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Olivier Blanchard, Senior Analyst at Futurum Research also Contributed to this article.
Last week, the Apple vs. Qualcomm Saga continued, with Apple responding to the recent actions undertaken by Qualcomm to attempt to enforce its standing contracts regarding the use of Qualcomm intellectual property in iPhone devices.
Let’s just say that it was no surprise when Apple’s response came that it was once again littered with questionable interpretations of the value of Qualcomm’s IP, the depth of Qualcomm’s contributions to technologies critical to the iPhone, and challenges to the fairness of Qualcomm’s licensing terms. More problematic, however, was the kerfuffle of red-delicious eyed media and analysts predictably giving Apple’s response a pass, and putting out articles jumping to the iPhone maker’s defense, clearly without so much as reading one page of the legal documents before parroting Apple’s position by default.
Over the past few months we have been regularly discussing this dispute between the two technology giants. Not just because talking about Apple makes for good reading, but because we see a much bigger story lurking underneath its dispute with Qualcomm – a story at the heart of which a battle is being waged for the future of – and access to – innovation. More than anything, we believe that there are two sides to every story, and feel that to simply accept the rhetoric coming from Apple, particularly as it relates to such a critical topic, is a form of dereliction of duty. It certainly is odd that so few seem interested in analyzing Qualcomm’s claims in earnest, or in remarking on the company’s relative silence in contrast to Apple’s invective.
Here are some basic facts: Together, Apple and Qualcomm have developed some of the most beautiful and popular mobile devices on the planet. If you believe Apple could have done it without Qualcomm, then just put your device in airplane mode. That will give you a taste of where Apple’s handheld universe would be without Qualcomm. Oh wait… Qualcomm also developed airplane mode. In fact, Qualcomm even invented the lock screen. The truth is that Qualcomm’s technology – much of it, critical and fundamental technology – is omnipresent in all smartphones. Apple can pretend otherwise, and try to minimize Qualcomm’s contributions to its ecosystem of mobile products, but that sort of propaganda doesn’t hold water, even when some journalists, analysts, and bloggers are either too lazy or too beholden to Apple to bother looking any of this up and fact-checking their own articles.
And now here we are. The danger here is that when a company feels that it can erode the value of innovation as a whole, blatantly disregard contracts simply because it doesn’t feel that it should have to pay for others’ critical R&D it chose to base its products on, and use the press as a propaganda machine to vilify its competitors, suppliers and partners, and slow the pace and scale of innovation to match its own, what we end up with isn’t good for anyone. It isn’t good for the technology sector, it isn’t good for investors, it isn’t good for the job market, and it certainly isn’t good for consumers. Long term, it isn’t even good for Apple.
With that out of the way, it’s important that we talk about Apple’s response so you can understand what they are claiming, and why we are throwing up red flags about it. Hopefully we can provide a bit more clarity on what we know, based on research, about the critical role Qualcomm and other companies that have invested heavily in mobile have played – and continue to play – in mobile innovation and in the brick-by-brick development of the mobile ecosystem as a whole. Rather than go through Apple’s entire response, which would take too long, let’s look at the part of Apple’s statement that most clearly frames its position. Per Apple:
“They supply us with a single connectivity component, but for years have been demanding a percentage of the total cost of our products — effectively taxing Apple’s innovation. We believe deeply in the value of intellectual property but we shouldn’t have to pay them for technology breakthroughs they have nothing to do with. We’ve always been willing to pay a fair rate for standard technology used in our products and since they’ve refused to negotiate reasonable terms we’re asking the courts for help.”
Let’s unpack that:
“They supply us with a single connectivity component.”
This statement is just flat out inaccurate.
Apple is either negating that it uses Qualcomm’s IP in addition to Qualcomm’s modem, or it’s trying to assert that all of Qualcomm’s IP applies only to the modem. In designing a wireless phone, Apple is clearly using Qualcomm’s wireless IP. That IP encompasses many aspects of the entire cellular system, aspects of how wireless devices work, in addition to modem, RF, and other component IP. Many also don’t realize that Qualcomm’s IP includes many other technologies (in phones and elsewhere) beyond wireless.
Qualcomm licenses (all or part of) its IP technology portfolio as a “product”, and independently, it sells its modems, processors, and other semiconductor components as different products. Don’t be confused that they are all one and the same, as Apple is depicting.
