The Qualcomm 'Tax' Rebellion (2017)

https://www.bloomberg.com/gadfly/articles/2017-01-24/qualcomm-s-tax-collection-days-are-looking-numbered

by drtillberg • 8 years ago

106 52 8 years ago

madengr• 8 years ago

Is it possible the whole push to 5G is to get out from under royalties? The first published 5G spec was not Qualcomm. There is definitely a technical improvement, but I’ll bet there is more to it.

mdasen6• 8 years ago

It seems unlikely. 5G NR has huge Qualcomm support.

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).

nqzero• 8 years ago

the qualcomm terms sound like none of the above

kalleboo• 8 years ago

Qualcomm has plenty of 5G patents http://www.ipwatchdog.com/2016/03/31/5g-mobile-networks-next...

Tempest1981• 8 years ago

Proposed 5G royalties per device: https://www.fiercewireless.com/5g/qualcomm-to-charge-up-to-1...

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"

ahartmetz• 8 years ago

What I read somewhere is that patentability is an extremely important design goal of mobile standards. Everybody who contributes can get a few patents in. It even goes so far that more complicated, worse performing, less energy efficient technologies are chosen instead of better alternatives because they can be patented.

"To promote the Progress of Useful Arts" my ass.

garmaine2• 8 years ago

Shouldn't CDMA be out of patent?

maxerickson• 8 years ago

Probably, but they have a whole portfolio of related patents obtained at later dates.

garmaine2• 8 years ago

Sure. So use something cinformant to the original standard.

mdasen6• 8 years ago

Qualcomm keeps making new IP that has contributed to newer standards like CDMA2000, UMTS & HSPA, and LTE. The article makes it seem like it's Qualcomm's "CDMA Technologies division" that's driving revenue. That might be what Qualcomm calls the division (or not), but it sounds like the division that makes its chips.

Either way, Qualcomm still owns a lot of standards essential patents needed for running a modern wireless network or handset.

projektfu3• 8 years ago

In a way it's better than the Microsoft tax which set, for a time, a lower bound on the price of a computer because one had to pay approximately the same amount for a low-spec computer as for a high-spec one. Eventually if you're making 20% margin on the components and that margin is lower than the cost of the Windows license, you have two options: use an incompatible operating system or not sell the computer. From what I understand, in the 80s and 90s, if you sold computers with Windows or DOS OEM, your license agreement probably said that you had to pay the tax on every system sold, regardless of the actually installed operating system.

pvg2• 8 years ago

a lower bound on the price of a computer

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.

projektfu3• 8 years ago

It started becoming a problem when Wal-Mart started offering cheap PC's, and they were running LindowsOS because there would be no profit margin if they paid $50 for a copy of Windows.

mdasen6• 8 years ago

That's an argument that Qualcomm would push. If Qualcomm charged a flat $25/phone, that would hugely drive up the price of low-cost phones. However, why should Qualcomm get more money if a manufacturer includes a better display or camera? Qualcomm isn't adding more value, the better display or camera is adding the additional value. Qualcomm is just demanding more money.

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.

projektfu3• 8 years ago

Interesting. It seems it should be illegal to require someone to pay for IP in a phone that doesn't contain it. I wish the Microsoft trial had made that practice explicitly illegal.

dis-sys2• 8 years ago

Qualcomm isn't adding more value, the better display or camera is adding the additional value. Qualcomm is just demanding more money.

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.

golergka2• 8 years ago

You're framing this discussion in terms of what's fair, while in reality it's just about having negotiation power. Phone manufacturers can't produce a phone without Qualcomm tech. Computer manufacturers can't realistically sell their computers without windows pre-installed. So both these companies have very strong negotiating positions and extract as much as they can from it.

gnu8• 8 years ago

Don't gloss over the fact that Microsoft forbade computer manufacturers to sell a computer without their operating system. They didn't have the option of paying for the license and not installing the OS, or paying for the license but installing a different OS. This was done solely to prevent competing operating systems from gaining any share of the market.

