Qualcomm, which has always been “mercury retrograde”, has ushered in multiple positives this year.
After successively resolving the time-consuming patent disputes between Apple and Huawei for many years, Qualcomm successfully overturned the US Federal Trade Commission’s (FTC) previous rulings on Qualcomm’s “abuse of monopoly power” and “domination of the market.”
On August 11, 2020, U.S. time, the Ninth Circuit of the U.S. Court of Appeals ruled that the U.S. Federal Trade Commission’s (FTC) antitrust (antitrust) ruling against Qualcomm in 2019 was not valid. According to Bloomberg News, Qualcomm’s appeal victory is worth billions of dollars. Affected by this good news, Qualcomm shares rose nearly 5%.
On the day of the successful appeal, Qualcomm’s official website immediately updated the page saying that it welcomed the appeal court’s comprehensive and unanimous revocation of the district court’s decision in the FTC case, and was very satisfied , emphasizing that Qualcomm has made great contributions to the industry. At the same time, the decision also verified Qualcomm. The effectiveness, feasibility and legitimacy of the business model and licensing plan.
▲Update on Qualcomm’s official website: Qualcomm welcomes the Court of Appeal to completely and unanimously overturn the judgment of the District Court in the FTC case | Qualcomm’s official website
This is another heavy news following this year’s patent settlement with Huawei. It has cleared the last existing “stumbling block” for Qualcomm’s smooth and stable development in the 5G era, and further strengthened Qualcomm’s “leading” position in the 5G era. It is foreseeable that Qualcomm will have no worries in the 5G era.
The mandatory “Qualcomm Tax” Looking back on the FTC v. Qualcomm case, the FTC has always raised various questions about Qualcomm’s business model. In January 2017, the FTC filed a lawsuit against Qualcomm in the Northern California Court of the United States, arguing that Qualcomm was suspected of monopolising the market. The lawsuit mainly includes three items. First, Qualcomm requires its chip customers to sign a patent license agreement before selling chips to it. This policy is called “no license, no chip.”
Second, Qualcomm refused to provide a standard essential patent license (SEP) to rival modem chips; third, Qualcomm reached an exclusive deal with Apple. The FTC believes that each of the above three actions maintains Qualcomm’s monopoly in the market and extracts high royalties and other unreasonable licensing terms.
After a brief trial in January 2019, in May, Judge Lucy Koh issued a lengthy ruling, arguing that Qualcomm has the power to dominate the market and the various actions of the FTC litigation caused monopoly damage to the market. The court issued a comprehensive injunction prohibiting Qualcomm from using “no license, no chip” as a bargaining chip, and prohibiting Qualcomm from reaching explicit or de facto exclusive deal agreements with manufacturers.
Then, Qualcomm immediately appealed to the Ninth Circuit Court to suspend the injunction. After a year of appeals, the Ninth Circuit finally passed 3-0 and unanimously overturned Gao Lanhui’s ruling.
In fact, throughout the 3G and 4G era, Qualcomm has been plagued by various antitrust lawsuits. Since Qualcomm dominated the global communications market, its business model has been criticized and controversial. Not only the local company Apple and rival Intel’s dissatisfaction with Qualcomm’s patent licensing model, Qualcomm has almost accepted various “examinations” from all over the world.
The most famous is that in 2013, the China Development and Reform Commission initiated a two-year anti-monopoly review on Qualcomm, and finally imposed a fine of approximately RMB 6.1 billion on Qualcomm, lowered the authorization fee collection standard, etc., setting the highest record of domestic anti-monopoly penalties at that time.
Not only that, the European Union accused Qualcomm of abusing market power to defeat competitors, and the South Korean Fair Trading Commission imposed a fine of approximately US$854 million on Qualcomm.
However, neither the corporate lawsuits nor the penalties imposed by various national antitrust agencies have substantially shaken Qualcomm’s fundamental business model. For example, in 2015, China’s fines on Qualcomm only accounted for 3.8% of its revenue that year, with limited impact, and the fundamental mode of Qualcomm’s patent fees has not changed.