This separation makes it possible for vendors to build (smart)phones with any modem or AP they choose, while still licensing Qualcomm’s technology IP. Apple’s claims that Qualcomm’s business model is anti-competitive simply don’t make sense.
As you can see, Qualcomm supplies Apple with a lot more than just “a single connectivity component.” As we have already mentioned, Qualcomm holds patents for many technical and functional features of modern smartphones, and technologies without which the iPhone couldn’t be a 4G/3G/2G phone. For example, Qualcomm’s IP covers aspects of the lock screen, Airplane Mode, Assisted GPS, LTE, the pairing of a smartphone with a wireless device (like a Bluetooth device). These are just a few among dozens of recognizable features used by smartphones, including the iPhone, that were invented and patented by Qualcomm. On top of those are dozens more features that users don’t necessarily know about that enable and enhance their mobile experience. To name a few…
- Mobile Video
- Secure and seamless app store purchases
- Wi-Fi connectivity
- Extended Battery Life
Even if, for the sake of argument, we ignore all of this and only focus just on connectivity, without all of the cellular technologies in the phone and behind the networks that support it (3G, 4G, LTE, and soon, 5G), the iPhone would just be a glorified iPod.
In short, Qualcomm doesn’t just “supply” Apple with “a single connectivity component.” It does far more than that. To try and trivialize Qualcomm’s IP and characterize the company as some kind of patent troll, given that they are responsible for inventing many of the complex aspects of cellular systems is absurd. Qualcomm spent billions of dollars developing critical technologies that Apple now seems to want to be able to have access to for free or next to nothing. To add insult to injury, given that Apple’s royalties to Qualcomm per device amount to less than the price of an Apple iPhone power adapter (excluding the lightning cable), I am dumbfounded as to why this dispute is taking place at all.
“but for years have been demanding a percentage of the total cost of our products.”
This approach to calculating royalties isn’t Qualcomm’s alone. There’s nothing weird about charging licensing fees for patents, and Apple knows it. Some Companies like Qualcomm innovate and share their technologies with others under license; companies that build products based on these innovations, like Apple does, benefit from them. As an aside, device-level licensing is prescribed in the IP rules of 3GPP, the standards-development organization where 3G, 4G and 5G were (and are) developed.
Also, “demanding” is a dishonest or at best a misleading word to use to qualify what is a basic, fair, established, and universal business practice in the mobile and other industries, and one that Apple itself has spent years practicing and defending. Fair trade practices aren’t “demands.”
“— effectively taxing Apple’s innovation”
To proclaim that Qualcomm is “taxing Apple’s innovation,” is also blatantly incorrect. Qualcomm is charging Apple for the legal and fair use of Qualcomm’s innovation.
In accordance with the industry-standard practice noted above, Qualcomm is asking Apple to pay for the use of Qualcomm’s IP using a proportional formula so that the royalty is fair to all.
The fairest mechanism for valuing the innovation and what it enables, is to scale the royalty with the device price, and to limit it so that the royalty doesn’t increase indefinitely. Despite what Apple says, the royalty is capped, and at some point, Apple’s royalties would stop increasing even if it continued to innovate and increase the price of the phone.
A low-cost device with fewer features (and typically lower margin) should incur a smaller royalty than a more expensive one (with higher margins) with more features, bigger screen, higher-resolution camera, etc. Lower royalties on less-expensive devices should make it easier for OEMs to still make a profit.
A flat royalty would mean that less-expensive devices would incur a disproportionately high royalty, or more expensive devices would incur a disproportionately low one.
Also, don’t be fooled: Apple’s features, apps, etc., derive much of their value from the fact that you can get data to and from the phone, that you can precisely locate it, etc. The faster and more robust the connection, the more you can usefully do with the phone, and the more you can rely on it. This isn’t a small, ancillary feature… this is the very fabric of what a smartphone is.
Unless Apple can show that its innovations could function or have value without Qualcomm’s more fundamental innovations, that statement is particularly egregious and dishonest.
This is why it is important that people understand what the devices in our pockets and handbags really are: a brilliant blending of Apple’s talent for gorgeous industrial and UI design and Qualcomm’s deep portfolio of mobile innovation. Without both, there would be no iPhone. Without Qualcomm and the mobile ecosystem, there would be no useful iPhone. Without Apple, there would be plenty of other slick, feature-rich smartphones. And not to minimize Apple’s undeniable contributions to the smartphone market in terms of design, UX, and marketing, but… when it boils down to it, one could argue that the Cupertino phone maker is far less valuable to the mobile industry than Qualcomm. There is simply no comparison. None. It isn’t even close. Anyone with a little time to dig into Qualcomm’s mobile innovation (and patents) would have to be wearing blinders not to see it.
