Apple and FTC Sue Qualcomm

Apple has fired the first shot in a war with cellphone modem developer Qualcomm over fees. Apple has accused Qualcomm of extortion, and filed a lawsuit asking for a judgement of $1 billion dollars a few days after the United States Federal Trade Commission (FTC) also sued Qualcomm for monopolizing the market. According to Apple, phone prices were artificially inflated due to billions of excess charges Qualcomm has billed for use of their technology.

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Why Qualcomm Charged Apple

Apple has been using Qualcomm’s CDMA technology in iPhones for the last five years. While Intel also provides a similar technology, Qualcomm’s deal with Apple required the iPhone manufacturer to accept a complicated rebate system or lose a substantial amount of money on each phone. These penalties added up to more than five times the payments Apple spent for every other cellular technology provider combined.

The FTC’s Anti-trust Case Against Qualcomm

Apple’s case is strengthened by the allegations brought up by the FTC. The FTC’s lawsuit suggests that Qualcomm created an exclusive deal with Apple to block competition. Due to the share of Apple’s iPhone market penetration, this contract, which was in force between 2011 and 2016, killed Intel’s competing WiMax standard.

Do Royalties Constitute Unfair Business Practices?

Both Apple and the FTC charge Qualcomm with requiring cellphone manufacturers to pay royalties that are out of proportion to the value of the CDMA modem technology included in each handset. Additionally, Qualcomm linked Apple’s fees to the retail price of each phone. Therefore, any improvements that Apple made which qualified for an increased retail value would also lead to increased fees, even if those changes were completely distinct from the communications system.

Qualcomm Denies the FTC and Apple Charges

Qualcomm has responded to both the FTC’s and Apple’s complaints by noting that their contracts with the iPhone manufacturer were standard business practice, and that it is reasonable to expect companies that use a patented technology to pay compensation to those who develop the innovations. The company’s modems also support the fastest connections available on the market, making them worth the extra cost. When Apple switched to Intel modems at the end of 2016, the company had to intentionally slow down the connection speeds of their older modems so that new buyers wouldn’t tell the difference.

Allegations against Qualcomm Go Global

However, the United States isn’t the only country to point the finger at Qualcomm for unfair business practices. In December of 2016, South Korea’s Fair Trade Commission fine the company the equivalent of over $850 million dollars for antitrust violations. South Korean based Samsung welcomed the opportunity to save millions in lower rates. Samsung ranks second behind Apple in payments to Qualcomm. China and the European Commission both filed suit against Qualcomm in 2015.

Qualcomm Is Still Beating Expectations

Until this filing, Qualcomm was basking in success, having outperformed Q4 market expectations by nearly 20 percent.  The company has shown a willingness to invest in new technology. They recently purchased a Dutch company at the forefront of semiconductor innovation. This was an attempt to switch to a different model after the end of their relationship with Apple. Qualcomm is also behind the development of the next mobile communications standard: 5G. The hope is that the regulatory decisions will not impede their R&D efforts.

Apple’s Awful 2016

Lowered payments would be a welcome piece of good news for Apple after a significantly lower performance in 2016. Apple CEO Tim Cook receivde a cut in total compensation for the year. The company failed to meet targets and released several products which garnered poor reviews by industry experts and Consumer Reports. The company’s sales were down by almost 8 percent. Apple cut Cook’s payment by $1.5 million overall, despite a $1 million dollar salary bump. One analyst, Toni Sacconaghi of Sanford C. Bernstein, even noted that the iPhone’s market dominance is waning and without new products, Apple will struggle to remain relevant.

“For Apple to really grow meaningfully again, it’s going to have to find new things beyond the phone, and that’s a big question mark,” he said in an interview with CNBC.

How the Apple Lawsuit Affects Trading

Qualcomm share prices fell by 2.5 percent after Apple filed its lawsuit. Both Apple and Intel stock went up. If a settlement looks likely, other cellphone manufacturers, especially Samsung, will be able to switch to different technology providers. This will lower prices and increase competition. Both the Dow, S&P 500, and the Shanghai Indices stand to show upward momentum if the cost of consumer electronics can be lowered.