The Qualcomm 'Tax' Rebellion (2017)
bloomberg.com
bloomberg.com
They charged around $50 and computers cost over $1000, I don't think that was really the problem with the Microsoft MS-DOS/Windows tax.
Microsoft is saying that Windows makes a computer better by $N and so manufacturers need to pay that. If you sell a computer with an integrated monitor (rather than an external display), there's no reason for Microsoft to get more money.
One big difference between Microsoft and Qualcomm's situation is that technologies like CDMA, UMTS, and LTE are official standards that only use patents from those willing to commit to FRAND licensing (fair, reasonable, and non-discriminatory). Microsoft never agreed to FRAND licensing while Qualcomm did.
Because Qualcomm wants a percentage of the selling price, it refuses to license the patents to, say, Intel or MediaTek. If they licensed the patents to Intel, Qualcomm couldn't then ask for royalties from Apple on devices that use the Intel modem. For example, when you buy an iPhone, Qualcomm can't come up to you and say, "you're using our patents so you owe us money." Likewise, if you sell the iPhone to someone else, they similarly can't ask for money from that person. But Qualcomm wants to get a percentage of Apple's selling price, not a percentage of Intel's selling price on the modem alone.
You brought up Microsoft's practice of requiring an OEM that uses Windows on some machines to pay for Windows for all machines, even ones shipped without Windows. In fact, Qualcomm has a similar arrangement called "no license-no chips". If you want access to Qualcomm's modems for your high-end phones, you must agree to elevated royalty rates for Qualcomm's patents even on your devices that don't use Qualcomm chips.
Much of the information in this comment comes from: https://www.ftc.gov/system/files/documents/cases/170117qualc.... It's a decent read.
With FRAND licensing, you can challenge the royalty rates in arbitration or court. Let's say that a court would set the royalty rate at $5 and we somehow know that and let's rewind a couple years before Intel was seriously making modems.
LG comes up to Qualcomm and says, "we need those Qualcomm modems for our $650 flagship phone, but we're happy using non-Qualcomm lower-end modems in our cheap phones." Qualcomm says, "Great! We'll sell you the chips for $N per chip and you agree that you'll pay patent royalties of $15/phone." LG could retort, "but the patents are only worth $5/phone and you agreed to FRAND licensing! We'll see you in court!" Qualcomm confidently says, "well, we might be required to FRAND license you our patents, but nothing requires us to sell you chips. If you challenge our preferred $15 royalty rate, good luck selling a $650 phone with a low-end modem in it. You'll be paying $5 royalties, but you won't have a flagship phone and those are the only phones you make money on."
Because phone manufacturers had no other high-end modem option, they had to agree to Qualcomm's preferred royalty rate rather than a true FRAND rate that a neutral third party would say is fair. If they went without Qualcomm's modems, they could make low-end phones with low-end modems, but the money is in the flagship phones.
At the same time, no company had enough incentive to invest in a high-end modem. It would take many years and many billions to get close to Qualcomm's modems and they might still stay one step ahead. Plus, all that royalty money could be poured into making sure their chips were always a step ahead. If you're thinking about competing, what's your business model? Pour billions into a few generations of LTE chips that no one buys in the hopes that you'll produce a generation close enough that customers will dump Qualcomm? Even if they buy your chips, unless they're willing to write-off Qualcomm, they're still on the hook for the higher-than-fair royalties.
If Apple didn't force the issue with Intel, nothing would have happened. Apple made a big bet there that they could break Qualcomm's hold.
It's different from Microsoft's case since the devices without Qualcomm chips would still have to pay Qualcomm a royalty, just a lower one that was either negotiated or set by a court/arbitrator.
Imagine if Microsoft owned the BIOS and had committed to license it to anyone under fair, reasonable, and non-discriminatory terms of $1. Then they turned around and said, "if you want to run Windows on any of your computers, we'll only sell you Windows if you pay $20 for the BIOS on all the machines." If you cut Windows out of your company entirely, you'd still need to pay Microsoft the $1 for the BIOS. But you couldn't run a PC company without Windows - just as you couldn't be a phone company without Qualcomm modems. Technically, nothing requires them to sell you Windows or sell you modems. FRAND only requires the BIOS/IP portion. By tying the two together, they can make it so that you pay elevated rates because you can't forgo the Windows/modems on all your devices.
To paraphrase Rick and Morty, that just sounds like what Microsoft did with an extra step.
Microsoft enforced every OEM of PCs should be distributed with Microsoft Windows. Later on, they enforced every OS should be distributed with an OS. Hence you had a few (very few) PCs which were distributed with FreeDOS. Microsoft argued this was to combat piracy. I argue the other [more nefarious] reason was to stop alternative OSes such as BeOS and Linux. Though I don't know which reason makes more sense, I can say I'm glad this hegemony is over. Too bad we apparently have different monsters to be slain.
