Qualcomm’s business model relies on two separate income sources: sales of its processors and modem chipsets, as well as royalty payments from smartphone manufacturers. Since 2016, Qualcomm has come under increasing scrutiny over the royalties it receives from the likes of Apple, Samsung, and most smartphone manufacturers. The company has been fined by antitrust regulatory agencies in South Korea, China, and Taiwan in recent times. It is also in the process of being sued in an antitrust lawsuit by the FTC in the US.
To complicate matters, Apple launched a $1 Billion lawsuit against the company in January, a case which is still ongoing. Apple has claimed that Qualcomm’s percentage-based business model for the royalty payments it collects is unfair and invalid. Qualcomm’s response has been to state that Apple’s claims are baseless. The company has also sued Apple for a variety of issues related with modems, code being shared with competitors, and more.
In recent months, the battle between the company and Apple has escalated as Apple has stopped paying royalty payments, claiming that Qualcomm’s chip licenses are invalid. As such, the legal battles are still playing out and are set to continue to play out in the coming months.
Now, a report by Digitimes has stated that some Android OEMs could choose to follow in Apple’s steps by temporarily suspending royalty payments to Qualcomm. This would be done with the aim of forcing the company (which rejected a Broadcom acqusition offer yesterday) back to the negotiating table to work out “fairer royalty schemes”, according to the report.
A Bloomberg report published in October stated that Qualcomm disclosed that a second major smartphone vendor (after Apple) had stopped royalty payments to it. Now, this has been corroborated by Digitimes as the report states that “[the chip maker] has revealed at its latest investors conference that a China-based smartphone [OEM] has already discontinued royalty payments for the use of Qualcomm’s patented technologies”. Qualcomm has not identified the Chinese OEM, but the report states that industry sources believe the vendor to be Huawei.
This could be a big development as Huawei’s smartphone shipments are reaching 150 million units in a year and they have an average selling price of $300, the report noted. It added that the Chinese tech giant’s royalty payments could account for 5-10% of Qualcomm’s annual royalty income. Huawei has its own base station technology and many related patents. Therefore, it has capability to have a bargaining chip in the form of suspending payments to Qualcomm.
Qualcomm’s royalty issues may not just be related to Huawei, as the report added that Samsung could also suspend its royalty payments to the chip maker. Samsung possesses a wide range of mobile technologies and patents of its own. Also, South Korea’s Fair Trade Commission (KFTC) has asked Qualcomm to renegotiate with Korea-based companies on royalty terms, which would give legitimacy for Samsung to stop payments. Digitimes noted that other Android phone vendors may follow the steps of Huawei and Samsung.
The report went on to state that Apple’s royalty payments are the most significant to the US chip maker, as they account for roughly 30% of Qualcomm’s annual royalty income. According to the report, this figure is based on Apple’s smartphone shipments of 200-250 million iPhone devices a year with an average selling price of $700-800.
If the report is correct, the royalty payment developments could have a significant impact on Qualcomm’s income, which has declined this quarter due to the ongoing lawsuits in which the company is involved. This is because royalty income accounts for nearly 70% of Qualcomm’s annual profits, according to Digitimes. It could also change the fundamental dynamics in the mobile industry regarding relationships between chip vendors and OEMs, as well as the equation of smartphone pricing. We will see how the situation develops in the coming weeks and months.