A few final points made by Apple in their response that simply cannot be ignored:
“We believe deeply in the value of intellectual property but…”
With the word “but” at the tail end of the sentence, Apple essentially undoes anything remotely thoughtful or self-actualizing about that comment. What it now says is that Apple believes deeply in the value of its own IP. Unfortunately, its statements and actions suggest that this belief may not extend to other companies’ IP, including those they have partnerships with.
“We shouldn’t have to pay them for technology breakthroughs they have nothing to do with.”
That’s true. Apple shouldn’t have to pay Qualcomm for technology breakthroughs Qualcomm has nothing to do with. The only problem is that no one is asking Apple to do that – the royalty obviously only applies to Qualcomm patents, not Apple patents, and the reason for it scaling with the price of the phone is explained above; so once again, that statement is a deceptive misrepresentation of Qualcomm’s licensing model.
“We’ve always been willing to pay a fair rate for standard technology used in our products.”
We find this to be questionable at best. Apple has made a habit of squeezing suppliers for years. This isn’t news. Apple’s definition of “Fair Rate” often seems more like a bully’s definition of a shared lunch than anything resembling “fair.” Also, it’s important to point out the insidious use of the term “standard technology” here. Apple may be attempting to characterize intellectual property as some sort of almost-free-to-all technology because it deems it “standard” or part of a standard. That isn’t how it works. That isn’t how anything works.
Lastly, we come to Apple’s “woe is me” moment: “And since they’ve refused to negotiate reasonable terms we’re asking the courts for help.”
This is just straight up nonsense. Quick recap: Apple already agreed to Qualcomm’s terms when it chose to piggy-back on the contract manufacturers’ existing contracts with Qualcomm. It has been paying these royalties for ~10 years. When it saw an opportunity to negotiate more favorable terms, Apple likely demanded unreasonably low rate from Qualcomm, and Qualcomm likely offered what it felt were reasonable terms in return (namely, what the rest of the industry is paying, or what the Chinese government recently said is fair). Apple then threw a tantrum, and here we are.
While Apple is extracting massive profits from the mobile industry’s innovation and everyone in the supply chain – and that’s fine, it seems unwilling to pay the small percentage of the price of its phones for technology that is fundamental to them. That part isn’t fine. It isn’t fine at all. And because of this and the escalation of Apple’s aggressive and seemingly self-serving behavior, we are concerned that Apple may end up turning into the Uber of the Silicon world if it doesn’t change course.
In the end, blind loyalty to Apple and a willingness to ignore the facts of this case could spell disaster for this innovation ecosystem that we have all grown to love and, in more ways than one, also taken for granted. Again, I don’t want to in any way minimize or ignore the contributions that Apple has made to the mobile product ecosystem. Its beautiful designs have always been a wonderful example of where synergy between technical innovation and a rigorous commitment to industrial design and user experience can take us. Apple itself has been open about this, admitting that it isn’t really an innovator, that it doesn’t like to be first to market with a game-changing technology. Apple lets others do that, and then, when the time is right, Apple enters the market with products that out-design the competition. That’s Apple’s model. It’s disruptive, and it certainly reflects an unequalled skill in marketing, but it doesn’t take the place of innovation.
What we have on our hands today is a battle being waged by one of the most popular brands on the planet against one of the greatest innovators in mobile, and the outcome may very well decide both the pace of innovation, and the future of innovation. Mobile is now an essential pillar for our civilization. It impacts how we live, how we work, how we access news, how we manage our affairs, and we are counting on companies like Qualcomm to continue to invest billions in R&D to bring us forward with mobile technologies like 5G (which they also will hold IP for). Companies like Qualcomm are essential to the ecosystem of innovation that will lead to the next wave of IoT, Augmented and Virtual Reality, Artificial Intelligence and more. Their and other innovators’ ability to do this work and to fund it through fair licensing and royalty models must be protected, and it is time for journalists, analysts, and bloggers who ought to know better to start taking this topic seriously.
Disclosure: Futurum Research, like all research and analyst firms, provides or has provided research, analysis, advising, and/or consulting to many high-tech companies in the tech and digital industries. The firm does not hold any equity positions with any other companies cited in this column.