Apple Required $1bn ‘Incentive Payment’ to Win iPhone

Article By : Rick Merritt

Qualcomm’s CEO testifies in antitrust case

Qualcomm paid Apple $1 billion in a three-year deal in 2011 to win its cellular modem business. Qualcomm CEO Steve Mollenkopf noted the eye-popping figure in testimony late Friday in an antitrust case the U.S. Federal Trade Commission brought against the company.

The figure was one of just two bombshell numbers from the day’s testimony. Earlier in the day, the head of procurement at Apple described the deal as an effort to get Qualcomm handset royalties below $10 per iPhone.

Judge Lucy Koh challenged lawyers from Qualcomm about releasing the billion-dollar figure. Multiple parties in the case have peppered her bench with motions to redact figures from testimony.

“Are you doing this for the media because I’ve been sealing a lot of your royalty numbers” at the request of Qualcomm and third parties, Koh asked.

Qualcomm used its cross-examination of Mollenkopf late Friday as a chance to lay out pieces of its case. He said the chip vendor has never cut off supply to a handset maker to enforce a patent licensing deal, despite testimony from a handful of OEMs about receiving such threats.

“We have the right to do it, but we don’t do it…It’s bad business, it isn’t good for the customer relationship and…It’s hard to be a top-tier supplier like we want to be if supply is disrupted,” Mollenkopf said.

He recounted an incident several years ago when he interceded to overturn an order to stop shipments to Sony. At the time, Sony had spun out its part of the Sony-Ericsson chipset company, leaving it without a WCDMA license.

“Our team mistakenly put in a stop-ship [order]. I instantly got involved [telling Sony’s CEO that Qualcomm] sent the wrong signal, and I’ll make sure nothing happens to the chip supply. I told the [Qualcomm] team the same thing. I said if anything like this happens in the future I want to know about it,” Mollenkopf said.

Regarding the 2011 iPhone deal, “Apple came to us and wanted to go with us in a big way — they wanted to use our [baseband] chip for 100% of their iPhones, but they wanted us to pay them a billion dollars to get that opportunity…it’s typical to ask for money to move to [a new chip] platform, but it was not a typical amount,” he said.

The deal “worked out for both parties,” he said, adding Qualcomm made a profit on it. A second three-year deal struck in 2013 had a similar structure of incentive payments from Qualcomm on a fixed schedule.

Under both deals, if Apple used another company’s baseband, Qualcomm would “claw back” some of its incentives. Toward the end of the 2013 agreement, Apple started using Intel chips, so Qualcomm took back some incentives but still made a profit on the deal, he said.

The FTC alleges the exclusivity was one example of Qualcomm abusing its market dominance. Mollenkopf described it differently.

“Apple had leverage because there was a lot of volume business at stake… we didn’t want to pay an incentive and not get the volume…[Qualcomm needed to] get the volume we needed to make the deal work,” he said.

After the deal expired in 2016, Qualcomm continued to ship baseband chips for existing Apple products, but “we haven’t had any new business” although it continued to seek design wins, he added.

Motorola never saw such a high IP fee

In its questioning of Mollenkopf, the FTC spent its time assembling evidence from emails and public documents for its argument that Qualcomm unfairly exercised its market position.

For example, in a 2012 email, Mollenkopf wrote the Apple deal was strategic because there’s not enough standalone modem business for rivals without the iPhone slot. In a late 2010 email, he worried aloud that Samsung might go “more vertical and hostile,” Via Tech might be acquired by Intel or Broadcom or Mediatek could get “over the quality threshold.”

Other emails made clear that Qualcomm was aware before the 2013 deal that Apple was considering use of an Intel modem in an iPad.

In separate testimony Friday, a procurement executive from the Motorola division of Lenovo said he had “never seen such a significant fee tied to another IP we licensed” as a baseband from Qualcomm.

Today with other suppliers available, Motorola still pays Qualcomm per device royalties on CDMA of 50 cents to $1. “The adder has declined but I still pay an adder,” he said.

“I’ve been working almost six years to bring up a premium-tier competitor to Qualcomm and have never been successful, and quite frankly my product roadmap today is 100% all-in with Qualcomm. There are too many barriers to bring up an alternative,” he said.

Qualcomm is extending that dominance to 5G, the Moto exec added. “Qualcomm is ahead of Samsung a fair number of months. Verizon is really pushing us for products this year and we can only do it with Qualcomm,” he said in a deposition taken in early 2018.

— Rick Merritt, Silicon Valley Bureau Chief, EE Times.

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