $1000 payment vs a $100 payment. Qualcomm's business model also allows companies to pay a lower fee on devices that are never sold, such as devices used for testing and prototypes. They also pay a lower amount on devices that were intended to be sold, but never were. I'd also suspect that Samsung paid substantially less royalty and licensing fees for their Note 7s then they would have if the device wasn't recalled. Sent from the iMore App
  • "My question though is, why it this practice demonized when Qualcomm does it but deemed acceptable when Apple does?" It doesn't take a genius to tell that the blogger is a hypocrite. Right?
  • Isn't Apple also applying the same business model to the App store?
    "the new 85 percent / 15 percent revenue share will kick in (applied per subscriber)"
    So when Apple does it is OK, but no others do it to Apple it's being label as abusive? You are such a hypocrite. Reference URL: http://www.theverge.com/2016/6/8/11880730/apple-app-store-subscription-u...