Qualcomm vs. Apple – Apple blinks

Ultimately, the pressure proved too much for Apple.

• Apple and Qualcomm have settled their long-running dispute (see here) over patent royalties and chipsets in what looks to me to be a big victory for Qualcomm.
• This outcome is very different from the settlement that was announced with Nokia in 2008 where I was of the opinion that Nokia got the better of Qualcomm.
• Both companies have been very tight-lipped (more than usual) with regards the settlement other than to say:
  • First: that a lump sum will be paid to Qualcomm,
  • Second: that the agreement is valid for 6 years with an option for a 2-year extension and
  • Third: that the resumption of Apple royalties and chipset purchases will be worth $2.00 in Qualcomm EPS over time.
• Usually what happens in these cases is that pressure and legal rhetoric slowly builds up in a series of tit-for-tat skirmishes until something happens that shifts the power balance meaningfully that brings one side to the table.
• A deal very quickly follows.
• In 2008 between Nokia and Qualcomm, it is not clear what it was that brought Qualcomm to the table, but this time it is clear.
• Intel has had enough of losing money on cell phone modems and is instead shifting its focus to integrating them into PCs and other data-centric devices (see here).
• Intel has been Apple’s sole supplier of modems since the iPhone Xs, leaving Apple very few options outside of MediaTek.
• I am certain that Intel communicated this intention to Apple some time ago, and it is this that forced Apple to come to the table.
• There is no way that Apple can take the risk of being without a supplier of modems and given its two-year design cycle, serious 5G decisions need to be taken now.
• Therefore, with a materially weakened hand to play, Apple was forced to give in to Qualcomm and resume what it has been paying for the last 12 years.
• For Qualcomm, this means no change to its current licensing practices, a resumption of business as usual and an excellent outlook with one of its biggest competitors exiting the business.
• I am surprised that Apple did not purchase the entire chipset business from Intel as this has been on the cards for some time.
• Perhaps Intel was unwilling to sell it as I am pretty certain that Apple offered as this would have enabled it to fight on to the end.
• In terms of the deal itself, it is very difficult to tell what has been agreed, but one should get some inkling once the payment is visible in Qualcomm’s cash flow statement.
• This one-time payment could be very large as it may include both back royalties as well as a pre-payment of future royalties.
• This is one-way Apple can get a slightly cheaper rate as Qualcomm will offer anyone a discount if they are prepared to pay some royalties on guaranteed volume up front.
• When one has excellent visibility and big volumes (as Apple does as there is nothing on the horizon to challenge its position at the moment), it makes financial sense to pre-pay something.
• Both Nokia and Samsung have availed themselves of this option in the past.
• The fact that the deal is only 6 years long (Nokia’s was 10) also is an indication that Apple is prepaying something as one can be reasonably comfortable that it will still be selling huge volumes in 6 years time.
• However one looks at it, this is a major victory for Qualcomm and I think this will go a long way to silencing the dissent of its activist shareholder base and the critics of the current management team.
• The shares are already up 23% and I suspect they will go further.