Qualcomm never license modem techs alone, they give you the whole package they have which includes a huge load of camera related patents.
When snapdragon chips are being shipped in a few hundred million a year, and all of those chips & associated software/firmware provided by Qualcomm are built on top of those mode/display patents, of course phone maker should pay for using those camera/display patents invented and owned by Qualcomm.
Microsoft is an evil company that must be destroyed.
This approach had advantages for everyone involved. It meant licensees and Qualcomm didn't have to scrap over which parts of the phone did or didn't use Qualcomm technology, so they could just go ahead and focus on the more important task of developing and selling these hip new gadgets.
And then:
Qualcomm's argument was that no matter what went in the phones, they wouldn't work at all without its technology.
So, was the current licensing agreements put in place because it was advantageous for everyone or was it because Qualcomm argued that the company's technology enabled mobiles? The reasoning is important because if it was former then wouldn't removing the current licensing structure remove the intended "simplicity". But, if it was the latter then I find it surprising why weren't people fighting an obviously dubious claim from Qualcomm.
Everyone got locked into the uniform Qualcomm licensing agreement and despite the change in the cost structure of modern phones, no one has had the leverage needed to force Qualcomm to change their licensing.
1) Let's look at it from Apple's perspective. Their current device lineup costs $700, $800, $850, $950, $1,000, or $1,150 (iPhone 8, iPhone 8+, iPhone 8 256GB, iPhone 8+ 256GB, iPhone X, iPhone X 256GB). Qualcomm is taking $35 to $57.50 per phone. Increasing the storage from 64GB to 256GB means Qualcomm gets an additional $7.50 for doing nothing. They didn't make the LTE faster on the devices with more storage. It's the exact same technologies, why should it cost more? In fact, Apple is paying 2.3-3.8x more per phone than the average. So, you can imagine that Apple wants to pay less. They're a manufacturer that only makes high-end phones.
2) Let's look at it from LG's perspective. They sell a variety of phones and let's say they have a $100 phone, a $300 phone, and a $509 phone and they sell equal amounts of each. They have to pay a $25.45 royalty on the $509 phone and only a $5 royalty on the $100 phone, but they're paying on average $15/phone in royalties so it doesn't really matter.
Before Apple, most device manufacturers created a variety of devices at a variety of price points so it didn't really matter if it was a percentage or a fixed cost. In fact, being a percentage meant that you didn't have to worry as much going down-market. If you create a cheap device, you could capture some of that market without as much worry about what the royalties would do to your margins.
I think the article is a bit fuzzy there. It's hard to argue that a percentage is really better for everyone. It does offer a certain flexibility in a market where people might be feeling things out. For example, let's say I want to make the next IoT LTE-connected thing - you want sensors around your home connected by LTE measuring micro-humidities and you'll need at least 100 of them per house. I'm planning on selling them for $10/sensor. It's going to be the next-gen of home comfort automation! If Qualcomm just has a straight royalty fee of $15, I can't get my business of the ground. New, innovative uses of LTE can't come to the forefront because while a $15 royalty is totally manageable for something like a smartphone with a high selling price, it's unduly burdensome for something like my sensors.
You can also say that the value-add of LTE in a smartphone is higher than the value add of LTE in my sensors. Why not just use WiFi for the sensors? Even if LTE is needed, they're going to be transmitting a lot less data, don't really need fast data or low latency (old GPRS would provide enough bandwidth to send the tiny updates). LTE is adding less value to these sensors than it does to a smartphone.
I think that's part of the argument from Qualcomm's perspective. They want me to be able to create my micro-humidity sensing IoT with affordable royalty rates while still raising enough money to pay for the technology development. If they had to charge $0.50/device to everyone (5% of my $10 selling price), they wouldn't make back their investment in developing new wireless techniques. If they had to charge me $15/device, I couldn't make a viable business model.
So, in that way, it can benefit everyone and make it simple. There's no arguing about how much value-add that Qualcomm is adding to my sensors vs your smartphone. I think most people would agree that the value-add proposition of LTE in a smartphone vs WiFi-only is way above my sensors having LTE or WiFi only.
I think one way one could measure the value-add is by how much data is consumed by the device. If the device's user is using more LTE data, they're getting more value from the Qualcomm IP than a device that's always on WiFi. If I agree to turn off LTE/CDMA/UMTS and just use WiFi, should I get a rebate of the Qualcomm royalty? While that's impractical, it makes sense - I'm not getting any value add from that IP.
