Personal Finance

The Chronological History of How Qualcomm Became the Most Powerful Apple Supplier Ever

Chart showing more than half of baseband suppliers exited between 2006 and 2014.
Chart showing more than half of baseband suppliers exited between 2006 and 2014.

No wonder companies kept exiting the baseband modem market. Image source: Intel Investor Meeting 2014.

Both the U.S. Federal Trade Commission and the European Commission opened their own investigations, commencing in September and October, respectively.

Apple attempted yet again to negotiate a direct license, knowing that several agreements would expire in less than two years. It was unsuccessful.

Discussions dating back to at least November 2014 between Apple and Qualcomm about a direct license for certain patents were conducted with the knowledge that certain of the agreements governing the parties' commercial relationship, such as the TA and BCPA, were set to expire at the end of 2016.

Roughly a year and a half after ST-Ericsson's dissolution, Ericsson also bailed on basebands, cutting 1,000 jobs in the process.

2015: Qualcomm makes peace with China, attempts to with Apple

In February, Qualcomm settled with China's NDRC and negotiated a rectification plan. The company paid the $975 million fine in full and agreed to modify its business practices in the Middle Kingdom. Qualcomm began charging royalty rates of 5% for 3G CDMA and WCDMA devices, including multimode devices that use both 3G and 4G. 4G devices that do not use CDMA fetch 3.5%. In both cases, that percentage is levied on a royalty base of 65% of the device's net selling price. Qualcomm offered these terms to Apple, but Apple rejected them, not believing that the offer was consistent with FRAND.

Four years after acquiring Icera's baseband assets, NVIDIA announced in May that it would wind down its Icera baseband operations, conceding defeat to Qualcomm.

Marvell announced a "significant restructuring" of its mobile platform, also bailing on mobile chips like basebands and applications processors. Annualized operating expense savings were estimated at $170 million to $220 million; Marvell laid off 17% of its employees.

The European Commission sent Qualcomm two formal Statements of Objection in December based on its preliminary conclusions that "the company may have illegally paid a major customer for exclusively using its chipsets and sold chipsets below cost with the aim of forcing a competitor out of the market." Well, now we know who that major customer is, although Apple wasn't named at the time.

2016: The end of exclusivity

Apple approached Qualcomm once again in February looking for a direct license. During discussions, Qualcomm disagreed on which patents may or may not be in fact essential, and the company removed a public list of its patents from its website.

On February 5, 2016, Apple reiterated its interest in exploring a direct license to certain patents in Qualcomm's patent portfolio....Apple rejected Qualcomm's attempt to shirk its burden to prove the merits of its claims. Qualcomm thereafter removed from its website its public list of U.S. patents disclosed to [European Telecommunications Standards Institute] and precluded archive searching of that list. Consistent with Qualcomm's other hide-the-ball behavior, this action makes it harder for a licensee to determine which patents Qualcomm has declared to be essential to cellular standards.

Qualcomm's exclusivity as Apple's baseband supplier ended in the spring.

The KFTC requested information from Apple, and Apple testified to the KFTC in August. Less than a month later, Qualcomm retaliated by withholding the quarterly Q2 rebate payment outlined by the BCPA that Apple had earned as of June 30 but wasn't due to be paid until September. Qualcomm hasn't paid the subsequent two quarterly payments, either. The $1 billion that Apple is seeking comprises three quarterly payments.

2017: Back to the future

That more or less brings us up to speed with how Qualcomm extracted exclusivity from Apple, which was a key factor in pushing out rivals. Apple is by far the largest purchaser of stand-alone modems, and missing out on that business was utterly fatal for rivals' baseband ambitions. In Apple's words:

This conduct has foreclosed Qualcomm's competitors from dealing with Apple, a key purchaser of chipsets, leading to the marginalization and exit of many of those competitors, and to the acquisition and maintenance by Qualcomm of monopoly power. But-for Qualcomm's conduct as alleged herein, rival chipset manufacturers would have become stronger competitors to Qualcomm.

No other Apple supplier in history has been able to wield such power over the Cupertino company. The key differentiator was Qualcomm's massive patent portfolio, combined with its willingness to disregard industry norms as well as its own FRAND licensing commitments. Perhaps more importantly for Apple going forward, there will probably never be another supplier with this much power ever again.

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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple, Nvidia, and Qualcomm. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Intel and Verizon Communications. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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