Apple’s recently announced plan to pressure Qualcomm into changing its business practices could potentially backfire, with both companies at risk of losing out if the conflict is not resolved swiftly.
Qualcomm is the biggest supplier of smartphone modem chips, providing essential components for Apple’s iPhones and other device makers’ products. Apple has long-questioned Qualcomm’s patent licensing practices, claiming that it charges too much for its technology and forces companies to take progressively larger cuts of their profits. Recently, however, Apple has begun to stop paying royalties to Qualcomm and is instead selling iPhone devices with modem chips from rival companies such as Intel. In addition, Apple has filed a legal complaint against Qualcomm in the US and EU antitrust authorities accusing it of numerous violations including abusing its dominant position in the market.
Given the potential damaging effects of this dispute on both sides, both Apple and Qualcomm must come together quickly to resolve their differences; otherwise they may not only damage one another but also risk disrupting the broader mobile industry.
This article outlines some key points in understanding this legal dispute between two giant tech giants which will determine how this complex battle plays out in the future.
Apple documents reveal multi-year plot to pressure and hurt Qualcomm
In a recent set of documents, Apple has revealed that they had been strategically plotting to pressure Qualcomm, intending to hurt their business. These documents were recently revealed to the public by the US Federal Trade Commission, who had been investigating the potential antitrust violations of Qualcomm.
Let’s look deeper at Apple’s multi-year plan to pressure Qualcomm.
Apple’s strategy to lower Qualcomm’s profits
Apple recently revealed its plans for pressuring Qualcomm, one of its major suppliers. The plan includes redirecting revenue normally from Qualcomm to lower the supplier’s profits. In addition, Apple is aiming to put pressure on Qualcomm, forcing it to reduce its licensing fees and ultimately leading to cheaper iPhones.
The move is at least partly in response to allegations made by the Federal Trade Commission (FTC) against Qualcomm earlier this year. The FTC accused Qualcomm of anti-competitive practices, claiming that the company had been charging exorbitant royalties while shutting out competitors from the chip market. It also claimed that Qualcomm was engaging in certain activities with Apple that could be considered illegal corporate coercion.
At its core, Apple’s strategy revolves around redirecting funds away from its traditional method of purchasing chipsets directly from suppliers such as Qualcomm. Instead, it buys them at negotiated volumes through third parties. This redistributes Apple’s payment streams away from direct payments to Qualcomm into collaborations between other companies and brokers, which lowers top-line profits for Qualcomm’s patent licensing business.
Apple has also created an incentive program that awards rewards and discounts for companies who collaborate and purchase components from alternate sources instead of buying directly from OEM manufacturers like Qualcomm. This investment gives Apple more leverage when negotiating fees between OEM manufacturers and third party distributors providing chipsets for smartphones such as iPhones and iPads. In turn, this reduces operating costs for Apple – but will ultimately damage supply chain partners including chipmakers who historically benefited greatly from iPhone sales – like Qualcomm.
Finally, Apple plans to rely less on components purchased through or manufactured by traditional OEMs like Qualcomm in favour of sourcing components directly through alternative channels including cloud computing providers like Microsoft Azure or Amazon Web Services (AWS). By reducing reliance on traditional chip manufacturers such as Qualcomm entirely or partially depending on how successful this venture turns out; Apple will be able to lower their operating costs further while simultaneously avoiding high royalty payments associated with purchasing chipsets through external vendors such as these mentioned earlier – thus enabling bigger discounts on products made available via their storefront globally across different markets both online digital stores & retail shop outlets alike.
Apple’s attempts to reduce Qualcomm’s market share
Apple has taken various steps to pressure Qualcomm and increase its market share within the semiconductor industry. These attempts include suing Qualcomm for billions of dollars in royalty payments and threatening to discontinue the use of its chips in future products. Additionally, Apple has been developing its chips and is currently releasing new iPhones with chips designed in-house.
