Qualcomm: Unfair, unreasonable, and discriminatory and why Apple needs to win

Here's how Wikipedia defines FRAND, the fair, reasonable, and non-discriminatory terms under which holders of patents agree to license technology in exchange for that technology becoming part of a standard and, as such, essential:

Reasonable and non-discriminatory terms (RAND), also known as fair, reasonable, and non-discriminatory terms (FRAND), denote a voluntary licensing commitment that standards organizations often request from the owner of an intellectual property right (usually a patent) that is, or may become, essential to practice a technical standard.[1] Put differently, a F/RAND commitment is a voluntary agreement between the standard-setting organization and the holder of standard-essential patents. U.S. courts, as well as courts in other jurisdictions, have found that, in appropriate circumstances, the implementer of a standard—that is, a firm or entity that uses a standard to render a service or manufacture a product—is an intended third-party beneficiary of the FRAND agreement, and, as such, is entitled to certain rights conferred by that agreement.

Apple, back in January, via CNBC:

"For many years Qualcomm has unfairly insisted on charging royalties for technologies they have nothing to do with. The more Apple innovates with unique features such as TouchID, advanced displays, and cameras, to name just a few, the more money Qualcomm collects for no reason and the more expensive it becomes for Apple to fund these innovations. Qualcomm built its business on older, legacy standards but reinforces its dominance through exclusionary tactics and excessive royalties. Despite being just one of over a dozen companies who contributed to basic cellular standards, Qualcomm insists on charging Apple at least five times more in payments than all the other cellular patent licensors we have agreements with combined.To protect this business scheme Qualcomm has taken increasingly radical steps, most recently withholding nearly $1B in payments from Apple as retaliation for responding truthfully to law enforcement agencies investigating them.Apple believes deeply in innovation and we have always been willing to pay fair and reasonable rates for patents we use. We are extremely disappointed in the way Qualcomm is conducting its business with us and unfortunately after years of disagreement over what constitutes a fair and reasonable royalty we have no choice left but to turn to the courts."

The way I understand it, Qualcomm holds a few patents that are essential for electronic devices to communicate on cellular networks, and holds those patents ransom in exchange for a deep cut not just of the modem that enables communication but the entire device built around the modem.

It's like the maker of your garage door demanding a percentage of the entire price of your house for allowing your car to fit inside. Or the vendor of your tires wanting a cut of your entire car.

Qualcomm's exact terms haven't been disclosed but rumors over the years have pegged it at exorbitant levels, especially for devices that need to access the legacy CDMA networks in the U.S., namely Verizon and Sprint. Exorbitant enough that it explains the $130 price difference between a Wi-Fi-only and Wi-Fi + Cellular iPad with a Qualcomm modem.

That's cost that's directly passed on to customers like us. It's a Qualcomm "tax", and we pay it regardless of whether or not we use Verizon or Sprint or even live in U.S. We pay it to such a degree that Apple started testing Intel modems (based on Infineon, the original iPhone modem suppliers) in more recent iPhones that didn't have to connect to Verizon or Sprint.

Qualcomm this week:

Qualcomm Incorporated (Nasdaq: QCOM) today announced that it is filing a complaint with the United States International Trade Commission (ITC) alleging that Apple has engaged in the unlawful importation and sale of iPhones that infringe one or more claims of six Qualcomm patents covering key technologies that enable important features and functions in iPhones. Qualcomm is requesting that the ITC institute an investigation into Apple's infringing imports and ultimately issue a Limited Exclusion Order (LEO) to bar importation of those iPhones and other products into the United States to stop Apple's unlawful and unfair use of Qualcomm's technology. The Company is seeking the LEO against iPhones that use cellular baseband processors other than those supplied by Qualcomm's affiliates. Additionally, Qualcomm is seeking a Cease and Desist Order barring further sales of infringing Apple products that have already been imported and to halt the marketing, advertising, demonstration, warehousing of inventory for distribution and use of those imported products in the United States."Qualcomm's inventions are at the heart of every iPhone and extend well beyond modem technologies or cellular standards," said Don Rosenberg, executive vice president and general counsel of Qualcomm. "The patents we are asserting represent six important technologies, out of a portfolio of thousands, and each is vital to iPhone functions.  Apple continues to use Qualcomm's technology while refusing to pay for it. These lawsuits seek to stop Apple's infringement of six of our patented technologies."

Apple seems willing and even happy to pay for Qualcomm's technologies. Simply not to be extorted into grotesquely overpaying for them.

FRAND is a pact between inventors and industry. It allows technology to become a standard — a dependency — in exchange for that technology being made available to everyone in the industry, fairly, reasonably, and without discrimination.

