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

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.