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The Paramus Post - Greater Paramus News and Lifestyle Webzine
Thursday, June 27 2019 @ 12:50 AM EDT
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The Paramus Post - Greater Paramus News and Lifestyle Webzine
Thursday, June 27 2019 @ 12:50 AM EDT
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The Paramus Post - Greater Paramus News and Lifestyle Webzine

Battle over wireless technology is creating bitter rivals


BITTER RIVALS
BITTER RIVALS
If a barrage of lawsuits and trade complaints is any indication, wireless technology titan Qualcomm could be the most hated U.S. company these days, next to Microsoft Corp.

The San Diego company, which began 21 years ago as a tiny startup with no real product and an office over a pizza parlor, grew into a powerhouse that upset the status quo of the wireless industry.

Its technology helps make it possible for the latest generation of cell phones to access the Internet at high speeds, download music and play television clips.

As the holder of 4,800 patents and pending patents - many related to making multimedia cell phones work - Qualcomm is on the verge of collecting royalties on virtually every handset sold in the world.

But it's Qualcomm's prices for use of its intellectual property that has the old guard wireless giants, such as No. 1 cell phone maker Nokia, in such an uproar.

"I put Qualcomm second to Microsoft as basically the most-hated American corporation," said Dave Mock, author of "The Qualcomm Equation," a book about how the company rose from an underdog in the telecom industry to its position of power today.

"Nobody likes paying royalties," Mock said. "Nobody enjoys cutting a check out of their profits and passing it back to someone else. But that's the cost of doing business."

Like software giant Microsoft in the 1990s, Qualcomm has come under attack by competitors who contend the company has used its muscle to squeeze out competition. They say Qualcomm is overcharging on royalties and giving price breaks to cell phone makers who also agree to buy Qualcomm's chips for their phones.

In both cases, critics say, Qualcomm is breaking a promise it made to license its intellectual property on fair, reasonable and nondiscriminatory terms when the industry incorporated the company's technology into its standard for the next generation of cell phones.

Qualcomm chief executive Paul Jacobs counters that the animosity is coming entirely from companies that have the most to lose because Qualcomm has changed the way the industry does business.

He said Qualcomm not only offers a fair deal to other companies, but that its business model of licensing intellectual property has given startups the boost they needed to compete head to head with the big, established players.

"It's the largest handset manufacturer, the largest infrastructure manufacturer and the largest chipset manufacturer all claiming that Qualcomm is somehow exerting dominance," Jacobs said. "Besides those guys, it's the No. 1 and No. 2 manufacturers in Japan and one company that is trying to get leverage on negotiations with us."

"They're trying to spread all sort of stories about what we're doing, and there's very little fact in what they have to say," he said. "There has been a strategy for quite some period of time where these guys have tried to figure out how to distract people to the fact that they're losing the ability to have an oligopoly in the market."

Among the pending legal actions against Qualcomm:

- An antitrust lawsuit filed in July 2005 in U.S. District Court in New Jersey by Broadcom, an Irvine, Calif.-based microchip manufacturer. It accuses Qualcomm of charging cell-phone makers who use its chips lower royalties than cell-phone makers who use a competitor's chips.

- Six separate complaints to the European Commission by Broadcom, Ericsson, NEC, Nokia, Panasonic Mobile Communications and Texas Instruments, which call for an investigation of what the companies describe as Qualcomm's "anti-competitive conduct."

- Complaints to the Fair Trade Commission in South Korea by Texas Instruments and Broadcom. The companies argue that Qualcomm is using its market dominance to demand excessive royalty rates.

"Their intent is to get Qualcomm to lower its commission," said Michael Burton, an analyst with ThinkEquity Partners in San Francisco. "That's the main thrust of where most of these battles are coming from."

On top of the antitrust complaints, Qualcomm and its rivals have generated a flurry of patent-infringement lawsuits and other complaints against one another.

Broadcom, which is trying establish itself in the cell phone chip market, is the most vocal Qualcomm opponent within the United States.

Besides the antitrust lawsuit, Broadcom and Qualcomm are embroiled in five lawsuits in which they accuse each other of infringing on patents.

A complaint that Broadcom filed last year with the U.S. International Trade Commission is also making its way through the system. Broadcom alleged that Qualcomm has engaged in unfair trade practices by selling chips that infringe on Broadcom patents.

A trade commission staff report concluded this year that Qualcomm has infringed on two of Broadcom's patents that help devices conserve power. An administrative law judge is expected to issue an opinion by Aug. 21, and the full commission is expected to render a final decision in December.

The rival with the most clout is Finnish handset maker Nokia.

The two companies have never been friends, but each has patented technology that the other needs. A cross-licensing agreement that allows Nokia and Qualcomm to use each other's intellectual property is set to expire April 9.

Negotiations are tense, judging by the legal maneuvering on both sides.

A week after Nokia filed its confidential complaint about Qualcomm with the European Commission last fall, Qualcomm sued the cell phone maker, accusing it of infringing on 12 patents. Then in June, Qualcomm complained to the United States International Trade Commission that Nokia was importing and selling cell phones that infringe on six Qualcomm patents.

