Antitrust failure, Qualcomm patent licensing model of ＂life
In April of this year, Apple and Qualcomm continued the patent litigation battle for more than two years, and finally ended with the reconciliation between the two sides. Apple also paid a high price for its failure to challenge Qualcomm's "patent acquisition model": a six-year settlement agreement and a $4.7 billion settlement fee.
However, Qualcomm's troubles are not over. Because it is currently losing in the anti-monopoly lawsuit of the US Federal Trade Commission (FTC). This also means that Qualcomm's vital business model for success in the smartphone era may be hit hard. Although the US Court of Appeal ruled that the antitrust judgment against Qualcomm will not be executed for the time being. However, this is only temporary. If Qualcomm does not have a proper reason to request an extension, or if it reverses the situation, the consequences are really serious.
Lost: Qualcomm and the US FTC's first confrontation
As early as January 17, 2017, the US FTC filed a lawsuit against Qualcomm, alleging that Qualcomm's patent licensing policy violated federal bills and constituted unfair competition. That is, a few days after the US FTC launched an antitrust lawsuit against Qualcomm, Apple also formally sued Qualcomm, claiming that it illegally used the monopoly position in the mobile phone chip field and demanded that it refund the patent royalties promised to be refunded by about $1 billion. At the same time, Apple and its partner Intel also became the main witness of the US FTC against Qualcomm's antitrust case.
(Insert here, Samsung was also the main witness of the South Korean FTC and the US FTC suing Qualcomm. However, last year, Qualcomm and Samsung reached a settlement, thus withdrawing from the lawsuit against Qualcomm. According to this year's court was "unintentionally" leaked. Information shows that Qualcomm paid $100 million in settlement payments to Samsung last year.)
FTC believes that the Qualcomm patent licensing model is at the heart of a series of illegal corporate strategies designed to maintain its monopoly on handset-critical chips. The FTC also accused Qualcomm of forcing smartphone makers to pay high royalties, especially if they don't have a license and there is no chip, and the model is charged at the price of the whole machine.
However, Qualcomm believes that it charges a maximum of 5% license fee per mobile phone, regardless of whether it is equipped with Qualcomm chips, which is a standard practice for funding research and development. Qualcomm stressed that it invested billions of dollars in research and development to develop products, which is also the source of the $85 billion patent portfolio. It also referred to the modem chip business of companies such as Intel and MediaTek as evidence that its resistance to authorized standard patents did not hinder competition.
For a long time, Qualcomm's charging method for mobile phone chips is quite "tough". That is, in order to use Qualcomm's chips, it must first reach a patent licensing agreement with Qualcomm, which is a large "entry fee." Moreover, each device that uses Qualcomm patents also needs to pay PG to Qualcomm at a rate of 5% of the cost per machine.
According to the previous Qualcomm's solution submitted to the National Development and Reform Commission, Qualcomm will charge 5% of 3G equipment (including 3G/4G multi-mode equipment) for the brand equipment sold in China, which has the necessary patent licenses for Qualcomm 3G and 4G. The license fee is only 3.5% of the license fee for 4G devices including 3 LTE-TDD, if CDMA or WCDMA is not implemented.
From the perspective of mobile phone manufacturers, this is not reasonable. For example, if a mobile phone using Qualcomm chips costs $100, then it may be required to pay Qualcomm $5, when the phone adds lens, memory and storage. When the cost of the component is raised to raise the price to $150, even if the new component has nothing to do with Qualcomm, the patent fee paid to Qualcomm will increase to $7.5.
In addition, Qualcomm also refused to license competitors to patents that are considered critical to the mobile phone standard. These patents are known as "standard essential patents." This also means that even if mobile phone manufacturers use other baseband chip manufacturers' chips, they must pay the corresponding patent royalties to Qualcomm in the whole machine charging mode.
