Qualcomm has warned, in a financial filing, that there is no guarantee it will come to agreement with Nokia over its CDMA patents licensing deal, which is due to be renewed in April.
It has taken the unusual step of singling out Nokia in the statement as a potential financial risk factor, indicating how strained relations between the two giants have become. Nokia cannot work around the Qualcomm patents, which are fundamental to several of its target growth businesses, notably CDMA and 3G W-CDMA handsets. But it wants to step up the pressure on the US company to agree to a cap on royalties in 3G cellphones, whose costs are kept artificially high by the levels of license payments. It is also likely to want a short renewal term, perhaps as little as a year, so it can quickly take advantage of any decisions by the European Commission to enforce new licensing practises on Qualcomm.
The EC is currently assessing anti-trust complaints brought against the chipmaker by Nokia, Ericsson, Broadcom and other players, which are concerned at Qualcomm’s expansion into their heartland W-CDMA market. Of course, Nokia and Qualcomm will have to come to some sort of agreement - Nokia cannot live without the patents, nor challenge them, and Qualcomm would not easily lose the business of the world’s largest phonemaker, especially as Nokia steps up its assault on the CDMA market, through its alliances with Sanyo and Texas Instruments.
With pressure mounting, some companies would seek to rethink their licensing policies to create a more harmonious relationship with key customers, but Qualcomm needs to play for time before its current business model plays out, and that may well mean taking its habitual intransigent stance.
Qualcomm gave a clear sign of how serious its royalties-oriented feud with Nokia is becoming, warning in a financial filing that there was "no certainty" that the companies would be able to agree on renewal terms for their patent licensing agreement.
Some elements of the licensing deal, for CDMA and W-CDMA technologies, expire in April 2007 and the companies, which are engaged in legal wrangles over Qualcomm’s intellectual property practises, are currently in negotiations over terms and contract length. The latter is highly important in the current situation, since Nokia is likely to favour a short renewal period – one to three years – so that it can rework its contracts with Qualcomm should the European Commission decide in its favour after itsongoing probe into the US companies’ business practises.
Nokia, together with Ericsson, Broadcom and other CDMA licensees, last year lodged a complaint with the EC, claiming Qualcomm is violating anti-trust laws and keeping competitors from entering the 3G chip market in Europe through its business practises.
This followed a series of patent-related lawsuits and antitrust complaints, spearheaded by Broadcom, in the US. Qualcomm also filed a patent infringement suit against Nokia and others last November.
The terms of CDMA license renewals with Nokia - the first to be negotiated with one of its antagonists since the complaints were made - will therefore send out important signals to the markets and other customers.
While Nokia is refusing to comment on the talks, Qualcomm took the unprecedented step of naming a single company in a warning to shareholders included in a recent 10Q filing with the US Securities and Exchange Commission.
The quarterly filing stated: "There is no certainty as to when we will be able to conclude an agreement [with Nokia] or the terms of any such agreement...There is also a possibility that the parties will not be able to conclude a new or extended agreement by April 2007."
Of course, it is unlikely that the two companies will entirely fail to reach agreement, since the royalties are essential to Qualcomm - in total, it gains over 35 per cent of its revenue from licensing agreements, and Nokia's contribution to this will increase as its interest in CDMA handsets, and in the W-CDMA 3G phones that also carry significant Qualcomm intellectual property, rises.
On Nokia’s side, although it buys no chips from Qualcomm, it could not sell these handsets without a licensing deal – one aspect of the periodic fights with the CDMA giant over patents is that companies never actually dispute its rights to the intellectual property, only the terms on which it licenses its technology.
Mounting pressure on Qualcomm
As well as the important issue of how long the contract is renewed for, Nokia is presumably using its negotiations as another prong – along with the EC and court actions – to put pressure on Qualcomm to reduce royalties and agree to the Nokia-Ericsson proposal that licensing fees should be capped at five per cent of handset cost in total. Qualcomm currently collects an estimated 4.5 per cent on average from CDMA devices.
With other renewals coming up in 2007-8, and Qualcomm entering a new battle over whether it is owed duties on the Chinese 3G technology TDSCDMA, the chipmaker may feel under pressure to take a moderate approach rather than call down a storm of renewed opposition. There is also the issue of intellectual property that Qualcomm may license from Nokia and its partners.
However, the fact remains that Qualcomm holds significant and undisputed intellectual property in CDMA and W-CDMA, both markets that are key to Nokia’s growth plan - especially following its recent CDMA handset deal with Sanyo - and it has never been in the habit of compromising.
Time is important to the chipmaker. It knows that, eventually, it will have to reduce its revenue dependence on intellectual property and take a more flexible approach to licensing in order to adapt to the next generation wireless market in which open standards like Wi-Fi, and platforms in which it does not (yet) have a dominant stake, like OFDM, will be key. Already, the company is ramping up its development of non-CDMA products - integrated WLan chips, the MediaFlo and Flash OFDM architectures - in order to enrich the roadmap for existing customers and to remain a key chip provider in a changed wireless world.
But it needs as long a breathing space as possible to prepare for the new business model, and to continue to collect its CDMA royalties. The laborious processes of the EC and the US courts will give it this space, and will encourage it to play hardball with the handset makers for as long as it can stave off legal judgements.
Copyright © 2006, Wireless Watch
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