In 2005, Apple contacted Qualcomm as a potential supplier of modem chips in the first iPhone. Qualcomm's response was unusual: a letter requiring Apple to sign a patent license agreement before Qualcomm would consider delivering chips.
"I had spent 20 years in the business, I had never seen a letter like this," said Tony Blevins, Apple's Vice President of Purchasing.
Most vendors are eager to talk to new customers, especially customers who are big and prestigious like Apple. But Qualcomm was not like other suppliers; It enjoyed a dominant position in the market for cellular chips. It gave Qualcomm a lot of influence, and the company wasn't afraid to use it.
Blevins' comments came when he testified earlier this year in the Federal Trade Commission's antitrust case against Qualcomm. The FTC filed this lawsuit in 201
Last week, a California federal judge delivered the FTC and Apple with sweet justice. In a fierce 233-page opinion [PDF] Judge Lucy Koh ruled that Qualcomm's aggressive licensing tactics had violated US antitrust law.
I read every word of Judge Koh's perception that portrays Qualcomm as a ruthless monopoly. The legal document describes a nearly 20-year-old history of overloading cellular chip smartphone manufacturers. Qualcomm structured its contracts with smartphone makers in ways that made it almost impossible for other chipmakers to challenge Qualcomm's dominance. Customers who did not come with Qualcomm's one-sided terms were threatened with a sudden and damaging loss of access to modem chips.
"Qualcomm has the monopoly power over certain mobile phone chips, and they use that monopoly force to charge people too much money," says Charles Duan, a patent expert at the free market R Street Institute. "Instead of just charging more for the chips themselves, they required people to buy a patent license and leave the patent license."
Now all that dominance can come to an end. In its decision, Koh Qualcomm ordered to stop threatening customers with the chip cutoffs. Qualcomm must now renegotiate all its agreements with customers and license patents to competitors on reasonable terms. And if Koh's decision survives the appeal process, it can produce a truly competitive wireless chip market for the first time in this century.
Qualcomm's Perfect Profit Machine
Different cellular networks operate on different wireless networking standards, and these standards change a few years. For many of the last 20 years, Qualcomm has had a lead – and in some cases a jaw-on-chip supporting large cellular standards. So if a smartphone company wanted to sell its goods around the world, it had little choice but to do business with Qualcomm.
For example, at the beginning of 2010, Qualcomm had a great leadership on chips for CDMA standards preferred by Verizon and Sprint in the United States and some other carriers abroad. Qualcomm's Chief Technology Officer James Thompson explained in an internal 2014 e-mail to CEO Steve Mollenkopf how this gave the company dividends over Apple.
"We are the only provider today who can give them a global launch," Thompson wrote, according to legal documents. "In fact, without us, they would lose much of North America, Japan and China. It would really hurt them."
It wasn't just Apple. BlackBerry was in a similar situation around 2010. In one deposit, BlackBerry's CEO John Grubbs stated that without having access to Qualcomm's chips, 30 percent of our unit sales would have gone overnight if we were unable to deliver CDMA devices. " Over the past two decades, Qualcomm has been in agreement with most of the leading mobile phone makers, including LG, Sony, Samsung, Huawei, Motorola, Lenovo, ZTE and Nokia, which gave Qualcomm tremendous influence over these companies so Qualcomm was able to recover patent fares that were far higher than those obtained by other companies with similar patent portfolios.
Qualcomm's patent licensing fee was based on the value of the entire phone, not just the value of chips constituting Qualcomm's patented technology. Qualcomm got a cut on all the components of a smartphone, most of which had nothing to do with Qualcomm's cellular patents.
"Qualcomm charges us more than everyone else," said Apple leader Jeff Williams. such a large license fee related to other IP licenses, "said Motorola's Todd Madderom.
Internal Qualcomm documents supported these claims. that Qualcomm's patent licensing operation brought in $ 7.7 billion in 2016 more than the total patent license revenue of 12 other companies with significant patent portfolios.
No license, no chips
These high royalties are reflected in an unusual negotiating tactic called "no license, no chips". No one could buy Qualcomm's cellular chips unless they first signed a license to Qualcomm's patent portfolio. And the terms of these patent deals were heavily attracted in Qualcomm's favor.
When a telephone maker signed his first deal with Qualcomm, Qualcomm got even more influence. Qualcomm was entitled to unilaterally terminate a smartphone manufacturer's chip supply when the patent license agreement expired.
