iPhone maker says component supplier unfairly leveraged its monopoly position
By Tripp Mickle
Apple Inc. sued Qualcomm Inc. alleging the chip supplier demanded unfair terms for its technology, escalating long-simmering tension between companies at the heart of the global smartphone industry.
The suit, filed Friday in federal district court in the Southern District of California, claims that Qualcomm leveraged its monopoly position as a manufacturer of baseband chips, a critical component used in cellphones, to seek "onerous, unreasonable and costly" terms for patents, and that Qualcomm blocked Apple's ability to choose another supplier for chipsets.
The complaint seeks $1 billion in rebate payments that Apple says Qualcomm has withheld as retribution for Apple's participation in an investigation by South Korea's antitrust regulator. The Korean agency last month an nounced a roughly $853 million fine on Qualcomm for alleged anticompetitive patent-licensing practices -- a decision Qualcomm disputed and vowed to fight.
San Diego-based Qualcomm long has been a dominant supplier of chips that let handsets and cellular networks communicate, and has developed a trove of patents around that technology that account for most of its pretax profit. Its licensing practices have rankled competitors and customers for years, analysts say, though the discord was generally kept behind doors.
Apple said in a statement that it sued Qualcomm "after years of disagreement over what constitutes a fair and reasonable royalty."
Qualcomm General Counsel Don Rosenberg called Apple's claims "baseless." In a statement, he said, Apple "mischaracterized" agreements and negotiations and failed to acknowledge "the enormity and value of the technology" Qualcomm invented.
"We welcome the opportunity to have these meritless claims heard in court where we will be entitled to full discover of Apple's practices," Mr. Rosenberg said.
The Apple suit comes three days after the U.S. Federal Trade Commission sued Qualcomm alleging it engaged in unlawful tactics to maintain a monopoly on a type of chip used in cellphones. That suit highlighted Qualcomm's dealings with Apple. Devices sold by Apple and rival phone maker Samsung Electronics Co. account for nearly half of Qualcomm's revenue, which totaled $23.5 billion in the company's latest fiscal year.
Qualcomm said earlier this week that it would fight the FTC's suit, which it said is based on inaccurate information and was rushed out ahead of the change in presidential administrations. Qualcomm said it has never withheld or threatened to withhold its chips to gain unfair licensing terms, and that its longstanding licensing model benefits the industry and is the most efficient approach for everyone involved.
Patrick Moorhead, president of market-research firm Moor Insights & Strategy, said the legal dispute with Apple will help determine what is fair pricing for patents that Qualcomm invested heavily to develop. "There's nothing clear-cut about this case," he said.
The iPhone has been enormously profitable for Apple, bringing in $136.7 billion in revenue in Apple's latest fiscal year, and, according to investment bank CLSA, accounting for three-fourths of its $84 billion in estimated total gross profit. Apple is on track to have sold more than $980 billion of iPhones in the decade since it went on sale in June 2007, saidHorace Dediu, founder of market research firm Asymco.
In its complaint, Apple says Qualcomm requires manufacturers to agree to license its patents to get Qualcomm chips. By making its chip supply contingent on paying patent licenses, Qualcomm was able to secure royalty terms that manufacturers "would not otherwise accept," the suit says.
For Apple, those terms gave Qualcomm as much 5% of the average price of an iPhone, which sells for anywhere from $400 to nearly $1,000. Qualcomm's cut stayed the same even as Apple added elements that increased the iPhone's value, such as sophisticated cameras and displays.
For example, Apple charges about $549 for an iPhone 6s with a 4.7-inch display and $649 for a iPhone 6s Plus with a 5.5-inch display. Though much of the higher price is associated with the larger display -- not Qualcomm's chip -- Qualcomm would collect the same royalty percentage and therefore a larger dollar amount, according to terms outlined in the suit.
Apple says Qualcomm also required it to exclusively use its chips in iPhones from at least 2011 to 2016 -- a claim also contained in the FTC complaint. Apple received what it called quarterly rebates under the agreement, but its suit says Qualcomm began withholding those last year after Apple met with Korean regulators. The suit claims Qualcomm told Apple it had forfeited the nearly $1 billion in rebates by responding to the Korea Fair Trade Commission.
Apple says Qualcomm's practices deterred Apple from switching to chips made by competitors like Intel Corp. That changed last year when it introduced Intel chips into a portion of its iPhone 7.
--Ted Greenwald contributed to this article.
Write to Tripp Mickle at Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
January 21, 2017 02:47 ET (07:47 GMT)
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