Ultimately, we only have imprecise approximations. As phone prices have skyrocketed in recent years, the fact that the royalty is a percentage has become a bigger issue. For years, the prices of phones would have been going down as technology became cheaper. Smartphones changed that as phones went from something where a good one was $100-200 to where a decent smartphone started at 5 to 10x that. I'm guessing that's part of the big issue now. People are looking at Qualcomm as getting fat off of their smartphone innovations rather than Qualcomm's wireless innovations. A better display or more memory doesn't make Qualcomm's IP better.
Of course, to play Qualcomm's side of the argument, a better camera means that fast data is a bigger value-add since you don't want to be waiting forever for uploads; a better display means more pixels and more data to send over the network; a better phone means a device you're going to be using more data with.
I tend to take Apple's side in this argument, but I can also see how Apple's side is self-serving. I think FRAND (fair, reasonable, and non-discriminatory) should be FRAND. Everyone should pay the same price and, in fact, hidden royalty prices should be enough evidence alone that a company is violating FRAND. Apple making better software or a better display doesn't mean Qualcomm should get to leach off that. Of course, that's kinda self-serving for Apple: a non-percentage royalty rate would mean royalties would have to rise on cheaper, non-Apple devices. It would also stifle innovation in areas we don't even know LTE might be useful yet. Maybe there's some hot new use for the technology just waiting to be invented, but if it requires a fixed fee, it won't get off the ground. Should a farm sensor that uploads maybe 1MB/day really require the same royalty as an iPhone where I slog through a couple hundred MBs/day? Do we want to say, "sorry, IoT is cancelled due to royalties"?
Maybe we just need categories. Phones cost $15/device, sensors cost $0.50/device, etc. based on some notion of value add.
Would be interested in informed individuals’ opinions on how the regulatory framework is falling over in this case.
Open data such as custom export data indicates most iphones shipped by companies like Foxconn are valued at around half of the retail price you see in apple stores.
2) Apples' MSPR is irrelevant here since it's Foxconn who pays Qualcomm with their existing licensing agreement from pre-iPhone era. Apple outsourced their manufacturing and "licensing" to cheaper manufacturers in Asia from the getgo. Foxconn's royalty in turn is based on their manufacturing cost, not retail cost of, Apple iPhones. So the prices for the current lineup would be more like $200, $230, $250, $300, $350 and Qualcomm's 5% (without any volume discount or other "rebates" agreed upon) is probably no more than $17 and change per device at max, or less than 1% or 1.5% of Apple's MSRP, which you grossly overestimated to make your lopsided argument. The way I see it, Apple's problem here isn't that Qualcomm's licensing rates are unreasonable or something out of ordinary, but that Apple believe that while their patents are worth ~$30 per device for a handful of frivolous utility and design patents (see Apple vs Samsung 2012), everyone else's, especially those that are essential and committed to SSO, are worth $0.0000000X per device. That is why they challenged pretty much every single wireless patent holders (eg, Nokia, Ericsson, Samsung, Moto, etc) whenever their licensing contract was up for renewal (but lost or settled every single one of them).
3) >why should it cost more?
I think most of us with smartphones would agree that Qualcomm's underlying tech is the single most important driver for market demand. We know from the significantly lower sales of Apple iPod, which is a perfect substitute good without Qualcomm's IP's, that Qualcomm's IP's adds significantly more value and drive market demand for Apple's iPhones.
4) >Before Apple, most device manufacturers created a variety of devices at a variety of price points so it didn't really matter...
No, it always mattered and regulators in other countries have challenged Qualcomm's licensing practices to lower their rates in the past. This time around we have a domestic company with significant political connections and influence.
5) I think you are compounding a few issues that aren't quite related. IMO, it's fair to charge per device at whatever rate Qualcomm is charge if Qualcomm's IP's indeed add significant value and drive market demand for end-products. For decades, while there were always some chatter that Qualcomm's gain was unfair -- just in the same way that some see Apple's profit as excessive and unfair today -- it helped catapult the mobile communication market from the 90's to what it is today. I expect there would be a different pricing tier, with perhaps different licensing models, for IOT's and other products (ie, cars or airplanes) that aren't communication devices and whose value and market demand are not driven significantly by Qualcomm's IP's. This is common sensical stuff.
6) As I replied to your other misguided comment about FRAND, the problem here isn't that Qualcomm's licensing is discriminatory -- many would probably argue that it's equally too high. Standard Settings Organization or FRAND says nothing about what precise royalty rates or basis ought to be* -- it's to be determined by market participants by trial and error, and through negotiation -- Apple has been the least willing participant in this, having developed or contributed nothing to offer in return, other than what Apple sees as "exorbitant" licensing fees. FRAND isn't certainly about making Apple or Apple fanbois happy and changing their rates as they see it fair, reasonable, fit to improve Apple's profit margin.
* note that IEEE made it an official policy to use the smallest salable patent practicing unit that embodies IP's as the royalty basis a few years back, but it is the only SSO to announce such policy.
