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Apple, Qualcomm, and a tumultuous year of asymmetrical business warfare

A lot has happened since our first piece, nearly a year ago, on the complicated and fascinating legal war between tech giants Apple and Qualcomm. Without rehashing the entire timeline just yet (look for an upcoming outline from us of the dispute’s many legal fronts and individual timelines), what we want to update you on today is the radical shift in both momentum and initiative we have been observing for several weeks now. After more than a year of conflict, the tide appears to be turning in Qualcomm’s favor.

The short of it is this: Back in early 2017, when Apple officially declared war on Qualcomm by filing suit against the San Diego chipmaker in federal court, Apple essentially seized the initiative. To Apple’s credit, through most of 2017 and some of 2018, it seemed that the iPhone maker was able to maintain that initiative and some of its momentum, thanks to three specific mechanisms:

1. Apple’s decision to stop making royalty payments to Qualcomm, pending the result of its lawsuit. (Thereby suddenly starving Qualcomm of significant quarterly revenues.)
2. Taking advantage of the timing of Broadcom’s aggressive – but ultimately failed -attempt to acquire Qualcomm. (Which temporarily drove a wedge between cadres of Qualcomm investors, threatened to shake up the company’s board, and directed Qualcomm’s attention inward.)
3. Taking advantage of the timing of the FTC’s antitrust action undertaken against Qualcomm.

And so, for the better part of 2017 and some of 2018, Qualcomm effectively found itself under siege, with some of its revenue cut off, foreign agents attempting to organize a coup within its walls, and outside political pressure judiciously applied to draw some of its defenses away from the main siege. The assault on Qualcomm was a brutal thing to watch from our vantage point, and to the San Diego giant’s credit, the fact that it came through the last fifteen months a little bruised and battered, but otherwise unscathed, is a testament to its resiliency. Most companies probably wouldn’t have fared so well after having endured that much, especially all at once. As we draft this article, Qualcomm’s stock is back up to $62 and change (from its low point of $49.75 on April 25^th). While it isn’t quite yet back to the mid-sixties range that it enjoyed before Apple filed its action in January of 2017, it appears to have turned the corner and be heading back up. The start of the commercialization of 5G later this year is expected to help drive Qualcomm’s stock value upward as well.

Why the shift? Simple: Uncertainty depresses stocks. Confidence strengthens them. As Qualcomm clears one hurdle after another, uncertainty about its future fades, and confidence increases. Watching Qualcomm not only survive 2017 but slide into 2018 no longer having to play defense, seems to be helping drive the stock’s value back up. Other factors: Qualcomm’s actuals are good; the company is hitting its numbers; Qualcomm’s IoT, automotive, and China OEM strategies, introduced earlier this year, look promising; and the impending commercialization of 5G is all but guaranteed to be a boost to Qualcomm’s chip and licensing businesses starting in late 2018.

Two questions emerge from the shifting dynamic between Qualcomm and Apple:

1. How did Qualcomm manage to turn the tables on Apple?
2. How will this clash of the tech titans end?

We can help shed some light on both of those questions.

 

Initiative, momentum, and the fundamental principles of war

Take a step back and think of Apple’s war against Qualcomm as a traditional medieval-style battle. Picture the battlefield in front of you – or rather, a board game’s version of a battlefield. Picture both camps, their fortifications, their armies, their resources, the terrain, etc. Now visualize the sorts of strategies and tactics that each side might use to advance on each other, retreat from each other, force the other side to overcommit, gain an advantage here or there, push through their lines, launch a counterattack, and so on.

The type of warfare that both companies have been engaging in for over a year now may not immediately resemble the sort of warfare that would pit artillery against cavalry, or siege-craft against castles, but the same fundamental principles are found in both types of warfare. Courtrooms, boardrooms, even sports arenas are battlefields too, and the rules of combat don’t change a whole lot though, regardless of their form.