Moreover, Apple is reportedly looking at ways to purchase competitors of Qualcomm if it feels there would be an overall beneficial impact on its market share. As part of this strategy, the company has increased its investments in ARM, a British-based chip designer. Along with this, Apple has been building up its engineering staff and commencing a series of hiring initiatives from competitors like Intel and NVIDIA corporation, which are well versed in the semiconductor industry. Through these measures, Apple hopes to gain access to more patents and reduce supplier costs by relying more on in-house components.
The company is aware that its attempt to displace Qualcomm’s substantial market share will be both costly and time consuming but believes it could offer advantages for iPhone consumers as qualification costs are reportedly lower for their home grown technologies compared to what they have paid before due to licences acquired from their chip suppliers like Qualcomm. However, the situation is likely far from resolved despite extensive developments over recent years with antitrust authorities continuing investigations into suspected anti-competitive practices by the chipset giant.
Apple’s attempts to limit Qualcomm’s access to the market
Apple has taken multiple steps to limit Qualcomm’s access to the market and to strengthen their position in the smartphone industry.
Firstly, Apple announced a patent licensing lawsuit against Qualcomm in January of 2017 that accused the semiconductor maker of unfair patent licensing practices. This had an immediate effect on Qualcomm’s stock, resulting in a decrease of 6 percent.
Apple also pursued the concept of ‘fair, reasonable and non-discriminatory’ (FRAND) by requesting Qualcomm supply iPhone baseband chips at cost or below cost. A legal battle is ongoing whereby Apple requested that Samsung pay their component fees, ultimately putting pressure on Qualcomm prices and making iPhones cheaper for customers.
Lastly, Apple has been creating a Custom modem developed with Intel that can be used as an alternative to Qualcomm’s Modem Chipset. This could be instrumental in weakening Qualcomm’s grip on the mobile industry and empowering other options for use in future devices.
Evidence of Apple’s Plan
Apple documents have reportedly revealed that the tech giant had been engaged in a multi-year plot to pressure and hurt Qualcomm. The documents show that Apple planned to use its power to pressure Qualcomm into a settlement, ultimately resulting in a court ruling that the tech giant had violated antitrust laws.
Let us now take a look at the evidence of Apple’s plan.
Apple documents
Apple documents obtained by Reuters show that the company planned to pressure Qualcomm Inc into reducing the royalties it charges for its mobile chip technology. The documents, which include emails and presentations, provide evidence of the aggressive stance taken by Apple in its negotiations with Qualcomm over royalty fees the chipmaker charges related to its modem chips used in iPhones.
The documents offer an insight into how Apple worked to prevent Qualcomm from making more money from iPhone users by charging higher royalties than what was agreed upon by contract. This included tactics such as withholding royalty payments and withholding payment of intellectual property rights until after agreements were signed with other suppliers.
The documents also reveal that Apple wanted access to details about patent licensing revenue that Qualcomm was taking in from rivals and other companies such as Intel (INTC.O), Samsung and Huawei. In one email exchange between Apple’s former chief executive officer Tim Cook and two senior executives, Cook noted the company should ask for information on how “non-Qualcomm” companies are being treated compared to Qualcomm’s deals.
The documents also show that Apple attempted to create an opening whereby competitor Intel could supply cellular modem chips instead of those sold by Qualcomm. Such a move would have provided leverage against Qualcomm in negotiations related to IP licensing, according to lawyers familiar with antitrust cases who analyzed the documents at Reuters’ request. Additionally, some emails suggest Apple sought data relating directly to the foundation of an anticompetitive case against Qualcomm brought by federal regulators last year alleging monopolistic practices surrounding patents proven essential for connecting phones like iPhones to mobile networks worldwide (FTC v. QCOM).
Internal emails
Internal emails between Apple executives show that Apple aimed to put pressure on Qualcomm by withholding the money it possessed. According to the emails, there were discussions about forcing Qualcomm’s hand by using the money owed as leverage.
The emails showed Apple planned to use the unpaid royalties to apply pressure for Qualcomm to drop its royalty fees and settle its dispute with the company. The emails stated that Apple might turn to outside sources such as regulators and customers for assistance if these efforts failed.