1. 30% cut on apps regardless of their price (an assumption that Apple's channel reach is the one enabling the sale, not the merit of your app)
2. A $5 or more price on licensing to build a MFI authorized Apple accessory
3. Complete lockdown of apps not distributed via the app store (for iOS)
4. Ominous warning while launching an app on the Mac, if app was downloaded outside the app store
When an industry group sets a standard, everyone must disclose their patents and agree to FRAND terms. If they don't, they'll work around their patents and they'll get no licensing fees. This is because everyone will be forced to use that standard. Rather than being a competitive market, it's a monopoly. As such, FRAND licensing is so important.
Apple, by contrast, doesn't force you to use their technology and is far from a monopoly. That doesn't mean that what Apple does is good or fair or just. However, I can buy an Android phone if I dislike what Apple is doing. I can't decide I'll buy a phone without Qualcomm's tech in it.
While Apple has significant market power, it doesn't have the type of market power that a monopoly gives you. If Apple has patents on a lot of iPhone things, competitors can work around it. While Apple still has power, it's much more limited.
Without the FRAND threat, once a standard had gotten traction like LTE, a company like Qualcomm could start charging $200/phone. Cell networks have invested at least $25 billion per carrier in the US into LTE networks. They have a huge installed base of LTE phone users. They can't move to a different technology even if they wanted to.
By contrast, while Apple has power, they don't have that kind of power. When the iPhone was AT&T-only, sure it helped AT&T, but Verizon countered with Android devices. Sure, some people might have left Verizon for the iPhone, but it didn't have any lasting impact on Verizon.
If Qualcomm decided to cut off Verizon from all its LTE patents and license them exclusively to AT&T, that would kill Verizon.
Apple's biggest power-move was AT&T exclusivity, and while it helped AT&T, it didn't change the dynamic of the industry. If Qualcomm did the same, it would change the industry.
That's not to say you should like Apple's exercise of power. It's to note that there's a difference between standards-essential patent licensing which is a bedrock of how we can have these industries and Apple's somewhat annoying practices which we wish they'd be nicer about.
Note this is only some industrial groups. The W3C, for example, requires a royalty free license of all patent claims; the IETF merely requires one to disclose patents "reasonably and personally known" held by the contributor or their employer.
Nonsense, that's a completely red herring. There is nothing different about Qualcomm's or Apple's extortion-like rates. l Qualcomm can charge a percentage per device (or unit) if this is a widely accepted reasonable industry practice.
Further, FRAND has nothing whatsoever to do with the royalty base or rates. Standard Setting Organizations, SSO's, aren't in the business of setting rates or telling their members what their basis ought to be, in part for fear that it might cross paths with regional anti-trust regulators. The IEEE has broken the tradition recently, but it's very rare for SSO to do so. Likewise, courts or regulators rarely want to set rates either -- for they understand their limits in their understanding of technology and market. Where they were exceptions (eg, Moto vs Microsoft), the courts have used the similar set of standards industry uses to charge potential licensees.
Contrary to pro-Apple fanbois views, FRAND doesn't necessarily mean cheap or does it imply that Qualcomm's IPs are essentially public properties. It just means that they must be open and willing to license their IP portfolio in fair, reasonable, and non-discriminatory manner to promote optimal interoperability and wide-adoption.
True,except you can work with android in smart phone apps, you don't even have a choice inn Qualcomm case.
Either way, Qualcomm still owns a lot of standards essential patents needed for running a modern wireless network or handset.
I believe specs aren't generally published by companies, but they use a lot of the IP from companies. That IP is supposed to be licensed under FRAND terms to anyone (fair, reasonable, and non-discriminatory).
5% on a $500 phone is $25
5% on a $50 phone is $2.50
Switching to a fixed $25 fee makes it 50% on a $50 phone.
On phones of yore, even “smartphones” in the early-mid 2000s, the radio was still arguably one of the most important / expensive components. This may just be bias on my part on how terrible I thought Nokia and Blackberry smartphones (typically around $500 RRP) were though. My loathing of J2ME knows no bounds.
Excerpt: "2.275% of the selling price of branded single-mode 5G handsets; and a royalty rate of 3.25% ... (for) multi-mode (3G/4G/5G) handsets"
"To promote the Progress of Useful Arts" my ass.
To take Qualcomm's POV, consider this analogy: if you had patented the microwave oven and you licensed that to appliance manufacturers. Those manufacturers then decided to offer new ones with a larger cavity for cooking larger meals. They could charge more for this new product, and might pay more in royalties. That's not particularly unfair.
Apparently Apple's suppliers have been making phones under this licensing agreement since before apple entered the business.
I sympathize with apple because unlike the microwave example, they truly do innovate a lot in this space. But they protect their inventions too.