For years, Qualcomm seems to have wanted all the advantages of FRAND but none of the responsibilities. That's easy to understand: If you make an industry as invaluable as the telecommunications utterly dependent on you, and then you ruthlessly extract as much value as you can from it and everyone connected to it, it's the legal version of a protection racket. And you become as dependent on those profits as a gangster does on its cut.

Until companies like Apple start refusing to pay up, that is. And governmental regulatory agencies from China to the U.S. start investigating.

These types of investigations and lawsuits can drag on for years or they can be settled seemingly out of the blue. Multi-billion-dollar companies certainly have the resources to sustain litigation and appeal as long as they need to. But sometimes they also have the foresight to avoid when it''s best for everyone, especially if they can look long-term.

Licensing essential communications technologies at a fair, reasonable, and non-discriminatory rate is absolutely better for everyone. And charging based on those technologies, not entire devices that you've contributed nothing else towards, while obviously better for Apple is also better for the shared customer because we end up bearing more than just the difference in price.

I like Qualcomm's modems. I'm just sick of paying their "tax". I don't have the resources, much less the control, to do anything about it. But Apple does. And the various regulatory bodies certainly do.

And godspeed to them.

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.

22 Comments
  • So many issues which display a lack of understanding, ill just take a few. First, on the SEPs. Any royalty is capped at an amount significantly below the retail price of an iPhone (or any Android phone). Evidence? Look at many comments made during earnings calls and various press releases over the past decade. Moreover, APPL's contract manufacturers (e.g., Foxcomm) pay on a capped royalty like rate at the CM's wholesale prices. Second, FRAND. Years before APPL entered into the market, every handset maker entered into the same basic agreement regarding royalties (subject to some type of offset based upon the patent portfolio of the licensee). Those companies took the leap into the unknown - taking a risk, signing an agreement providing for royalties. Meanwhile, APPL sat on the sidelines letting other companies do the heavy lifting in creating a brand new market. Once it was crystal clear the market was real, enormous, and lucrative, APPL enters. APPL was offered a license in the same terms as all other companies (since modified in accordance with the Chinese agreement). So, APPL (through the CMs) pays roughly 10-15$ in QUALCOMM royalties for chip set manufactured by other suppliers (think INTC). The royalty is based upon a capped wholesale price. Finally, the author doesn't distinguish between SEPs and nonessential patents. ONLY SEPs are subject to FRAND; non essential patents (which simply make the phone work better (in this case with less of a battery drain)) are TOTALLY outside of any FRAND requirements (because, theoretically, the standard will work without the non essentials). QUALCOMM's licensees have total access to these non essential patents - without paying any more on royalties (in other words, get a license have access to the entire trove of patents - SEP and non-SEP). APPL, however, now lacks access to these non-essentials (through its CMs) and there is no requirement to (1) license it under any terms or (2) allow APPL to pay ONLY the FRAND rate for the SEPs. The way it stands now, if QUALCOMM has valid patents on non essential elements, AND APPL is using those patents, APPL has bought itself a long running dispute which goes to the heart of its business; moreover, because FRAND doesn't apply APPL can't decide sometime down the road to accept the SEP license on the same terms as all other licensees. Oh, and one other thing. APPL users should educate themselves on the differences between the QCOM and INTC products used in the iPhone. Ask yourselves: why does APPL throttle the QCOM chip so it's performance is reduced to INTCs level. Ask yourselves: why are US android phones so much faster than the upcoming iPhone? Why doesn't my iPhone take advantage of the new high speed networks? All to save a few bucks for APPL - to the detriment of consumers.
  • That’s quite a chip you’ve got on your shoulder. Tell us how you really feel.
  • Sounds like he/she knows more about it than you do and that therefore you've developed the chip?
  • We will see what the courts say, it seems strange though that Apple is not the only one who is making complaints against Qualcomm. I believe you may have some bias , like many people on both sides, but I believe the truth will come out in the upcoming cases with Apple and the FTC.
  • Talking more ≠ knowing more. Don’t conflate the two.
  • Right back at cha. Tell you what, why don't you come up with a plausible explanation with the same level of depth?
    That's right, I didn't think so,
  • You sound so mature.
  • Lol, no joke, sounds like a Qualcomm employee on their internet defense force. Qualcomm is being handed their butts in courts all over the globe in several different countries for a reason, because they are extortionist & thieves, and I'm very glad to see it happening. Qualcomm's illegal business model is bad for consumers, whether you use iOS, Android, or both, period.
  • oh nooo he did ein't
