The wireless industry witnessed a revolution named iPhone this summer. It has also been in the news constantly for another reason: The QualComm-BroadCom legal battle. Over the next few posts, I wish to discuss this story as it unfolds and provide some insights on its impact on QualComm (QCOM).
A quick re-cap
On June 7th this year, the US International Trade Commision (ITC) banned the import of phones having QualComm EV-DO (the evolution path for CDMA 1xRTT pioneered by QualComm) chipsets into the US. These chipsets were found to infringe upon BroadCom patents dealing with conservation of battery power in the absence of network signals as per an ITC ruling last fall. Subsequently, President Bush declined to veto the ITC ruling despite heavy lobbying from QualComm (which spent $740000 in the first half of 2007) and support from most carriers and phone manufacturers who were using the disputed chipsets. Besides, QualComm suffered a series of other set-backs preceding and following the ban –
Before we investigate the impact of these losses, it is important to understand the genesis of the conflict. It is my belief that QualComm’s aggressive protection of its intellectual property (IP) portfolio is the primary factor. The chip-makers and the phone vendors engage in cross-licensing agreements wherein they allow unlimited and exhaustive usage of each other’s patents in order to minimize their costs.
QualComm, on the other hand, seeks an aggregate licensing fee, typically less than 5% of the hand-set selling price, for non-exhaustive use of its patents. This is important for its business model and its position as the technology leader. The company spent $1.01 billion for R&D in 2005, a staggering 17.8% of its revenue. A reduction in its IP value and licensing revenue would have a direct impact on this model.
Now, companies such as Nokia and BroadCom have started being aggressive about the valuation of their patents as a means to counter QualComm and force it to come to the licensing tables for relative IP valuation. Beyond a point, every unresolved valuation was taken to court.
So, from BroadCom’s perspective, these suits are means to reduce the IP value of QualComm leading to a reduction in the royalty paid and an increase in its margins. For the latter, it is a fight to save the very business model it has thrived on. In the sequel, we will discuss the impact of these events on QualComm.
This segment is a part in the series : QualComm