Qualcomm should change its licensing before Apple and the industry change Qualcomm

It's easy to understand why Qualcomm would try to gouge every nickel and dime it could from Apple and other wireless device manufacturers. Qualcomm owns the key technologies for CDMA and LTE networking. Despite the usual agreements that come with being included in a standard — that you will charge fair, reasonable, and non-discriminatory licensing fees — short-term abuse can be so lucrative for a company that it oftens fails to consider long-term sustainability and consequences.

Bruce Sewell, Apple's senior vice president and general counsel, speaking to Bloomberg:

"Here it is," Apple's Sewell says, sliding a fingernail-size square covered with electrodes across a conference room table: a Qualcomm modem. "That thing sells for about $18."He means the chip itself, before any royalties. Qualcomm's business model, which is either ingenious or diabolical depending on whom you talk to, is to allow any chip company to use its technology royalty-free. Phone manufacturers can choose to buy chips from Qualcomm or one of the other five companies that make modems using Qualcomm's technology. Either way, they still have to pay Qualcomm its 5 percent.

Qualcomm doesn't want to be paid for its chips. It wants a cut of the entire price of any device that uses its chip. It's not dissimilar to Apple or Samsung saying: If you use an iPhone or Galaxy S for your business, it won't cost you the price of the phone, it'll cost you a percentage of your business.

Not only is it ridiculous, it's untenable. Were other equally important components of a computing device licensed that way — the camera system, the display technology, the Wi-Fi, Bluetooth, and NFC radios, the location and positional sensors, and the list goes on and on — the amount could theoretically reach 80%, 100%, even 120%.

It makes the kind of sense that doesn't.

Because Qualcomm spends more on R&D than any of its peers, its modems are the most advanced. For years, Apple considered Qualcomm's to be the only modems good enough for the iPhone. That, Sewell says, is why Apple put up with Qualcomm's licensing scheme for years. If Apple refused to pay the royalty, Qualcomm could cut off its modem supply, forcing Apple to rely on inferior chips. That calculation changed in 2015, when Apple began working with Intel Corp. to develop a modem that was used in some versions of the iPhone 7. "What prompted us to bring the case now as opposed to five years ago is simple," Sewell says. "It's the availability of a second source."

Apple feels like it no longer needs to pay the exorbitant "Qualcomm tax". In part, that's because Intel — which bought original iPhone modem-maker, Infineon — can now also supply cellular modems for iPhone and perhaps for other products going forward.

What's more, with the W1 chipset introduced in AirPods and W2 in Watch series 3, Apple is beginning to flex its own wireless muscles. This year, with the A11 Bionic system-on-a-chip in iPhone X and iPhone 8, Apple went from custom central processors to fully custom graphics processors. It's not impossible to imagine the company could go from Wi-Fi and Bluetooth to cellular one day as well.

Next year, carriers will begin testing so-called 5G, an even faster standard that's widely seen as necessary to the development of technologies such as augmented reality and driverless cars. Qualcomm has been working on parts of the standard for a decade, which Mollenkopf says is a reason the dispute with Apple is coming to a head now. "This is maybe a little bit wonky," he says, "but there's always a period of time where the industry is a little bit stable and there's a battle for margin." Once 5G hits the market, he argues, electronics companies will have new opportunities for growth and will be happy to pay Qualcomm's fees again.Apple's lawyers say that's self-serving nonsense, and they're preparing for a trial. "There's no way that this case settles, absent a complete reinvention of the licensing model that Qualcomm has adapted in the industry," Sewell says.

Qualcomm might be delusional but, if so, it's preventing them from seeing the larger threat.

You're irreplaceable. Right up until you're replaced. My read is that the industry, in general, hasn't been happy with Qualcomm's tactics for a long time. Now it's coming to a head. And Apple is one of the few companies with the resources and sense of right (" 'It's not that we can't pay,' Sewell says. 'It's that we shouldn't have to pay' ") to prosecute this for the long haul. Even as it reduces its dependency on Qualcomm down to nil.