This kind of charging model is also called "Qualcomm Tax" by the outside world. It is this mode of charging according to the whole machine pricing that has also caused dissatisfaction among many terminal manufacturers. Previously, Meizu had not hesitated to go to court with Qualcomm. But in the end, it ended with the Meizu compromise and Qualcomm settlement, reaching a patent licensing agreement.
Although Qualcomm has won in the confrontation with many mobile phone manufacturers, it has lost in the anti-monopoly lawsuit of the US FTC.
In May of this year, the US San Jose area judge Lucy H. Koh made a judgment against the US FTC lawsuit against Qualcomm, ruling that Qualcomm violated the anti-monopoly law and used its technological advantages to demand excessive patent licensing fees from the market. Affected by this news, Qualcomm's share price immediately fell 10.86%.
Gao Lanhui ruled that Qualcomm must renegotiate the licensing agreement with the customer. It must license patents (including 5G patents) to competitors (such as MediaTek, Samsung, Zhan Rui, etc.) at a fair price, and cannot sign exclusive agreements to prevent competitors from selling chips to smartphone makers such as Apple. In addition, Qualcomm must also accept the FTC's seven years of supervision.
Obviously, this judgment is very unfavorable for Qualcomm! This will be a heavy blow to its successful patent licensing model!
Temporary calm: Qualcomm is allowed to postpone execution
After Qualcomm suffered a loss, Qualcomm protested and quickly filed an appeal with the higher court and filed an application for the suspension of the anti-monopoly judgment.
According to Qualcomm, Qualcomm needs to re-sign the licensing agreement with a large number of patent-licensed customers, but if the lawsuit wins in the appeal process, Qualcomm will not be able to modify the patent licensing agreement with the major customers again, which will cause Qualcomm loss.
On August 23, the US Court of Appeals for the Ninth Circuit in San Francisco, California approved Qualcomm’s request to suspend the US federal magistrate Gao Lanhui’s antitrust judgment against Qualcomm.
The Court of Appeal allowed Qualcomm to temporarily continue its current business practices by eliminating the need to renegotiate and sign patent licensing agreements with other smartphone vendors as required by the judgment.
It is reported that in the appeal process of the case, the submission of written legal documents by both parties will continue until mid-November, and will be followed by oral arguments in the Ninth Circuit Court shortly thereafter. It may take months or more for the Court of Appeal to make a final decision. In other words, as soon as next month, the US Ninth Circuit Court will hear the case, and the final decision may be announced next year.
This will also have a major impact on Qualcomm's business model.
US government intervenes
Although Gao Langhui’s decision against the US FTC’s lawsuit against Qualcomm was not a final judgment, Qualcomm could also appeal to the higher court, but it does not mean that the judgment does not have legal effect. After the Qualcomm appeal, the US Ninth Circuit Court quickly passed a decision to suspend Qualcomm’s antitrust judgment. Behind this is the intervention of the US government.
According to the data, in July this year, the US Department of Justice, in conjunction with the support of two other US federal agencies, the US Department of Energy and the Department of Defense, asked the Court of Appeal to suspend Qualcomm's antitrust judgment.
Organizations such as the Department of Defense believe that if Qualcomm's business is adjusted or restricted, it may affect high-tech telecommunications technology innovation capabilities or technological advantages.
The latest news shows that Trump government officials asked her not to punish Qualcomm before Judge Gao Lanhui announced her decision. However, Gao Lanhui’s decision was not affected.
Under the "leadership" of US Attorney General William Barr, the US Department of Justice dismissed the FTC's view that Qualcomm's business practices did not have any anti-competitive behavior. The Justice Department, the Department of Defense, and the Department of Energy also told the Court of Appeal that rulings against Qualcomm could affect the US military and its energy and nuclear infrastructure. Obviously, this is putting pressure on the Court of Appeals, the US Court of Appeals, which is about to hear the Qualcomm monopoly.
What is the final result?
So what kind of ruling will the US Ninth Circuit Court eventually decide on the Qualcomm antitrust case? Will it overturn the previous ruling of Judge Gao Lanhui? Under the intervention of the US government, the final result is really unpredictable.