"If we are unable to source the modem, we cannot send the handset," said Motorola management Todd Madderom in a deposit. "It takes many months of engineering to design a replacement solution, if there is another viable on the market that supports the need."
That made Qualcomm's customers very vulnerable as they approached the expiration of a patent license agreement. If a customer tried to negotiate more favorable terms – say nothing about formally challenging Qualcomm's court claims – Qualcomm could suddenly cut off the company's chip supply.
"We explained that we considered closing the license," Lenovo executive Ira Blumberg tested during the trial. A senior Qualcomm executive "was very calm about it and said we should be happy to do so, but if we did, we would no longer be able to buy Qualcomm chips."
"You look at months and months, if not a year or more, without supply," Blumberg said in a deposit. It would be, if not fatal, almost fatal for almost any company in this business. "
Judge Koh found that Qualcomm used this tactic over and over the last 20 years: Qualcomm threatened to cut Samsung's chip supply In 2001, LG's chip supply in 2004, Sony and ZTE's 2012 chip deliveries, delivered Huawei and Lenovo's chip deliveries in 2013, and Motorola's chip supply in 2015.
Qualcomm's chip handler excluded competitors
One obvious question is how Qualcomm maintained its strictness over the supply of modem chips. Partially qualified Qualcomm talented engineers and spent thousands of dollars to keep their chips on the edge. 19659004] Qualcomm also strengthened its dominant position by selling systems on a chip that contained a CPU and other features, as well as modem functionality, resulting in significant cost and energy savings, and it was difficult for smaller chip makers to compete with.
But in In addition to these technical reasons, Qualcomm has also structured its deals with customers to do It is difficult for other companies to break into the cellular fashion business.
Qualcomm's First Weapon Against Competitors: Patent License Terms That Require Customers to Pay Royalties on All Phones Sold – Not Only Phones Containing Qualcomm's Wireless Chips. This gave Qualcomm an inherent advantage in competition with other chip makers. If another chipmaker tried to undermine Qualcomm's chips on price, Qualcomm could easily afford to cut the price of their own chips and knew the customer would still pay Qualcomm a hefty patent license fee on all phones.
Judge Koh draws directly in parallel with license behavior that got Microsoft into legal problems in the 1990s. Microsoft would offer PC manufacturers a discount if they agreed to pay Microsoft a license fee for each PC sold – whether the PC was shipped with a copy of MS-DOS. This meant that a PC manufacturer had to pay twice if it sent a PC running a non-Microsoft operating system. In 1999, a federal judge decided that a fair jury could conclude that this event violated the antitrust law by making it difficult for Microsoft competitors to break into the market.
And some of Qualcomm's license agreements contained terms that explicitly encouraged the companies to use non-Qualcomm wireless chips. Qualcomm wanted to offer discount coupons on all Qualcomm pieces they sold. But cell phone makers would only get those discounts if they used Qualcomm chips for at least 85 percent, or in some cases even 100 percent of the phones they sold.
For example, Apple signed an agreement with Qualcomm in 2013 that effectively guaranteed that Apple would only use Qualcomm's wireless chips. Under the deal, Qualcomm Apple paid hundreds of millions of dollars in discounts and marketing campaigns between 2013 and 2016. However, Qualcomm would stop making these payments if Apple started selling an iPhone or iPad with a non-Qualcomm cellular chip.
Apple was even required to repay some of these funds if it used non-Qualcomm mobile chips before February 2016. An internal Qualcomm email meant that Apple would owe $ 645 million if it launched an iPhone with a non-Qualcomm mobile chip in 2015.  Qualcomm made similar deals with other major cell phone makers. In 2003, Qualcomm signed a 10-year deal that gave Huawei a reduced 2.65 percent royalty if Huawei purchased 100 percent of its CDMA chips for the Qualcomm Chinese market. If Huawei bought non-Qualcomm CDMA chips, the royalty jumped five percent or more.
An agreement from 2004 gave LG discounts if LG bought at least 85 percent of the Qualcomm CDMA chips. The deal also meant that LG would pay a higher patent royalty rate when it sold phones with non-Qualcomm cellular chips. A 2018 deal provides incentive payouts to Samsung if the company buys 100 percent of its Qualcomm's premium cellular chips, as well as lower thresholds (the exact percentages are edited) for lower chips.