Qualcomm is still making a lot of money globally through patent fees + chip sales.
In fact, the main reason for the huge dissatisfaction of various regional market supervision departments and industry chain manufacturers with Qualcomm is that different customers’ patent licensing fees are treated differently, and more importantly, the “Qualcomm tax” is too expensive.
For example, a mobile phone priced at 3,000 yuan that does not support 3G and only supports 4G, in addition to the 65% patent starting fee, also charges 3.5% of the 4G patent fee on this basis, which is 3000×65%x3.5% Finally, mobile phone manufacturers need to pay 68.25 yuan in patent fees. If you support mobile 3G, you still need to pay 3G patent fees. In addition, coupled with the cost of mobile phone chips, the cost of the entire mobile phone will increase a lot, and the profitability of mobile phone manufacturers will be greatly reduced.
For manufacturers with a certain patent foundation, such as Apple, Huawei, and Samsung, they have certain bargaining power when negotiating with Qualcomm. However, for small and medium-sized mobile phone manufacturers, they dare not say anything and can only pay patent licensing fees in accordance with Qualcomm’s requirements, even if Qualcomm chips are not used in the mobile phones.
In the 5G era, the world is almost at the same starting line, and the manufacturers that contribute patents are more diversified. This is also the best time to subvert the market structure and break the market monopoly. However, due to internal and external factors, Qualcomm will once again win 5G.
After 3G and 4G, win 5G? In April 2019, Qualcomm and Apple ended a two-year patent dispute. Apple will pay Qualcomm about US$4.7 billion in patent fees, and the two have reached a six-year license agreement, including an option that can be extended for another two years and a multi-year chipset supply agreement. A few hours later, Qualcomm’s rival Intel announced its withdrawal from the modem market.
Since 2011, Apple iPhone began to use Qualcomm modems. Since 2016, Apple has adopted Intel modems in some iPhone 7 and iPhone 7 Plus mobile phone models, and Qualcomm is no longer the only supplier. In 2018, all Apple iPhone XS series use Intel chips.
Regrettably, Intel, which Apple fully supports, is not strong. Apple’s famous “signal gate” incident is due to the technological gap between Intel modems and Qualcomm, which caused the user’s mobile phone signal to go up and down, and Apple lost some of the praise in the consumer market.
Therefore, while worrying about the progress of the 5G product release and whether Intel’s 5G modem technical capabilities passed the test, Apple was “forced” to reach a settlement with Qualcomm. Apple is one of Qualcomm’s largest customers and contributes nearly 30% of Qualcomm’s revenue each year. The reconciliation of the two is of great significance to the sustainability of Qualcomm’s future business model.
If the patent settlement between Qualcomm and Apple is “renhe”, it is because rival Intel “cannot support it.” So, the reconciliation between Huawei and Qualcomm not long ago, and the overthrow of the FTC case this time, is more like a “time of day”.
The US government hopes to dominate the global 5G voice and maintain its absolute leadership in various technology industries. According to Bloomberg News, an important factor in the miraculous reversal of the FTC case is that the U.S. judicial department and Qualcomm rarely stand in line and agree, believing that the previous judgment of the District Court may damage the U.S.’s leading position in 5G wireless networks and other technologies. In particular, considering the market positions of competitors Samsung, Huawei, and MediaTek, it may harm the national security of the United States.
At this point, Qualcomm has drawn termination signs in litigations around the world and even in the United States, as well as with major major customers. Qualcomm has also signed multi-year patent license agreements with major mobile phone OEM manufacturers in the market, and Qualcomm can breathe a sigh of relief for the time being.
Although it is temporary, at least in the 5G era, Qualcomm will no longer worry about its business model ushering in a large-scale defection. After all, communications patents have continuity. Regardless of whether Qualcomm chips are used, as long as they are connected to a mobile network, they must pay Qualcomm patent licensing fees. Qualcomm has become an insurmountable mountain, and can only expect the next generation of communication standards to bring new subversion.
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