The plan seemed to be successful because a settlement was reached between Qualcomm and Apple after the leaked emails were made public. However, from these internal documents, it appears that this was part of a well-conceived plan developed by Apple to force Qualcomm’s hand and come to an agreement that would benefit both companies.
Other evidence
In addition to Apple’s statements documenting its strategy, other evidence from unbiased sources supports the idea that Apple was targeting Qualcomm and aiming for market dominance.
The first of these is records from regulatory authorities like the European Commission. Their investigations into Qualcomm in April of 2016 found Apple had provided “significant information” supporting their complaint. In the report, it says that the investigation had uncovered internal Apple documents showing the company acted with “a view to reducing costs indirectly while at the same time eliminating non-Apple chipset providers as a commercial threat by denying them access to essential infrastructure”.
Further evidence comes from documents released in court proceedings between Apple and Qualcomm after both companies filed lawsuits over suspected infringements of Intellectual Property Rights. These documents showed Apple attempting to cut out other competitors by culling supply contracts with phone makers like Lenovo, Alcatel and ZTE.
It is clear from this evidence that what has been documented by authorities and come out in legal proceedings is part of a larger strategy by Apple to raise market share, squeeze out competition and strengthen their negotiating position with suppliers and manufacturers.
Qualcomm’s Response
Qualcomm has strongly refuted Apple’s claims regarding its multi-year plot to pressure and hurt the longtime chip supplier. Instead, Qualcomm has said that Apple’s documents reveal a “calculated attempt to deviate from its contractual commitments and to benefit from the subsequent reduction of its royalty payments.”
As a result, Qualcomm has sought to defend its business practices and actions.
Qualcomm’s legal action against Apple
Qualcomm responded fiercely to Apple’s efforts to pressure the chip giant into lowering its fees. The company sued Apple first in January 2017, accusing it of infringing on six Qualcomm patents. It followed up with a second lawsuit in July, alleging patent infringement and false advertising by Apple.
The chip manufacturer has also lodged multiple complaints with the U.S. Federal Trade Commission, as well as European and Asian antitrust authorities, over Apple’s alleged anti competitive behaviour — including its use of counterfeit Intel chips in some iPhones — and allegedly using its control over the iPhone ecosystem to impede competition from Qualcomm’s products.
Qualcomm is seeking damages for alleged breaches of agreement and unfair competition from Apple and has requested that a ban be imposed on iPhone imports in some cases due to patent-infringement allegations. The company has also accused Apple of orchestrating a “global attack” on its reputation and cutting it out of royalty payments due under existing agreements with other companies who use Qualcomm technology in their products; conversely, Apple claims that Qualcomm is licensing its technology at exorbitant rates and invading its privacy by collecting data from users’ iPhones.
The legal skirmish between the two companies is ongoing — while they may find common ground eventually, the battle could continue for some time.
Qualcomm’s attempts to counter Apple’s strategy
Qualcomm has been fighting Apple’s attempts to pressure the company as it sought to end its long-running chip dispute. During the height of their dispute, Apple ordered parts suppliers to stop paying licensing fees to Qualcomm and instead pay them directly.
While Qualcomm successfully got some Chinese courts to ban iPhones from being sold in China, the company could not head off Apple’s strategy.
To counter Apple’s moves, Qualcomm offered billions of dollars in incentives and discounts for patent licence agreements with smartphone makers in exchange for higher royalty payments on sales of iPhones and other devices using its chips. These deals were designed not only to reduce the amount of money that phone makers would need to pay out but also as a way for Qualcomm to increase revenue even if it was stopped from collecting the licensing fees directly from Apple and its parts suppliers.
Despite these efforts, Apple has been able to keep up pressure on Qualcomm and prevent it from earning more by appealing court decisions that favoured the chip maker. In 2020, both companies agreed on a settlement covering all litigation between them worldwide. In addition, they licensed each other’s patents in a joint agreement that ended their long-running disputes regarding royalties and market access.