If you had to pay Apple or Samsung $2,500 for your phone because you used it to earn $50,000 at your job, even though you also used other things to earn that money, you'd likely feel the same way.

That's why Qualcomm would do better counting its lucky stars it could gouge for as long as it did, and then quickly finding a more reasonable, less discriminatory, and far more sustainable way to work with Apple and other manufacturers going forward.

"What's the first thing you do when you land on a flight? You turn off the airplane mode," [Qualcomm's Matt Grobb] says with a grin. "By the way, we invented airplane mode. That patent's out in the lobby."

Nortel, another networking giant, once had thousands of communications patents as well. Those patents are still around. Nortel is not.

Rene Ritchie

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.

  • So why should the average consumer care about this? Would a change in the way Qualcomm does business result in consumers paying less for devices that are already increasing in cost? In other words, if the price Apple and Samsung and other manufacturers pay to Qualcomm decreases....will the price that we the consumers pay to companies such as Apple or Samsung? If not...why should we care?
  • I can't help but notice that the cellular Apple Watch is on $70 more rather than $130 more like on an iPad. Not saying it has to do with this, and it invites a lot of criticism over still charging $130 onnthe iPad. Still, it's interesting to me at least.
  • That's kind of my point. Honestly, if Apple isn't adjusting their prices if Qualcomm plays fair...I don't really care lol. My feelings always come back to the consumer. Apple can absolutely afford the price Qualcomm is charging. They are the most profitable company in the world. So I don't care about insanely rich companies being "over charged" for technology made by another company that ONLY that company can provide. They have the right to set their prices as they please. Capitalism. Now...if Apple and Samsung and company are fighting the good fight so they can offer their products to the consumers at a lower price...then I'm ALL for that, lol.
  • Currently Apple has to pay a premium for each device containing a modem and they must recharge that cost to us, and that's normal. Now if they can get Qualcomm to go from a percentage to a fixed raisonnable price instead, Apple won't certainly lower its prices, but they will have some lead way to add more features for the same current price.
  • So the consumer benefit is the possibility of more features in our devices? Yea...I don’t really care about this ongoing saga between Qualcomm and device manufacturers lol. I don’t see this benefitting us at all.
  • Don’t forget the watch get also 8 GB extra storage
  • Companies like Apple and Samsung and even Qualcomm spend tons of hours and money on R&D. All that must be payed for by the total price of the product.
    Instead of Qualcomm figuring out how much it’s costs are, forecasting the quantity of sales and determining a price, they’ve decided to take as much as they can get.
    Like the idea of $18 or 18%, whichever is greater.
    This affects consumers because Apple has, does and will continue to push the entire industry forward.
  • That’s a straw man argument. You have zero evidence that the price of an iPhone would not be less if they didn’t have to pay a Qualcomm tax. Apple prices their phones to make a specific margin. If past performance is any indication, Apple keeps their prices stable and don’t maximize the prices people would be willing to pay. And that would indicate more features might be included on a $699 (or $999) phone if Qualcomm didn’t get their pound of flesh.
  • I'm not making an argument. I'm saying I don't care because I don't see anything changing for the consumer. If I'm wrong that's awesome. Time Will tell.
  • No way will the consumer see any change in pricing. Apple will keep the same prices even if they didn't have the "qualcomm tax"
  • "Nortel, another networking giant, once had thousands of communications patents as well. Those patents are still around. Nortel is not." I find it rather amusing that Rene made this statement and then stopped short of saying that those patents Apple (along with others) purchased went into a shell company set up to extort concessions from others, most notably Google, Samsung and other makers of Android devices. Qualcomm extorts concessions = bad & they better watch themselves. Apple sets up a NPE (read: patent troll) and attempts to extort concessions = swept under the rug.
  • Lol, not surprising with Rene..
