Why QUALCOMM, Inc. Fell On Wednesday

Image source: Author, using QUALCOMM for the logo and a public-domain Korean flag.

What: Shares of QUALCOMM fell as much as 9.9% on Wednesday. The semiconductor giant's stock hasn't traded at these prices since 2011, and have now fallen more than 35% year-to-date.

So what: Early Wednesday morning, QUALCOMM confirmed that the Fair Trade Commission of South Korea has launched another investigation into the company's licensing practices. An Examiner's Report (ER) from that regulatory body claims that QUALCOMM's technology licensing practices are anticompetitive and in violation of Korean law.

Specifically, the ER notes that the company collects royalties on the device level rather than on the value of components included in each handset or other gadget. QUALCOMM says that this is an industry standard, and will "vigorously defend" itself against these allegations.

Now what: Device-level licensing is potentially much more lucrative than component-based schemes. Say you've invented a technology that lets smartphones communicate directly with your brain stem. The chip necessary for making this work can be bought for, say, $1.00 apiece. The phones including this revolutionary new feature, on the other hand, will be worth hundreds of dollars and feature the direct brain connection as a major selling point. Would you rather grab a royalty based on the entire device, or on the piddly little chip that makes the magic happen?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

If all of that sounds like roses and unicorns, you must have forgotten about August already. Because of a with weak consumer-goods sales, DreamWorks shares fell more than 17% in that quarter.

This conflict carries loud echoes from a previous Korean licensing disagreement. In 2009, the same Foreign Trade Commission accused QUALCOMM of anti-competitive licensing practices based on giving royalty discounts to device builders who used QUALCOMM's own chips rather than compatible competitors. That battle dragged on all the way into 2013, when it ended with a $236 million fine.

That was the largest antitrust fine in Korean history at the time. By contrast, Wednesday's market reaction to the latest ER slashed more than $7 billion off of QUALCOMM's market value.

I'm inclined to call that an overreaction, given the relatively modest financial impact of the 2009 case. But only time will really tell, and this case could very well spend years crawling through the Korean legal system. I'd love to give you a clue on QUALCOMM's chances here, but my knowledge of Korean law rivals my appreciation for cilantro-flavored ice cream. Hint: That's a really, really low figure.

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The article Why QUALCOMM, Inc. Fell On Wednesday originally appeared on

Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Qualcomm. Try any of our Foolish newsletter services free for 30 days .We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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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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