However, what is certain is that if the judgment of Judge Gao Lanhui is implemented, Qualcomm's patent charging model will be hit hard, and it will have a great impact on the subsequent competitive advantage of Qualcomm in the market.
First, Qualcomm must renegotiate the licensing agreement with customers to reduce the “excessive” patent licensing fees, which will obviously lead to a reduction in Qualcomm patent licensing fees.
It is worth mentioning that in April last year, after the announcement of the second quarter financial report for 2018 as of March 25, Qualcomm announced that the patent licensing fee will be lowered, and the highest charging standard will be priced at US$400. As a cap, it also added a new 5G patent license, while the previous cap seems to be $500! And this is the first major adjustment of Qualcomm's global patent licensing fees over the years.
▲ Qualcomm's cellular communication standard essential patent licensing program is licensed to original equipment manufacturers (OEMs) branded mobile phones including 3GPP Release 15 and below 5G NR standards worldwide under the following license terms: mobile network alone The core patent, the actual license fee for the brand single-mode 5G mobile phone is 2.275% of the sales price; and the actual license rate for the brand multi-mode (3G/4G/5G) mobile phone is 3.25% of the sales price. And the whole machine is priced at $400.
Second, Gao Lanhui’s decision also requires Qualcomm to license patents (including 5G patents) to competitors at fair prices, and cannot sign exclusive agreements with customers.
In other words, Qualcomm must license its patents to competitors such as Apple, Samsung, Huawei, Zhan Rui, and MediaTek at a reasonable price, which means that if Samsung, Huawei, Zhan Rui, and MediaTek get Qualcomm. After the patent is granted, the downstream terminal manufacturers will not need to pay the patent license fee to Qualcomm after using the mobile communication chips of Samsung, Huawei, Zhan Rui and MediaTek, and they will not have to pay the patent license fee to Qualcomm according to the pricing of the whole machine. This move will greatly weaken Qualcomm's advantage in the market competition.
The simplest example is the previous lawsuit between Qualcomm and Meizu. In June 2016, Qualcomm accused Meizu of infringing its 3G/4G communication technology patent and suing it to the Beijing Intellectual Property Court and the Shanghai Intellectual Property Court for a claim of 520 million yuan. However, Meizu has been using MediaTek's chips before, and has never used Qualcomm chips. The reason why Qualcomm can charge Meizu is because Qualcomm did not license the patent to MediaTek, nor did it charge MediaTek to the MediaTek, because such charges are obviously far less than direct pricing to the terminal manufacturer. The benefits are high.
If MediaTek was granted Qualcomm's patent license at that time, then Meizu would no longer need to pay the patent license fee to Qualcomm, and it would not be necessary to pay the patent license fee to Qualcomm at the price of the whole machine, which will undoubtedly greatly reduce the cost. Of course, MediaTek certainly needs to pay the corresponding patent license fee for one-time or according to the shipment of the chip using its patent, which will bring about an increase in the cost of the chip, but it is also far lower than the patent license fee paid by the terminal manufacturer according to the product pricing.
Obviously, if Qualcomm must license its patents to competitors at a reasonable price, its original patent licensing model may collapse completely. Because if the original patent charging model is used, the customers who use Qualcomm chips will continue to pay high royalties at the price of the whole machine, while the chips of other chip manufacturers that have obtained Qualcomm patent authorization may not need to pay at the whole machine price. High patent fees. In order to maintain the competitive advantage of its own chips, Qualcomm will inevitably need to completely change the charging model. Because it is prohibited from signing an exclusive agreement with the customer.
In addition, Qualcomm must also accept the FTC's seven years of supervision, which also means that Qualcomm is difficult to implement the judgment.
Of course, the above is only based on the Qualcomm appeal still after the loss of the analysis. But with the intervention of the US government, the final result is really unpredictable. After all, the acquisition of Qualcomm by Broadcom was also a sudden shot by the US government, which eventually changed the outcome.
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