Looking at the war between Apple and Qualcomm then, we can observe that for most of 2017, Apple was waging an offensive war against the San Diego chipmaker. Putting motives, precursory slights, and earlier skirmishes aside, we can see that the start of that war effectively began on January 20, 2017 when Apple filed its lawsuit against Qualcomm, and used it as a pretext to hold back royalty payments (presumably in an attempt to starve Qualcomm of cash, and ultimately bend investors and the company’s leadership to its will).

Although Qualcomm began to retaliate (or mount a counteroffensive) against Apple in April of 2017, it was the chipmaker’s defensive war on three separate fronts against Apple, Broadcom, and Regulators that the business press zeroed-in on. And while that sort of three-pronged assault on your positions can severely limit your movements, at least for a time (in sports parlance, imagine quarterbacking a football team that has to play three opposing teams simultaneously), a judicious observer wouldn’t be wrong to look for counterattacks where the attacking armies have left themselves either stretched too thin or open to counterassaults.

Here, Apple’s miscalculation may have been to not only overplay its hand, but underestimate its own vulnerabilities.

Miscalculation number one: Apple may have believed that Qualcomm wouldn’t be able to survive that much aggression all at once, and would therefore try to negotiate some sort of truce, even a surrender. Neither happened, obviously.

Miscalculation number two: Because Qualcomm isn’t a traditionally litigious company when it comes to its licensees, and Apple suppliers usually don’t really fight back when Apple aggressively asserts itself, Apple may have assumed that Qualcomm would simply cave in to its demands. What Apple may have failed to anticipate was that Qualcomm would not only push back, but take the initiative and go after Apple’s exposed flanks to exploit the vulnerabilities that its licensing attorneys knew they would find there. That miscalculation may yet prove to be the most damaging of the two.

 

Qualcomm’s counteroffensive, Apple’s exposed flanks, and free business lessons from the proverbial bear cave: How blind spots left unaddressed at the start of a war generally shape its end

About a year ago, Qualcomm began its counteroffensive when it began to file complaints against Apple for patent infringement in various jurisdictions around the world – namely the United States, Europe (specifically Germany), and China, as well as with the International Trade Commission (ITC). In a separate filing, Qualcomm also alleged that Apple violated the terms of its Master Software Agreement – otherwise known as an MSA. (Rumors that Apple may have shared Qualcomm trade secrets with a Qualcomm competitor have been circulating for months now,  These complaints didn’t exactly lie dormant (all lawsuits take time to mature and come to bear), but they were largely eclipsed by the Broadcom episode and other more media-friendly volleys being exchanged between Apple and Qualcomm in recent months. And so, for the better part of a year, these cases have been moving forward, while garnering precious little notice from the business press. Nearly 40 cases in all, touching on a range of alleged IP infringements and “trade secret misappropriations” on Apple’s part, that relate to software and hardware found in Apple’s most important product: the iPhone.

Now that Apple has thrown everything it could at Qualcomm but somehow failed to produce either a win or a capitulation, we now come to the phase of this war in which Qualcomm’s counteroffensive has gained sufficient momentum to finally put Apple squarely on the defensive. Specifically, in this phase of the war, Apple finds itself on the receiving end of a multifront siege launched by Qualcomm months ago.

Of the 36 instances of patent litigation we are highlighting today:

• 6 were initially filed with the ITC and in US District Court last year, three of which could be decided in the coming months.
• 9 more could be decided in Germany in the coming months as well, although the EPO (European Patent Office) could be called upon to resolve individual challenges to the validity of one or more patents before German courts can deliver their decision on the associated case(s). So far, I only see one of the patents being affected by this apparent patent invalidation strategy, but we will have to wait and see where things go from here.
• The remaining 21 could also start being decided in the next few months in China.

Cutting through the complexity of it all, here’s what is at stake for Apple: If Apple loses even one claim in the 36 instances of patent litigation filed by Qualcomm, the jurisdiction it loses in could ban the importation and/or sale of any product found to infringe on specific Qualcomm patents (and a manufacturing ban with regard to the Chinese cases). Based on our review of the cases being decided in China, Germany, the United States, and before the ITC, these bans could impact some combination of the iPhone 7, iPhone 8, and iPhone X (including all three) in some of Apple’s most profitable markets: China, Germany, and the United States.

