Apple Cuts Off Licensing Payments to Qualcomm as Fight Escalates

Qualcomm said Apple is cutting off licensing payments related to the iPhone until their legal dispute is settled, forcing the chipmaker to lower forecasts it gave just last week.

The announcement escalates the fight between the world's largest publicly-traded technology company and one of the main suppliers of components to its most important product. The two have traded accusations of lying, making threats and trying to create an illegal monopoly. Their spat involves billions of dollars of technology licensing revenue that, if permanently cut off or reduced, could damage Qualcomm's main source of profit and help bolster Apple's margins.

Apple has told Qualcomm it will stop paying licensing revenue to contract manufacturers of the iPhone, the mechanism by which it's paid the chipmaker since the best-selling smartphone debuted in 2007, the San Diego, California-based company said in a statement. Qualcomm is therefore removing any assumption it will get those fees from its forecast for the current period. Apple doesn't have a direct license with Qualcomm, unlike other phone makers.

Revenue in its fiscal third quarter ending June will be $4.8 billion to $5.6 billion (roughly Rs. 30,859 crores to Rs. 36,002 crores), down from last week's prediction of $5.3 billion to $6.1 billion (roughly Rs. 34,073 crores to Rs. 39,216 crores). It's also short of the $5.78 billion (roughly Rs. 37,159 crores) average of analyst estimates compiled by Bloomberg. Earnings per share will range between 52 cents and 62 cents, compared with the earlier forecast of 67 cents to 92 cents. Minus certain items, profit per share will be 75 cents to 85 cents.

For Qualcomm, Apple's move is a further infringement on its legal agreements with the contract makers of the iPhone, who also make devices for other companies. Those agreements predate Apple's entry into the phone market and are still legally enforceable.

"While Apple has acknowledged that payment is owed for the use of Qualcomm's valuable intellectual property, it nevertheless continues to interfere with our contracts," said Don Rosenberg, Qualcomm's general counsel. "Apple has now unilaterally declared the contract terms unacceptable; the same terms that have applied to iPhones and cellular-enabled iPads for a decade."

He said Apple's interference with Qualcomm's agreements to other parties is wrongful and part of the Cupertino, California-based company's global attack on Qualcomm.

Qualcomm's lucrative licensing division funds an industry-leading research-and-development budget, which has helped its chips stay ahead of rivals. That strategy, which has helped the company more than double revenue since 2010, is under threat as the dispute with Apple worsens and it deals with regulatory investigations in the US, South Korea, Taiwan and Europe. It says Apple instigated those investigations by making false claims to government agencies. Apple's end goal is to lower the fees, Qualcomm said.

When it began it's suit against Qualcomm in January, Apple accused Qualcomm of monopolising the market for chips used in wireless devices and withholding $1 billion in retaliation for cooperating with South Korean antitrust authorities. Apple also said it wants back some of the billions of dollars it claims it was overcharged in "Qualcomm's illegal scheme" to control the market for mobile phone chips. It wants a court to change how Qualcomm charges for its technology.

Patents controlled by Qualcomm cover the basics of all high-speed data capable mobile phone systems. It charges a percentage of the total selling price of the phone regardless of whether the device uses a Qualcomm chip or not.

Qualcomm had given a wider-than-normal forecast range for the current quarter, reflecting the possibility that Apple may pressure its suppliers, company President Derek Aberle said last week.

"We'd expect that they will pay, consistent with their obligations," he said at the time. "We can't completely discount the possibility that Apple will continue to interfere and cause them to pay less than they owe."

© 2017 Bloomberg L.P.