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Google neutrality pacts has shifted the balance

Qualcomm faces tough demands in China

What has thrown a spanner in the works of its master plan seems to be China, whose companies and government agencies are becoming more determined to assert their own patent power and reduce their payments of royalties to western firms, especially Qualcomm. This was anticipated, but the way China has stepped up its efforts in the past year was not, and Qualcomm is now on the defensive in an expected round of tough negotiations of the new deal with Chinese licensees.

That is already causing problems, since many of those customers, Qualcomm says, are withholding royalties payments until the issues are settled, hitting its immediate revenues. And for the past year, the Chinese National Development and Reform Commission has been conducting an anti-monopoly probe of Qualcomm, widely seen as a powerful bargaining tool for improving the terms it gets from the US vendor.

This comes at a time when Qualcomm is in a weaker negotiating position than ever before, because for the first time it faces significant competition on the cellular modem front, so Chinese handset makers can go to Chinese and Taiwanese chip powerhouses like MediaTek and Spreadtrum. That does not protect those firms from Qualcomm’s royalties, but it does make the market as a whole less dependent on the San Diego firm’s technologies.

Sources indicate that China is demanding lower royalty rates for its vendors in return for agreeing a resolution to the antitrust investigation. The NDRC reportedly wants to base fees on the value of selected phone components, not the whole device – a direction in which the handset industry, prompted by Apple and others, is moving anyway, as noted above. This is likely to be inevitable in most markets, and Qualcomm will lack its old power to hold back the tide as it will no longer be the only credible source for certain critical components, as it has been in the past, especially in CDMA. However, the firm will play for time to adjust its business to the new realities.

The NDRC may also request that Qualcomm unbundles licensing agreements, charging fees for each patent rather than its usual practice of blanket deals which cover all its IPR. The US firm argues that this approach represents better value for money for most customers ,protects them from litigation, and saves the work of negotiating a separate contract for each new patent, but others say they end up paying for IPR they never use.

More uncertain is whether the NDRC is making any comments on unbundling licensing fees from chip sales, one of the most obscure and controversial aspects of Qualcomm’s business model. It insists the two are separate, and there is no preferential treatment for chip customers in terms of licensing deals, as some have alleged. However, the issues have been the subject of repeated accusations and some regulatory probes, including one ongoing in the US.

The same sources told Bloomberg that Qualcomm had proposed a higher fine, if it could keep its business model intact, but that was rejected. In the past five years, Qualcomm has collected $30.5bn in licensing fees, according to Bloomberg, and the move to component-based charges and individual royalties could reduce that by 10 times or more in some cases. Fines could reach a record $1bn, say some experts.

As well as fighting its corner with regulators and licensees, Qualcomm has been trying to gain a better position in China by investing in the country – to please the authorities and to tap into some of the growth and innovation in the local chip industry. Late last year it scored a PR point when it announced $40m of investment in four Chinese software and algorithm startups, and the China Walden Venture Investments fund. These are the first beneficiaries of the previously announced $150m China Venture fund.

The four firms chosen are 7Invensun, an eye-tracking solution pro-vider; Chukong Technologies, a mobile entertainment platform provider; inPlug, a smart home device/platform solution provider; and Unisound, a voice recognition and processing technology provider. While the investments are small fry compared to China’s massive Semiconductor Fund, designed to make it almost self-sufficient in chips, they are important for perception, especially as Chinese entrepreneurs complain of the lack of venture capital in their country, making Walden an influential entity.

What is the new balance of power?

One important question is how important Chinese companies really are in mobile SEP? That will be especially significant if China gets its way and removes Qualcomm’s right to demand cross-licensing deals – i.e., in return for licensing its own IPR, its customers must also offer theirs, usually with no charge. At the end of 2013, Huawei had about 30,000 patents and ZTE 52,000 though those cover a wide range of technologies.

In the latest league table of US technology patents granted, Chinese firms were absent from the top 10, though Korean and Japanese players remained strong. The top 10 was led, as it has been for 22 years, by IBM, followed by Samsung, Canon, Sony, Microsoft, Toshiba, Qualcomm, Google, LG and Panasonic. That indicates where technology (though not specifically mobile) R&D is occurring, but of course, many Chinese innovators will not register initially in the US.

In LTE, the two Chinese leaders, LG and Qualcomm have all been credited, by one metric or another, with being the leading SEP holder. This month, LG said it had been ranked number one by US patent consultancy TechIPm, which calculated the Korean firm had 29 per cent of all SEP in LTE and LTE-A, followed by Samsung with 16 per cent and Qualcomm with just 8 per cent. The ways to estimate patents holdings are notoriously diverse, but such a ranking from a respected source highlights the scale of Qualcomm’s challenge. Google, via Motorola, was thought to have almost as much LTE SEP as Qualcomm, on 7 per cent, the same as Nokia and InterDigital. In late 2011, another study, by Jefferies, also placed LG in the lead, though at that time Qualcomm was close behind (with 21 per cent versus LG’s 23 per cent).

Qualcomm has a strong track record in responding aggressively and effectively to the many challenges it has faced to its unique business model. China may prove its undoing, but more likely it will morph into a firm which continues to make massive income from its unquestioned superiority in R&D and patent acquisition. It may defocus on SEP and invest more heavily in non-essential but attractive and high value technologies.

It will certainly lose a lot of its stranglehold, but that does not alter the fact that, to dominate in IPR, companies have to have exceptional brains and engineering, which Qualcomm still has. It will benefit the industry if the Chinese firms get to tap into that on a fair commercial basis, rather than Qualcomm becoming the focus of a stand-off that could be as destructive to mobile device innovation as the Apple-Android wars.

Copyright © 2015, Wireless Watch

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