At the end of my previous post on Qualcomm's business model I wrote I would follow up with an analysis of the economic magnitude of the various antitrust investigations and civil complaints concerning Qualcomm's two mutually-reinforcing business areas, baseband processor chipsets and wireless standard-essential patent licensing. While it will probably take a while before a publicly-accessible court filing by either Qualcomm or Apple makes reference to a particular damages claim or royalty rate, some information is already available and I'll take the liberty of connecting some dots. If you consider some of it speculative, that's fine, but someone has to do the job of trying to infer and deduce information even in the early stages of a dispute.
Many media reports on Apple's recent complaint (see PatentlyApple's report, which includes the document) portrayed it as a $1 billion case. However, $1 billion is just the only somewhat precise number that the complaint states but relates to merely a subset of the issue. Paragraph 4 is clear about that:
"Apple, which has been overcharged billions of dollars on Qualcomm's illegal scheme, brings this action to recover its damages, enjoin Qualcomm from further violations of the law, and request declaratory relief. Among Apple's damages are nearly $1 billion that Qualcomm owes to Apple under an agreement between the two companies." (emphases added)
So without much effort or speculation, we know it's about "billions of dollars." But how many billions? Apple's prayers for relief don't say. After the court has determined a fair, reasonable and non-discriminator (FRAND) royalty rate for certain Qualcomm patents, Apple may be more specific.
"Billions of dollars" can mean anything from $2 billion to ten times that amount or more. If we were talking about substantially more than $20 billion, the complaint would almost certainly say "tens of billions." But in the aggregate of damages recovered for the allegedly excessive charges of the past and lower payments being made in the future, that dispute may indeed be about tens of billions of dollars.
The $1 billion part of the overall claim is just about one year's "rebate" (a term that, according to the complaint, Apple uses though Qualcomm rejects it) paid by Qualcomm to Apple. Paragraph 100 provides the following clarification:
"The rebates reduced, but by no means eliminated, Apple's overpayment of royalties to Qualcomm. Taken together, these rebates reduced the effective royalty burden on Apple to around [REDACTED] per iPhone and iPad through 2016. This represents an amount that is still significantly larger than the royalty Apple pays for [REDACTED]—licenses that collectively represent a far greater percentage of the patents declared as essential to the cellular standard."
The second sentence is consistent with other factual representations made by Apple in its complaint, such as the second sentence of paragraph 79:
"In 2016, this was an order of magnitude greater than the royalties that Apple pays to any other patent holder, and indeed is more than Apple pays to all other cellular patent holders combined."
Paragraph 80 focuses on four other licensors (presumably including such companies as Nokia and Ericsson):
"By way of illustration, in 2016, Apple's four largest direct licenses for cellular-related SEPs, excluding Qualcomm, were with [REDACTED], each of which has made claims similar to Qualcomm about the strength and value of their respective portfolios of 3G and 4G cellular SEPs. Together, these four licensors represent [REDACTED] of all 4G cellular SEP declarations, significantly above the 23.5% self-declared by Qualcomm [...]"
The second sentence of paragraph 81 suggests the problem is exacerbating:
"Moreover, Qualcomm currently is demanding Apple pay [REDACTED] that amount starting January 1, 2017."
If we knew how much Apple pays licensors like Nokia and Ericsson, we'd now be able to estimate what Qualcomm has received. I would guess that the four largest cellular patent holders except Qualcomm collectively get something on the order of $10 per iPhone, but this guess could also be very wrong (in whatever direction).
What the complaint makes clear is that Apple has to pay Qualcomm for the baseband processor chipset (except that it's now using Intel chips in part) and for a patent license. Paragraph 83 is a very important one: its first sentence states that "a baseband processor chipset sells for around $10 to $20." It's a reasonable assumption that Qualcomm as the market leader is at the higher end of the range, while anyone still trying to somehow compete with Qualcomm will have to sell products at a much lower price.
The last sentence of paragraph 83 compares Qualcomm's patent royalty demands to the price at which it sells its baseband processors. In the image below, I've added some possibilities for what is hidden under the blackout rectangle (click on the image to enlarge; this post continues below the image):
Note that the numbers are not meant literally: they are just meant to show the width of different kinds of numbers (or the word "half") in the same font. For example, 100% has the same width as 199%, but not the same as 200% ("2" is wider than "1").
A triple-digit percentage with a "1" (all other numbers are wider) in the beginning looks like the most probable scenario. Let's now assume 100% because it's the lowest (i.e., most conservative) percentage that would match the width of the redacted area. The other examples in the above image just aren't wide enough, and it's really very hard to imagine anything else there than a percentage.
So, if Qualcomm sold its baseband processors at approx. $20 per unit and collected or demanded royalties from Apple amounting to more or less the same amount, that would correspond to $40 per iPhone (or cellular iPad). Since 2015, annual iPhone sales have been north of 200 million units. If one multiplied that number with the $40 hypothesis, that would be a total (even before adding cellular iPads) of $8 billion a year, or roughly a third of Qualcomm's revenues.
This is now the right moment for a first plausibility check. Is it possible that Apple alone accounts for approximately a third of Qualcomm's revenues? I believe it is. Qualcomm reports revenues for its two divisions, the chipset division and the patent licensing division. Chipset sales are more than twice as big as patent licensing revenues (see the table on page 10 of Qualcomm's last annual report), but presumably the chipset price doesn't vary nearly as much from customer to customer as patent royalties, given that Qualcomm seeks a percentage of the sales price of a device. The average sales price of the iPhone was $695 last quarter and not much lower in the previous quarters. That's a whole lot more than for other companies in the industry (and part of the reason why Apple is by far and away the most profitable device maker). Apple is also selling the highest number of units (it has surpassed Samsung again, and Samsung's average sales price is substantially lower).
Another plausibility check is based on what is publicly known about Qualcomm's commitments and representations to China's National Development and Reform Commission (NDRC). In this press release (PDF), Qualcomm refers to "royalties of 5% for 3G devices (including multimode 3G/4G devices) and 3.5% for 4G devices (including 3-mode LTE-TDD devices) that do not implement CDMA or WCDMA, in each case using a royalty base of 65% of the net selling price of the device." Multiplying 5% with 65% of the average iPhone sales price is also roughly a $20 per-unit amount.
By the way, while Qualcomm's press release portrays those percentages as having been approved and/or mandated by the NDRC, footnote 10 of this third-party document says:
"The [NDRC] Decision does not define what would constitute a lawful royalty base or royalty rate. It thus stops short of imposing on Qualcomm a 'compulsory license' with any specific rates or terms."
I don't know what exactly the purpose of those percentages is then, but here we just need them for a plausibility check.
What I have no doubt about is that Apple v. Qualcomm is way bigger than Apple v. Samsung, and if Apple succeeds in getting its terms improved, or if further headway is made on the antitrust front, I wouldn't be surprised to see Samsung and others seek refunds and price reductions... actually, in that scenario I'd be surprised if it didn't happen.
Share with other professionals via LinkedIn:
