Personal Finance

Qualcomm Messed With the Wrong Customer

QCOM Revenue (Quarterly) Chart
QCOM Revenue (Quarterly) Chart

QCOM Revenue (Quarterly) data by YCharts .

Broader smartphone adoption was the main factor, but the iPhone pulled an awful lot of that weight, too -- both directly and indirectly (Android was created largely in response to the iPhone). More specifically, from 2011 to late 2016, Qualcomm had extracted both exclusivity in supplying Apple with cellular baseband modems as well as its silence. You may note in the chart above how much sales increased during this time period. Apple was restricted from actively complaining to law enforcement and regulators, although it was allowed to respond if asked. So long as Qualcomm maintained its lock on baseband chipsets, it had incredible leverage and there wasn't a whole lot Apple could do.

Enter Intel (NASDAQ: INTC) . Intel had been trying to crack the baseband market for years with little to no success. Even today, Intel's modems are technologically inferior to Qualcomm's, but they're good enough and much cheaper, and Intel expects to catch up within a few generations. The combination of Qualcomm's exclusivity ending combined with Intel's ability to supply a sufficiently competitive modem is the perfect storm for Apple to unleash its pent-up discontent in court. The $1 billion that Qualcomm is withholding was just the final straw.

Now that Apple has a path to an alternative supplier (even though the majority of its basebands still come from Qualcomm) and is no longer contractually obligated to keep quiet, Apple is bringing a brutal suit against Qualcomm that threatens Qualcomm's very business model . You know it's serious when Apple is litigating, given CEO Tim Cook's hatred of litigation . Did Qualcomm really think that Apple would never retaliate?

The moral of the story: Don't extort Apple, and don't blackmail Batman.

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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple 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. 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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