Qualcomm-Apple settlement a win for both companies, less so for the FTC

17 April 2019 7:44pm

17 April 2019. By Leah NylenMike Swift and Joshua Sisco.

The settlement announced today between Apple and Qualcomm is a huge win for both companies, but much less so for the US Federal Trade Commission.

The two tech companies, which shared the profits from the sale of hundreds of millions of iPhones from 2011 to 2017, are together once again in the smartphone business as 5G wireless technology emerges that will offer many new — and profitable — uses for mobile devices.

For Apple, the armistice means it once again will be using Qualcomm to supply the critical modem chips that allow a smartphone to connect to a cellular network. But it is unclear whether Apple will achieve its cherished long-term goal of having multiple suppliers for that component, as Intel announced in the hours after the settlement its plan to exit the 5G modem chip market.

Qualcomm’s stock rose by 23 percent following news of the settlement, and continued to climb in after-hours trading. The market’s reaction underscored the stakes for Qualcomm had the San Diego chipmaker lost this trial to Apple, and the value to Qualcomm of erasing that cloud and once again supplying chips to Apple. Apple's stock was largely unchanged, suggesting the markets saw Qualcomm as the victor today.

Qualcomm said in a filing with the US Securities and Exchange Commission that it expects an increase in earnings per share of $2 as a result of the settlement,* and that the settlement reflects the "value and strength of Qualcomm’s intellectual property.” The company's stock rose more than $13 after the announcement of the settlement.

Financial terms of today’s settlement were not released, but the deal included a payment from Apple to Qualcomm, not the other way around.

The global settlement between Apple and Qualcomm was already resonating today in a court in South Korea. Apple submitted a document in the Seoul High Court to remove itself as an interested party in a case in which the company has sided with the Korea Fair Trade Commission in an appeal trial where Qualcomm is trying to reverse an antitrust decision by the regulator.

For the US antitrust enforcer, and arguably for Intel, the news is much less welcome. The FTC is awaiting a ruling by US District Judge Lucy Koh following an 11-day bench trial this year in San Jose, California in which the agency argued that Qualcomm’s patent-licensing business violated the antitrust laws. Koh could issue a decision at any time.

The FTC alleged Qualcomm — which owns patents essential to 3G and 4G/LTE wireless communication standards — violated antitrust law with its “no license-no chips” policy, which the agency says forces companies into onerous licenses in order to receive their chip supply. Testimony from Apple and Intel was key to the FTC’s case, providing the foundation for the FTC to argue that Qualcomm’s conduct harmed competition.

Since the trial, Qualcomm has been trying to negotiate a settlement with the FTC but has been unable to gain traction with the agency’s four commissioners who would need to approve any consent.

Tuesday’s settlement between Apple and Qualcomm may not affect Koh’s substantive ruling on whether the chipset manufacturer violated the law, but it likely complicates what remedy the FTC could seek.

The agency asked Koh for an injunction blocking Qualcomm’s “no-license, no chips” policy going forward and in connection with chips related to 5G technology. The Apple-Qualcomm settlement largely moots that request by proving that companies — including Qualcomm’s biggest detractor — can successfully negotiate licensing deals in spite of the allegedly onerous policy.

Such a remedy, which would largely undercut Qualcomm’s existing business model, also opens the FTC up to criticism that it is meddling in corporate disputes that have already been largely resolved.

While the FTC could continue challenging Qualcomm’s business model, there are few corporate complainants left on the agency's side. Major handset suppliers supplying US consumers, such as Samsung and LG, have also reached global resolutions with Qualcomm.

Some licensees were understood to be pushing for a settlement to include a provision that would allow them to invalidate existing patent deals with Qualcomm, saying those deals were coerced by Qualcomm’s monopoly power. That type of remedy has always been less likely given the FTC’s reticence to seek settlements that have the effect of setting prices.

The settlement also appears to have erased the situation that existed before the FTC and Apple sued Qualcomm, an exclusive supply relationship that several Apple executives testified allowed Qualcomm to abuse its position to obtain anticompetitive royalties.

During the trial in January, Apple’s chief procurement executive, Tony Blevins, testified that Apple’s relationship with Qualcomm was different than any other supplier of iPhone components.

Only Qualcomm was the sole supplier of a critical iPhone component, an arrangement that Blevins testified ultimately resulted in a “stranglehold Qualcomm had on us.”

There are roughly 1,000 separate components in an iPhone, and a foundational element of Apple’s business strategy was to have multiple suppliers that would compete on price and quality for each component, Blevins testified during the January trial.

Apple always strives to have two to six suppliers for each iPhone component, because the competition allows Apple to negotiate better prices and assurances of supply; the sole exception was the 2013 deal that made Qualcomm the iPhone’s exclusive provider of modem chips. That agreement would have been a central element of the trial that ended today.

The earliest iPhones sold starting in 2007 used chips made by Infineon to transmit data to and from cellular networks when a WiFi connection was unavailable.

By 2012, Apple Chief Operating Officer Jeff Williams testified in San Jose, the iPhone-maker was transitioning away from using Infineon chips, which it didn't believe were technologically capable of meeting its demands. It was at this time that the company was preparing to offer its first iPhone that could connect to Verizon's CDMA network, a wireless technology pioneered by Qualcomm.

Williams testified that Qualcomm’s monopoly over high-quality modem chips required by premium smartphones such as the iPhone placed “a gun to our head” during those negotiations. Apple ultimately agreed to exclusively buy Qualcomm’s chips. In exchange, Qualcomm paid Apple a $1 billion transition fee along with other rebates Apple could claim later in the multi-year deal.

The FTC argued in the January trial that the exclusivity deal with Apple was one element of a multilayered licensing strategy by Qualcomm that violated federal antitrust law. The deal deprived rival chipmakers such as Intel and MediaTek of the potential sales volume to enter the market because they couldn’t sell chips to Apple.

The biggest loser from today's settlement may be Intel, which had struggled for years to develop chips that could compete with Qualcomm's, but which Apple ultimately judged were good enough by 2017 to go into the iPhone.

Intel CEO Bob Swan said "it has become apparent that there is no clear path to profitability and positive returns” in building modem chips for smartphones.

Intel said today it will continue to meet current customer commitments for its existing 4G smartphone modem product line, such as for the iPhone. But Intel does not expect to launch 5G modem products in the smartphone space, including those originally planned for launches in 2020.

An FTC spokesman declined to comment. Apple and Qualcomm declined to respond to requests for comment from MLex.

In a statement Tuesday evening, ACT The App Association, which represents app and connected device makers, urged the FTC to “ensure every company is safe from Qualcomm’s anticompetitive patent schemes.”

“The Federal Trade Commission must continue fighting to ensure Qualcomm lives up to its commitments to license its standard-essential patents to any willing licensee under fair, reasonable, and non-discriminatory terms,” said the group, which includes Intel among its members.

With Apple and Qualcomm battling in courts in Germany, China and in Washington before the US International Trade Commission, today’s settlement is widely expected to lead to the termination of those cases as well.

ABA 2019