FTC vs. Qualcomm: Who benefits and suffers the most from the court decision? (Analyst Angle)
The telecom industry is still digesting the surprising and far-reaching decision by Judge Koh of the U.S. Northern California District Court. The expansive court order is as hard to digest as it is to comprehend. If you thoroughly read it (yes, I have, all the 233 pages!), it seems that Judge Koh had already made up her mind long before the trial, and hand-picked specific points from testimonies, evidence, and circumstances to suit her narrative. However, the battle rages on: Qualcomm is appealing the decision at the U.S. Ninth Circuit Court of Appeals. Meanwhile, the company is requesting a stay from Judge Koh until the appeal is heard. I think this is a mere formality, as I expect Judge Koh to reject the stay request. If and when that happens, Qualcomm will request a stay from the Ninth Circuit Court. While all of these court proceedings play out over the next few months, if not years, it is important to consider the havoc this decision and the possible denial of stay might cause in the market. It is even more crucial because we are at a critical juncture in the global 5G race, and this decision will affect how different companies, and perhaps more importantly, different countries progress.
In my previous article, I had briefly touched upon the question “who might benefit from an adverse decision against Qualcomm.” Since that fear has become a reality now, a more detailed discussion and evaluation of some what-if scenarios is in order.
At the very outset, there is no question that Huawei and China are the biggest beneficiaries. With this legal quagmire, the attention of Qualcomm’s executives and many of its engineers may be divided between trying to prevail in the legal fight and making great technology. This distraction gives Huawei (and in turn, China,) a leg-up, allowing it to strengthen its position in 5G. When you dig a little deeper, you will realize that, if Qualcomm’s request for a stay is not granted, the situation gets even direr.
What happens if the stay request is denied?
As I have discussed in my previous article, licensing revenues are the lifeblood of Qualcomm’s virtuous cycle of technology development, commercialization, and monetization. Judge Koh’s order threw a monkey wrench in to that cycle, exposing almost all of Qualcomm’s licensing contracts to renegotiation risk. Based on the news articles, it seems that recent deals with Apple and Samsung could be safe for some time; but I can’t imagine both of those behemoths not trying to use the court’s decision to eke out more concessions from Qualcomm. If you remember, during a separate trial, Qualcomm produced documentary evidence that showed how Apple intentionally tried to harm Qualcomm’s licensing business. Bottom line is, Qualcomm’s every licensing contract could be up for grabs. The company’s much-publicized, recent licensing spat with LG offers a glimpse of how convoluted and long these renegotiations could get.
Let’s look at the biggest block of the licensing lot, the Chinese OEMs that bring in a large portion of Qualcomm’s licensing revenue. Just like LG, all of these OEMs buy chipsets from Qualcomm. That means just as LG is trying to do, they might also ask for chipset based licensing. But most of them, if not all, license Qualcomm’s full portfolio, including cellular SEPs (Standard Essential Patents), non-cellular SEPs (e.g. Wi-Fi and Bluetooth), and non-SEPs (NEPs). However, the court order only applies to cellular SEPs. Given Judge Koh’s ruling, how would you negotiate a licensing deal that would span all these different kinds of patents? It would seem that the only option would be for Qualcomm and its licensees to examine more than 130,000 patents, one-by-one, and license on a la carte basis. As one could imagine, that would be a herculean task. Taking this insanity further, many of these are system-level patents, which mean they may cover more than just the modem or any single chip, and span different parts of the system and software. For example, if you consider MIMO, an important feature of 4G and 5G, the technology covers not just the modem but also RFICs and antennas, phones, and network equipment. Would patents related to MIMO be licensed based on modem pricing or RFIC, or antennas, or base stations? Also, different vendors produce these components. So, would all those vendors have to get licenses for cellular SEPs? So many complex questions with few clear answers!
If your head is not yet spinning with the complexity, consider this absurdity: Qualcomm would still be free to license all patents other than cellular SEPs at the device level. This means, there might be a case wherein the prices of non-SEPs would be higher than that of SEPs, which at some level defies logic! The point is, licensing could get so complex that it might take years to agree on how to structure meaningful contracts. A side note, look for my next article on the range of absurdities this court order is causing. Also, if you would like to know more about cellular licensing, please read my articles here, here and here.
The real threat of 5G investments getting strangled
During the uncertainty of lengthy negotiations and the complexity of restructuring of contracts, it is highly likely that many OEMs would be tempted to stop paying royalties. This would be similar to what Huawei is doing during its negotiations with Qualcomm now, and to what Apple did until it settled with Qualcomm back in March 2019. Such a large-scale disruption could mean that the revenue stream that feeds the Qualcomm’s R&D engine would go dry. The direct casualty of such an outcome would be the development of 5G, and America’s leadership in 5G. As you might know, we are only in the early stages of 5G. A lot of what 5G promises is still under development. All of that requires billions of dollars of investment and multiple years of sustained development, with a long lead time for revenue generation. Any interruption to Qualcomm’s licensing revenue could directly impact Qualcomm’s ability to create those inventions and the development of 5G. The world would be at the mercy of China for the future of 5G, and to deliver technologies for Industry 4.0, and others.
Handing a powerful lever to China in the trade war
The fact that a large portion of Qualcomm’s licensing revenue comes from Chinese OEMs has huge significance when the United States is in a bitter trade war with China. As evident from developments, both countries will use whatever leverage they have to get the upper hand. In such a case, the considerable revenue stream for a strategic American company will surely be weaponized and used as a bargaining chip by China in the broader trade negotiations. It is no secret that the Chinese government wields considerable influence over these OEMs. If you think about it, this is such a potent tool, not only for trade negotiations but also to severely hurt America’s prospects for 5G leadership.
Whose interest is FTC fighting for?
It is abundantly clear that the real and biggest beneficiaries of the FTC’s and Judge Koh’s actions are neitherthe American People, nor American companies, but ironically, China and Chinese companies. And this too, to the detriment of American 5G leadership and at the expense of an American technology company that has been hailed as a 5G leader by the U.S. Government itself. This is exactly the reason the U.S. Department of Justice voluntarily tried to impress upon Judge Koh that she be cognizant of the implications of her decision for America’s national interests.
On the closing note, to those who value free markets and fair competition, I would like to point them to recently finalized 5G infrastructure contracts in China. Huawei won the lion’s share of these contracts, clearly showing how the Chinese government protects its companies. Who is there to protect the American companies? Far from protecting its own national interests, a U.S. government agency is effectively fighting tooth and nail to hurt a legitimate American company and help the Chinese. What an irony!