Apple wanted to use Qualcomm’s 4G LTE processors in its newest iPhones, but the chipmaker wouldn’t sell to it, Apple’s operating chief testified Monday.
Qualcomm continues to provide Apple chips for its older iPhones, including the iPhone 7 and 7 Plus, Jeff Williams testified Monday during the US Federal Trade Commission’s trial against Qualcomm. But it won’t give Apple processors for the newest iPhones designed since the two began fighting over patents, he said. And Williams believes the royalty rate Apple paid for using Qualcomm patents — $7.50 per iPhone — is too high.
“We have been unable to get them to support us on new design wins past that time [when Apple filed a lawsuit against Qualcomm],” Williams said. “This has been a challenge.”
The FTC has accused Qualcomm of operating a monopoly in wireless chips, forcing customers like Apple to work with it exclusively and charging excessive licensing fees for its technology. The FTC has said that Qualcomm forced Apple to pay licensing fees for its technology in exchange for using its chips in iPhones. The trial kicked off Jan. 4 in US District Court in San Jose, California.
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Apple makes its own application processor — the brains of the iPhone — but it relies on third-party chips for network connectivity. From the iPhone 4S in 2011 to the iPhone 6S and 6S Plus in 2015, the sole supplier for those chips was Qualcomm. The following year, Apple started using Intel modems in some models of the iPhone 7 and 7 Plus, but it still used Qualcomm in versions for Verizon and Sprint.
It continued that trend in 2017, but Apple’s latest phones — the iPhone XS, XS Max and XR, now only use Intel 4G chips. And it’s believed the next iPhone will also use only Intel chips, something that will make Apple late to the market for 5G phones. By the 2019 holiday season, every major Android vendor in the US will have a 5G phone available. But Intel’s 5G modem isn’t expected to hit phones until 2020.
“The strategy was to dual source in 2018 as well,” Williams said Monday. “We were working toward doing that with Qualcomm, but in the end they would not support us or sell us chips.”
He said he contacted Qualcomm CEO Steve Mollenkopf to get him to sell chips to Apple. When Qualcomm refused, Apple had to call Intel’s CEO at the time, Brian Krzanich, to ask him to supply all modems needed for the iPhone instead of only half the volume.
“He had to scramble,” Williams said. “We would have loved to continue to have access to Qualcomm’s tech.”
The FTC, aided by modem chip rival Intel and iPhone maker Apple, filed a suit two years ago arguing that Qualcomm has a monopoly on modem chips and harmed competition by trying to maintain its power. The trial has revealed the inner workings of tech’s most important business, smartphones, showing how suppliers wrestle for dominance and profit.
Qualcomm’s “no license, no chips” policy is at the heart of the FTC’s case against Qualcomm, which lawyers are arguing before Judge Lucy Koh this month. Qualcomm customers, such as Apple, don’t agree with the policy, and the FTC argues it hurts competition and elevates phone prices.
While Qualcomm is battling the FTC in court, it’s also facing off against Apple, once one of its biggest customers. Apple filed a lawsuit against Qualcomm three days after the FTC’s complaint, saying the wireless chipmaker didn’t give fair licensing terms for its processor technology.
The iPhone maker thinks it should pay a fee based only on the value of Qualcomm’s connectivity chips, not the entire device. It says Qualcomm is “effectively taxing Apple’s innovation” and that Apple “shouldn’t have to pay them for technology breakthroughs they have nothing to do with.” Qualcomm, meanwhile, says the iPhone wouldn’t exist without its technology.
Qualcomm in October said that Apple owes it $7 billion in patent licensing fees.
On Friday in the trial, Tony Blevins, Apple’s vice president of procurement and a witness for the FTC, testified that Apple wanted to build an Intel communication chip into its iPad Mini 2, released in fall 2013, but Qualcomm’s hardball business methods crushed the plan. Apple didn’t like relying solely on Qualcomm for modem chips, he said. But in exchange for exclusive use of its chips, Qualcomm offered Apple rebates that reduced costs so they were no longer “exorbitant,” a deal that pushed Intel out of the iPad Mini 2.
$7.50 per device royalty rate
Some companies license patents on an individual basis; Qualcomm licenses all its patents as a group. For a set fee — based on the selling price of the end device, typically a phone — the manufacturer gets to use all of Qualcomm’s technology.
It’s been the norm in the mobile industry for patent holders to base their licensing fees on the total value of a handset, so Qualcomm isn’t alone there. Ericsson, Huawei, Nokia, Samsung and ZTE also charge licensing fees based on the entire device.
When Apple started developing the iPhone, it talked with Qualcomm about directly licensing its technology, but it would have had to cross-license its own patents to Qualcomm and still pay Qualcomm a fee, Williams testified Monday. Apple didn’t want to do that so it went the route of licensing Qualcomm patents through its manufacturing partners.
Apple’s contact manufacturers like Foxconn pay Qualcomm, and Apple then reimburses them. Through Qualcomm’s agreement with Apple, Qualcomm also gives Apple a rebate on the royalty rate.
Apple ultimately paid Qualcomm a licensing fee five times more expensive than it thought was fair, Williams testified Monday. Apple wanted to pay $1.50 per device in royalties to Qualcomm, based on a 5 percent fee for the cost of each $30 modem connecting iPhones to mobile networks. Instead, it ended up paying $7.50 per phone, Williams said.
“The whole idea of a percentage of the cost of the phone didn’t make sense to us,” Williams said. “It struck at our very core of fairness. At the time we were making something really really different.”
But Apple agreed to the rate since it was lower than what Qualcomm wanted to charge the contract manufacturers — a 5 percent fee for every iPhone sold, which would equate to about $12 to $20 per device, Williams said. A rebate agreement dropped that to $7.50 per iPhone.
When Apple went to Qualcomm to supply modems for the iPhone in 2011, it found it was going to pay more than the previous $7.50 per device royalty fee, plus a higher rate for the processor than what its previous supplier, Infineon, charged, Williams said. Apple ended up negotiating to keep its lower rate, but that meant it agreed to exclusively use Qualcomm chips and pay a fee if it ended up using another supplier, he said.
And then in 2013, when negotiating a new contract, Qualcomm wanted to boost the $7.50 per device licensing fee by another $8 to $10, Williams said. Apple ended up negotiating the fee down to $7.50, but the agreement continued to contain exclusivity clauses and other provisions that limited Apple’s ability to use a second supplier.
“We were staring at an increase of over $1 billion per year in licensing, so we had a gun to our head,” Williams said as he explained why Apple signed another licensing agreement.
“The alternative was if you don’t accept it, it just defaults to the contract manufacturer rate of $18, $17,” Williams said. “We needed their chip supply. If we tried to pursue them legally, we wouldn’t have access to the chips. We didn’t have a lot of options.”
The FTC likely will rest its case Tuesday. Then Qualcomm will present its defense.
CNET’s Stephen Shankland contributed to this report.
First published at 10:02 a.m. PT.
Update at 10:30 a.m. PT: Adds comments about royalty rate.
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