  • For some reason I was not able to comment directly to cuttheredwire and his/her comment about the $70 vs $130 difference for the cellular functionality upgrade on the Apple Watch vs. the iPad. The non-cellular Apple Watch has a GPS radio, so the cellular version only needs to add a cellular chip. The non-cellular iPad has no GPS radio. The cellular version does. So, the cellular enabled iPad has to add GPS functionality in addition to cellular functionality. I suspect that may account for some of the upgrade price difference.
  • I liked the explanation saying it's like Apple saying to the companies who uses it's product, we want a percentage of your business since you're using our stuff and not for you to just pay for the phone. It's silly what Qualcomm tried to pull.
  • You are attacking Qualcomm, but the real threat is china! What about them?! It make me sick to see so many try to destroy an American company. that can charge what it wants.
  • Rene, you are only defending this because Apple is taking on the fight. Apple takes a percentage of EVERYONE'S business on the iPhone for in-app purchases. Why is that not absurd? There's no patent in play, that's just a plain money-grab by Apple. I commend Amazon for not playing ball. It might be annoying that I have to buy the TV show or movie through the website, then return to the app, but then I'm not paying an unnecessary tax to Apple. And Rene, before you say "but Apple provides the infrastructure to handle those payments", Qualcomm provides the network, chip, and communications technology infrastructure over which those payments travel. Like it or not, independent tests have shown that Qualcomm's chips are superior to Intels, and that Apple intentionally downgrades or prevents the full functionality of the Qualcomm chips to be used in order to match that of Intel. And, even then, Qualcomm's downgraded chips outperform the Intel chips. So, in this case, why shouldn't you pay more for a superior product? Finally, with Qualcomm charging a percentage of the device value for the chip, this allows less expensive phones to remain less expensive, even while taking advantage of the most advanced networking technology, while the more expensive phones to be more expensive. Those of us who like the newest, best devices pay a higher tax. Guess what? That's how taxation works. You pay $1,000, more goes to taxes. You pay $100, less goes to taxes. But in the case with Qualcomm, both consumers receive the same networking. Rene, stop getting involved in this argument. You clearly show that you cannot be objective.
  • Not the same. Qualcomm does not provide any network. They help to develop a standard. What if you had to pay your ISP an extra 18% percent all because they use WiFi modems? Please stop the Rene bashing. This situation is different. Qualcomm develops he devices and carriers and ISPs buy these devices and deploy them on their networks. Apple foots the cost to keep the AppStore up and running. Electricity, storage, etc. Qualcomm does nothing. Apple doesn’t force you to use inApp purchases. You can sell your products on a separate site and allow users to buy it there. But users prefer convenience. That convenience comes at a cost for apple and thus they charge developers.
  • Aww poor apple. They only have 250 billion dollar in bank. Lets not pay Qualcomm so their execs can make a little more for just putting plastics around the complex wireless core technology that made the existence of smart phones possible. Let's make the Chinese take build the chip without spending a dime om R&D.
    Apple's greed destroys America!
  • Qualcomm has thousands of patents in 3G/4G (and now 5G) that without those contributions we would not be using smart phones the way we are using it today. Apple has built its 250 billion dollar cash because of those Qualcomm innovations. To keep these innovations going, Qualcomm spends 5.5 billion dollars every year and they don't have 250 billion cash in bank like Apple does. Without the Royalties the R&D will not be sustainable as the Chinese and Taiwanese will be able to rip off and copy all the innovations at much lower cost due to lower labor.
    One of the reasons that smartphone chips are so cheap is because of the current model which was set many years ago so the R&D cost can be recovered from the device. If they had not used this model the smartphone chips would cost a lot more similar to the price that Intel charges for lower and mid range laptop CPU's. And now that the chip prices are low because of that model, apple wants Qualcomm to get a percentage of the chip. QCOM will not be able to sustain the R&D spending required for innovations if that happens. Period!
    Apple can destroy Qualcomm by not paying the fair value of the technology that made them rich and that only damages the innovation. The $5-$10 saving that apple makes will surly add to Tim Cook's and executives paycheck and not passed to the consumers. But they sure can destroy an American innovation icon.