  • > Ask yourselves: why does APPL throttle the QCOM chip so it's performance is reduced to INTCs level. That's very simple to understand, Apple only sells iPhone, not iPhone with Intel modem and iPhone with Qualcomm modem. If Apple doesn't make all iPhone consistent, you'll have users returning devices with hope to get the faster modem. Apple needs to be able to have suppliers that are capable of scaling to the customers that Apple have. The only way they can do this is to have various suppliers and enforce consistency via different methods they can do. It is not illegal to enforce throttling like this and I'm okay with this. I just vote with my money and not buy it. > All to save a few bucks for APPL - to the detriment of consumers. Apple isn't saving any money doing this, they still have to pay for the said modems from both companies and they potentially lose more money from unhappy customers that do not get "faster Qualcomm" modem. Seriously, you're acting like Apple wants to use the slower modem. No, they do not. Apple is the victim of their biggest success, too many customers, not enough parts to go around.
  • You are making several errors here. Qualcomm has been and continues to be investigated around the world because of the numerous violations it is requiring. Most FRAND patents cost fractions of pennies to the licensee. Very often, those patents are licensed as a package, with dozens to thousand of other patents from numerous other companies. It’s estimated that a leading edge flagship smartphone is encumbered with ar;und 250,000 patents. Yes, a quarter million patents. If companies tried to do with their patent royalties what Qualcomm is doingthen there would be no smartphone at all. Qualcomm is double dipping. That is, they are charging the companies that manufacture the chips that use their patents a licensing fee, and then, are requiring the companies that buy those chips to enter into another licensing agreement. That’s illegal. It’s also been reinforced by a recent Supreme decision that disallows that double dipping. In simple terms, Apple, and other buyers of these chips should not be paying a license fee because the patents rights are existed after first sale, meaning, the first license. Qualcomm has been giving Apple a rebate of most of the licensing fees they’ve been paying, so Apple has allowed the practice to continue. But deter having cooperated with the S Korean investigation into Qualcomm’s practices, for which they were fined close to a $billion, and possibly cooperating with the Chinese investigation, Qualcomm withheld the licensing rebates. That caused Apple to form their lawsuit. As Qualcomm upped the stakes, Apple did too, and so we’re at the point at where we’re at now. But it’s more complex than that, as Qualcomm is now charging Apple with violating 6 patents which experts think are at least partly invalid. In addition, Qualcomm has been charging companies licensing fees for phones that don’t have one of their chip patents. Microsoft used to do this do computer manufacturers. If they sold computers without a Windows install, Microsoft would charge them a Windows license fee anyway. That practice was knocked down in the last federal trial against Microsoft. I assume that it will be killed here as well. Qualcomm is now attempting to prevent Apple from selling phones here that use modems other than their own, which is, on the face of it, ridiculous. Apple also wants to integrate the modem into the SoC, as other manufacturers using Qualcomm’s own chip designs do. Qualcomm has refused to allow Apple to do this. Using the terms may have your argument sound sophisticated, but it isn’t. It’s clear that you don’t understand this situation.
  • The way " I Understand", is another company abusing the spirit of the law if not the Letter of the Law. Companies has done it before and will do it long after Apple, Google, Samsung, and etc are gone. They all do it......But does it make more Albright where when you go to patent extreme you end up hindering where the initial intent was to protect. Makes business sense but is right......
  • 2 options. Just pass the bill on to the consumer, Apple lovers will buy the devices anyhow. Or, Apple is supposed to be the king of innovation, figure out a new design that totally cuts Qualcomm out of the equation. I shed no tears over giants battling it out.
  • They're already passing the bill to the consumer, that’s why it’s an extra $130 for the LTE model. The extra cost isn’t just for the hardware, it’s also for the patent licenses.
  • None of the patents being squabbled over are essential and therefore don't fall under the FRAND umbrella. I'm not saying that Qualcomm are in the right, just that the article's arguments in favour of Apple are flawed.
  • "I like Qualcomm's modems. I'm just sick of paying their "tax"." I like apple's products. I'm just sick of paying their "tax". LOL...I couldn't resist :)
  • Or the idi0t tax, as The Register calls it.
  • ID TEN T?
  • For some bizarre reason imore censures the word "i-diot".
  • Qualcomm's modems are much faster then Intel... Can't compare them.. Different league... That's is ,of course, unless APPL uses them... Now that's apples to apples.
  • So what does your statement have to do with what I was talking about, please help me understand?
  • "while obviously better for Apple is also better for the shared customer because we end up bearing more than just the difference in price. I like Qualcomm's modems. I'm just sick of paying their "tax"" What tax are you paying? Let's not kid ourselves. Apple isn't lowering the cost of the iPhone for us if this passes. They will still charge a premium on their products. I read the cost difference to make the 32 gb 7 compared to the 256 gb 7 was around $40. Yet the sale price difference is $200. All companies are out to pinch as many pennies out of their customer as possible. We just pick and choose who we are ok with.