Last week Apple filed a lawsuit against chipmaker Qualcomm. For every phone Apple sells, a marginal portion is paid out in royalties to Qualcomm, who makes most of the mobile chips in iPhones. The problem is that not every iPhone uses Qualcomms’s chips anymore.
When Apple’s five-year exclusivity contract ran its course last year, the company began using Intel’s wireless modem chips instead. The Intel chips are in around half of the newer iPhones.
However, Qualcomm claims that since competitor chips use their patents, the royalty fees are still justified. Quarterly rebates to Apple are meant to reimburse some of this, but Apple claims their one-billion-dollar rebate from last fall is being withheld.
According to Fortune, Qualcomm’s royalty licensing division earned “$6.5 billion of pretax profit on $7.6 billion of revenue. Meanwhile, the company’s chip business itself only made $1.8 billion in pretax profit on $15.4 billion.”
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Royalties and patents
The Federal Trade Commission also filed a lawsuit last week challenging Qualcomm’s royalty practices. Both Apple and the FTC pointed out that Qualcomm charges royalties based on the total value of a device, not just the cost of the mobile chip. Qualcomm deals directly with smartphone makers instead of chipmakers.
Rather than licensing relevant patents and paying royalties directly to the owners like most companies, Qualcomm forces smartphone makers to pay them directly.
The FTC noted some smartphone makers have to pay patent royalties to Qualcomm even if another company made the chip. Qualcomm has also actively suppressed its competitors by refusing patent licenses to companies like Intel and Samsung.
Not the first time
While Apple has not commented on the lawsuit, Fortune notes, “Qualcomm says that its practices have been misrepresented by Apple and others that are merely seeking to pay less for its valuable technology.” Regardless of their interpretation, Qualcomm has certainly staked out a monopoly in the chip game. Two years ago China imposed a huge fine on the company and forced them to negotiate with new device makers. These new lawsuits may impose more change on the company.
Qualcomm stands by their claims to legitimacy, stating their thousands of patents are fairly licensed. Stay tuned to find out how this plays out for them when they battle it out with Apple and the FTC.