A BLOW TO QUALCOMM

Later that month, Nokia announced it will stop designing and manufacturing handsets that use Qualcomm's technology in early 2007. The move was a blow to Qualcomm because, as the largest cell phone manufacturer, Nokia could have helped spread the use of Qualcomm technology.

If Qualcomm and Nokia can't reach agreement by the April deadline, "then both of us will be infringing on the other's intellectual property," noted Jacobs, Qualcomm's CEO.

"At the end of the day, it's in everyone's best interest to come to an arrangement," said William Plummer, Nokia's vice president of external affairs.

The biggest sticking point - not just for Nokia but for other companies that are displeased with Qualcomm - is how much the company charges for its intellectual property.

Qualcomm got its start in the wireless industry in 1989, when it introduced a new technology that it touted as superior to any other for handling voice calls. But the company was late to the game. The industry was on the brink of adopting another technology as its standard.

Still, Qualcomm tirelessly promoted its code division multiple access technology, ultimately getting CDMA approved as a standard and persuading wireless carriers to use it.

Verizon Wireless and Sprint are among the U.S. carriers that use CDMA technology. Cingular Wireless and T-Mobile use a competing standard developed in Europe called GSM, or Global System for Mobile Communications.

Qualcomm built its business, in part, around the model of licensing its technology for a fee. Almost a third of its $5.7 billion in revenue in fiscal 2005 came from royalties. Much of the rest comes from selling chips for cell phones.

Qualcomm cornered the CDMA market that it had tenaciously built. By some estimates, Qualcomm sells 95 percent of the CDMA chips and owns 80 percent of the patents for the CDMA standard.

Still, only 20 percent of the world's cell phone networks use CDMA technology.

MORE WILL JOIN

The rest use GSM. But when wireless carriers upgrade those cellular networks to transmit music, video and games at high speeds, they, too, will put Qualcomm's technology to work.

The standard for these next-generation phones is called wideband CDMA, which uses a smaller percentage of Qualcomm patents than CDMA does. Yet Qualcomm charges the same rates for wideband CDMA - by most accounts about 5 percent of the sale price of a cell phone that uses its technology, though the actual terms are confidential.

Companies that have to pay Qualcomm's royalty rates say it's outrageous to expect the same royalties for wideband CDMA as for CDMA.

"We think they're charging more than anybody, compared to what they have contributed to the WCDMA standard," said Broadcom spokesman Bill Blanning.

Nokia's Plummer said it's "irrational and unreasonable" for Qualcomm to charge the same royalties for its wideband CDMA phones, where the company has 20 percent of the patents, as it does for CDMA phones, where it owns 80 percent of the patents.

Qualcomm said the way it determines rates isn't based on the number of its patents that are incorporated into wideband CDMA, but rather on the importance of those patents.

Company spokesman Jeremy James likens it to a car. Other companies may hold patents to a car door-handle design or reclining seat, but it's the engine, the drive train, transmission, steering and braking that are essential to building a car, he said.

Qualcomm, James said, holds the wideband CDMA patents that are akin to those essential parts of a car.

"What's a wideband CDMA camera phone without Qualcomm intellectual property?" he asked. "It's just a camera."

PATENTS CITED

Jacobs said one of the ways to determine whether patents are essential to a standard is whether other companies are willing to pay royalties for use of those patents. He points out that 130 companies have license agreements with Qualcomm to use its intellectual property.

He said another good indication of how essential Qualcomm's patents are to the wideband CDMA standard is to count how many patents issued to other companies cite Qualcomm patents. He said Qualcomm patents are cited by 47 percent of the wideband CDMA patents, more than any other company's patents.

Analyst Christin Armacost with SG Cowen & Co. in New York said that looking at the essential patents is a more accurate gauge for judging royalty rates.

"I believe Qualcomm does have the largest share of the essential patents (in wideband CDMA), and it has the right to charge whatever it likes," Armacost said.

The complaints about Qualcomm go beyond royalty rates. The chip makers accuse Qualcomm of lowering royalty rates for cell phone makers that use Qualcomm's chips, essentially shutting out competitors.

Five of the six companies that filed complaints to the European Commission have licensing agreements in place with Qualcomm.

"Qualcomm has illegally tried to exclude chipset competition in Europe and elsewhere," said Gail Chandler, spokeswoman for Texas Instruments. "That's the primary thing for us."

Jacobs says royalty discounting is nothing more than price competition that is good for manufacturers, operators and especially consumers. He said the company has never made the purchase of its chips a condition of granting a license.

Whatever the outcome of the complaints and lawsuits, the impact isn't likely to be felt for years. Michael King, a San Diego-based analyst for Gartner market research firm, said that U.S. consumers are unlikely to feel much of an impact on the price of cell phones because the handsets' prices are subsidized heavily by wireless carriers.

Qualcomm's stock, however, has taken a beating, falling from a 52-week high of $53.01 in May to the $35 range recently.

"A lot of the focus and pressure on the stock recently has been due to the Nokia negotiations and questions about the royalty rates," said analyst Burton. "And certainly some of the noise is around the Broadcom litigation as well as the European Commission complaints, and whether the European Commission will launch a formal inquiry into Qualcomm's business practices. But the company's business has been doing very well."

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