Microsoft is an evil company that must be destroyed.

golergka2• 8 years ago

"Good" and "evil" are leaky and useless abstractions on such scale.

chx• 8 years ago

No, they did none of that. Microsoft had a scheme which the OEMs could agree to where they paid a fixed amount of money multiplied by the number of machines sold. Thus they had zero incentive to sell with anything else when they already paid for Windows. And if you wanted to say, I will only pay after say 95% they said, then we will not make this agreement with you, this is only for OEMs who pay after all their computers...

thisisit• 8 years ago

The article is very illuminating on how the licensing on the technology side. But I am confused. First it said:

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.

crusso• 8 years ago

It was put in place because Qualcomm owned the most important piece of the package and leveraged their strength to get a percentage of the whole phone's value.

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.

mdasen6• 8 years ago

I think looking at it through a couple lenses might help. For the sake of simplicity, let's say that the average royalty Qualcomm gets is $15/phone and they're charging 5% of the MSRP (manufacturer's suggested retail price). These are made-up royalty rates since, as the article notes, royalty rates are a closely guarded secret.

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.

kemiller• 8 years ago

One angle missing is accounting. Percentage makes it really easy — Tell me revenue earned on licensed devices in aggregate, without even revealing breakdown, and we know the royalty.

kalefranz• 8 years ago

It seems that FRAND in this case is a farse.

Would be interested in informed individuals’ opinions on how the regulatory framework is falling over in this case.

dis-sys2• 8 years ago

Apple doesn't pay Qualcomm directly, thus the retail price you see in apple stores means nothing here. Companies like Foxconn pay Qualcomm to make those phones, because they are the M (Manufacturer in MSRP) here.

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.

dman• 8 years ago

Wonder if Apple will take the same stance on the cut it takes off apps. Ie if you look at the value add that Apple provides by running the app store it has a fixed cost, whether the app costs $2 or $200.

tooltalk2• 8 years ago

1) Apple does not have a license with Qualcomm.

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.

pentae• 8 years ago

I wonder when App store developers try using the same case against the Apple tax, how far they get? Why should we care about Goliath vs Goliath when the little guys are the ones getting screwed?

JBReefer• 8 years ago

App developers have options - iOS is a small chunk of the market. Handset makers don’t, because of broken ip laws.

JudasGoat• 8 years ago

Apple could get back at Qualcomm and charge $100 for an Iphone, right?

antognini• 8 years ago

That would be cutting off their nose to spite their face.

wyldfire2• 8 years ago

Actually, Apple's not a licensee. Their suppliers are (Foxconn, et al).

robocat• 8 years ago

I wonder if they could charge $100 for the phone, and have a separate $500 boxed copy of the OS to install? Or an OEM licence that the phone seller installs for the consumer?!

mankash666• 8 years ago

This is much like the multiple Apple tax(es) in place today:

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

mdasen6• 8 years ago

Apple certainly puts taxes in, but Apple never agreed to FRAND terms. Qualcomm did. That's a huge difference.

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.

gsnedders• 8 years ago

When an industry group sets a standard, everyone must disclose their patents and agree to FRAND terms.

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.

tooltalk2• 8 years ago

Apple certainly puts taxes in, but Apple never agreed to FRAND terms. Qualcomm did. That's a huge difference.

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.

wyldfire2• 8 years ago

This article is inaccurate or incomplete in that it doesn't mention the royalty cap. A more fair argument might be "the cap is too high"

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.

adventured• 8 years ago

Apple is about the last company anyone should sympathize with regarding patents. The mighty patentee of rounded corners.

Nomentatus3• 8 years ago

This neglects FRAND - without FRAND, a patent is precisely the right to exclude, and you can do that in just about any way you wish, including charging royalties according to astrological principles.

The Qualcomm 'Tax' Rebellion (2017)

Related Stories