Qualcomm could have one life left

By Bloomberg | 24 May 2019 at 08:24hrs
By Shira Ovide

I was never very good at video games, but I knew enough as a kid to use the special code for extra lives in Contra. (People younger than 30: Look it up.)

I wondered on Wednesday whether Qualcomm Inc. had finally run out of what has seemed to be infinite lives.

Just about any company that wants its smartphones or other computer devices to connect to the internet needs to pay Qualcomm licensing fees for its patents, even if they don't buy Qualcomm's components. And the royalty rate is based on the consumer price of the smartphone, not the lower cost of individual components. The unusual business model made Qualcomm incredibly profitable but also the target of many lawsuits and regulatory challenges. The litigation disclosures in Qualcomm's annual securities filing run for 10 pages.

Qualcomm outlasted them all - even a grueling legal shootout with consumer tech giant Apple Inc. But just like in Contra, the game can come to a gory end. U.S. District Judge Lucy Koh late Tuesday said Qualcomm had broken the law by using its power in smartphone chips to drive up its licensing fees and disadvantage competitors.

Qualcomm said it disagreed with the decision and would ask for an expedited appeal. The litigation could take years to resolve. But if Judge Koh's decision stands, Qualcomm could be forced to rework its royalty agreements with customers, end exclusivity arrangements, agree to license its patents to other chip companies at fair and reasonable prices and subject itself to years of government oversight.

This could fundamentally blow up how Qualcomm does business. Unless, of course, the company cracks the code for yet another life.

Qualcomm could prevail in court, or the company may be able to adjust its licensing arrangements without upending its entire business model. Bloomberg Intelligence analysts said that even if Qualcomm customers renegotiate their contracts, it may not result in drastically different terms or fees. For one, Qualcomm's chip technologies are far ahead of rivals' in some areas, and device makers need Qualcomm.

There are other possible lifelines, too. Susquehanna Investment Group analyst Christopher Rolland mused in a note to investors whether the U.S. government would step in to rescue Qualcomm from this court loss, which - wait for it - stemmed from a lawsuit filed by the U.S. government. The U.S. Federal Trade Commission was the plaintiff in this antitrust case filed more than two years ago.

Rolland's reasoning is that Qualcomm is the U.S.'s "great 5G hope." Qualcomm is one of the few American companies that is essential in guiding standards for next-generation mobile internet technology. This has become as much a symbol of nationalist self-interest as it is a technical project. The U.S. government has framed 5G as a race between the U.S. and China, and Qualcomm is running for flag and country.

It's not a race, really. Yes, equipment from Chinese telecom equipment companies will be building blocks of 5G in many countries, as they are for today's cellular standards. But each country has its own 5G blueprint, and what happens in the U.S. or China won't necessarily have any bearing on each other. And yet 5G has become yet another chess piece in the economic and political tussle between the U.S. and China.

That has helped Qualcomm once already. The White House stepped in last year to block Broadcom Ltd.'s unsolicited takeover offer for Qualcomm. The White House's reasoning was an acquisition and subsequent cost-cutting by Broadcom would hurt Qualcomm's prowess in 5G and damage national security.

That gives fuel to Rolland and other analysts who wonder whether politicians might step in even if Qualcomm can't win in court. It is a window into the state of technology right now. Investors and people in the industry need to evaluate political winds as much as which companies have the best products and sales strategies.



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