 

Scorched-earth strategies and the self-defeating nature of desperate measures

It is no surprise then, that Apple is now systematically putting in question the validity of the patents it is accused of infringing. Part delaying tactic, part defense of last resort, this strategy further suggests that Apple has lost the initiative in this fight and has now fallen back on a scorched-earth strategy to cover its retreat. Consider this: Hypothetically, should Apple successfully manage to convince the courts that none of the Qualcomm patents cited in these 36 instances of patent litigation is valid or enforceable, why wouldn’t Apple also challenge the validity of any Qualcomm patent that it doesn’t want to pay for? Why stop at Qualcomm’s patents, for that matter? If the strategy were to actually work, why would Apple not also seek to invalidate whatever patent held by other partners or competitors it doesn’t want to have to pay for? If you happen to be a Samsung or an Intel, you can probably weather these types of skirmishes, but if you are a tech startup or a young company with limited legal resources (at least compared to Apple), your IP could find itself at very serious risk if Apple were to get its way. That’s something we need to think about. This is bigger than Apple and Qualcomm.

If you take a broader view of this phase of the dispute between Apple and Qualcomm, one that takes into account its possible ripple effects on the entire tech industry, the legal track that Apple appears to be on – one in which Apple would presumably seek to invalidate other companies’ patents whenever expedient – isn’t healthy for anyone. It isn’t healthy for the technology sector on the whole, for the startup ecosystem, or even for tech-friendly investors. If companies are no longer able to monetize their own R&D and IP without falling prey to predatory tactics aimed at invalidating their patents, investors will look for opportunities elsewhere. The irony here is that ultimately, if patent protections find themselves eroded enough, even Apple’s patents will find themselves at risk. And therein lies the flaw in scorched-earth strategies: in your desperation, it’s your own fields that you end up burning to the ground. It just isn’t a sound strategy, and Apple, being Apple, ought not be that desperate.

 

Absolute victory not required

Bear in mind that Qualcomm doesn’t have to win every claim. It only needs to win one. With 36 cases in all, many of which assert more than one claim, the odds appear stacked against Apple. Should Qualcomm only win a handful of these cases, let alone most of them, the consequences for Apple could be disastrous. And if that isn’t enough, there is also the MSA case, which we will have to circle back to another day. (As we alluded to at the beginning of this update, we will soon complement this article with a handy timeline of – and tentative schedule for – all of the pending cases in the Qualcomm v. Apple dispute, including the decision that could ultimately decide the fate of the billions of dollars in royalties owed but never paid to Qualcomm.)

Now that Apple finds itself on the defensive, it probably isn’t a stretch to imagine that the architects of the Apple v. Qualcomm strategy must be wondering how things could have gone so wrong so fast: On offense one minute, and outmaneuvered the next. Wherever Apple thought its war on Qualcomm would lead when it began, I doubt that anyone expected it would bring Apple to such a precarious juncture: Wrestling with the very real possibility that its iPhone business may now be in jeopardy in the US, China, and Europe. Note that if Apple were to decide to sue for peace, and work with Qualcomm to achieve some sort of compromise, or truce, or find a way to bury the hatchet (and I hope that happens, soon), every single one of these cases, with the exception of the FTC’s suit, would go away.

Given both Apple’s market notoriety and the iPhone’s popularity with smartphone users, the next few months could prove interesting. Especially if, after all the time and effort that Apple has put into its war against Qualcomm, the iPhone maker only succeeds in getting some of its own products banned in some of the world’s biggest smartphone markets. Should that happen, Apple v. Qualcomm / Qualcomm v. Apple could become one of the most brutal objective business lessons in why it is never a good idea, even for Apple, to go poking at bears.

To be continued.