Qualcomm vs. Apple: The Ongoing Battle for Intellectual Property

TECH WARS

It is a time of conflict.

A rebel chip manufacturer, Qualcomm, has struck a blow against the Apple Empire by filing a lawsuit in the Superior Court of San Diego.

The intellectual property claim is the latest battle in the 10-year-long civil war.

Apple, the most powerful Technology Empire in the Galaxy, continues to expand its dominion.

Led by Emperor Cook, it has surpassed $1 trillion in valuation.

As a sign of its strength, Apple has just completed construction of its SPACE CAMPUS…

A massive headquarters with enough engineers to design consumer electronics for an entire planet.

During the battle, Qualcomm submitted evidence that Apple had stolen its Source Code — a key component of the Apple Empire’s ultimate weapon: THE IPHONE X — and given the code to Darth Intel, a rival chip manufacturer loyal to the Apple Empire.

Pursued by the Apple Empire’s sinister corporate lawyers, Qualcomm hopes the attack will convince Emperor Cook to settle out of court and return possession of the Source Code…

Returning the rebel chip manufacturer’s intellectual property and restoring freedom to the galaxy…

If you can’t tell, we think Qualcomm’s latest lawsuit against Apple, which is an amendment to another lawsuit filed in November 2017, is a battle of galactic scale.

The trouble began when Apple prevented Qualcomm from auditing Apple’s use of its mobile-chip source code. Qualcomm believes Apple not only used the code without paying for it but also gave the code to Intel, Qualcomm’s mortal enemy in the battle to win a place inside the more than 200 million iPhones sold each year.

Why would Apple do such a thing, you ask? Well, here’s a guess…

It has long been known that Apple loves squeezing suppliers’ margins into the dust (remember when it caused the bankruptcy of a once-beloved supplier?). Overreliance on a supplier, and especially one with coveted technology and patents like Qualcomm, is a risk. Why not help out said supplier’s competition? You can see where we’re going with this…

We’re not saying this is definitely what happened, but when you’re as big as Apple, competition amongst suppliers is a definite win.

Apple Is Right to Envy Qualcomm’s Technology

Founded 30 years ago, Qualcomm is the market leader in application processors (vital to our increasingly smartphone/mobile-driven world). According to Statista, in 2017 Qualcomm held 42% of the application processor market, almost double the silver medalist (you guessed it) Apple’s 22%. Market share tapers off further with number three MediaTek’s 15% of the market, and the balance is taken up by a host of other firms (including Intel).

Long before anyone knew what an iPhone was, Qualcomm placed its chips on the eventual emergence of the personalized smartphone that would be, for all intents and purposes, an extension of ourselves. As Qualcomm CEO Steve Mollenkopf recently said in a Bloomberg interview:

When I started at Qualcomm, this is before digital cellular, when you called someone you called a place… You were calling a “home.” We had this belief that not only would you eventually call people, so the concept of having your own personal number, but [we also said to ourselves] you’re going to put a personal computer in your pocket…

Boy, were they on the money.

And speaking of cold, hard cash, Qualcomm makes A LOT of it thanks to all I’ve just mentioned. The company reported net income of $1.2 billion for the quarter ended June 24, 2018, on revenues of $5.6 billion. This may not sound like much compared to Apple’s $11.5 billion Q2 haul, but what’s interesting is HOW Qualcomm made its profits.

Qualcomm isn’t so much a technology manufacturer as it is the owner of some of the most valuable and advanced communications technology patents in the world. Of its $5.6 billion in revenues for Q2, $4.1 billion was derived from equipment and services, while a whopping $1.49 billion came from THE LICENSING OF ITS TECHNOLOGY.

If you think that sounds like a sweet gig, you’re right. Licensing out valuable technologies, instead of engaging in the hard work of assembling and marketing consumer electronics, makes for a lean, incredibly profitable operation. Qualcomm’s Q2 gross profit margin came in at 55.5%, almost 50% higher than Apple’s 38.29% for the same period.

On top of all this, Qualcomm appears to be a leader in the emergence of 5G — what CEO Steve Mollenkopf said in that same Bloomberg interview was “the widest funnel we’ve had of opportunity in the history of the company.”

The War Goes On

As we alluded to with our hammed-up introduction, this is just the latest battle in what has been a decade-long war between the two technology leaders.

One could be forgiven for passing over the headline. While this latest campaign revolves around Qualcomm’s allegation that Apple gave source code and tools for to Intel the express purpose of giving it a competitive boost in the face of flaws in its iPhone-destined chips, there are many fronts both past a present. Cult of Mac has estimated that over 50 lawsuits have been lobbed between the two companies over the past decade.

Here are the latest additions:

• Just before Christmas last year, a federal judge in San Jose, California, approved sanctions against Apple that included a $25,000 per-day fine for failing to meet the court’s deadline in submitted evidence in a federal suit against Qualcomm.
• Apple filed a complaint against Qualcomm on January 20, 2017, claiming that the company breached several contracts and even violated Federal Antitrust Law.
• Three days later, on January 23, the two took the fight to China when Apple fired shots in the Beijing Intellectual Property Court.
• At the center of all this is Qualcomm’s July 6, 2017, lawsuit (to which this week’s suit was added) against Apple that it had violated six patents.

What Investors Need to Know

The first thing you should note is that Apple could be on the hook for unpaid licensing fees. How much? The answer is anybody’s guess and will likely be agreed upon in a closed room between the two companies, away from the public eye.

According to a Bloomberg report from this summer, Apple could be on the hook for as much as $4.2 billion. That’s before this week’s amendment.

More broadly, the outcome of these cases affects us all. Technology continues to shrink and become more and more nuanced — how these cases shake out will not only affect the shareholders of both these companies but also serve as a precedent for any future technological IP knowledge.

While the one-time monetary damages are relatively small for Apple, there are potential risks for the world’s largest technology firm and its alleged co-conspirator Intel. As for Qualcomm’s investors, there appears to be only upside — especially when taking into account its market leadership and leadership with things like 5G. 

Good Investing,

Wealth Daily Research Team