1 00:00:00,120 --> 00:00:02,360 Speaker 1: Those of us with iPhones all love what they can do, 2 00:00:02,440 --> 00:00:04,840 Speaker 1: but most of us don't think much about the components 3 00:00:04,880 --> 00:00:07,640 Speaker 1: inside the device. Depending on which phone you have, there's 4 00:00:07,640 --> 00:00:10,119 Speaker 1: a good chance that relies heavily on technology created by 5 00:00:10,119 --> 00:00:14,120 Speaker 1: a company called qual Colm. Qualcomm invented key technologies that 6 00:00:14,240 --> 00:00:17,560 Speaker 1: let phones send and received data, and it has a 7 00:00:17,600 --> 00:00:20,479 Speaker 1: mass more than a hundred and thirty thousand patents, some 8 00:00:20,600 --> 00:00:23,320 Speaker 1: of which let Qualcom collect royalties as high as five 9 00:00:23,320 --> 00:00:26,799 Speaker 1: percent of the selling price of mobile phones. That adds 10 00:00:26,880 --> 00:00:29,720 Speaker 1: up to billions of dollars from better known companies like Apple. 11 00:00:30,320 --> 00:00:33,040 Speaker 1: It's big money, and it has led to a high stakes, 12 00:00:33,120 --> 00:00:37,120 Speaker 1: worldwide legal battle between Qualcom and Apple. The fight is 13 00:00:37,120 --> 00:00:39,280 Speaker 1: the subject of a story in the upcoming edition of 14 00:00:39,320 --> 00:00:41,920 Speaker 1: Bloomberg Business Week, and here with us to talk about 15 00:00:41,920 --> 00:00:44,560 Speaker 1: it is Max Chafkin, who's one of the reporters who 16 00:00:44,600 --> 00:00:48,720 Speaker 1: wrote that story. Max, thanks for being here. Yeah. So, 17 00:00:48,800 --> 00:00:50,760 Speaker 1: as my kids could tell you, I am pretty much 18 00:00:50,800 --> 00:00:55,440 Speaker 1: technologically illiterate. So tell us tell explained to me what 19 00:00:55,560 --> 00:00:59,560 Speaker 1: Qualcomm's great technology is and why it is so important 20 00:00:59,600 --> 00:01:02,600 Speaker 1: to my my iPhone. Sure so, so one point of 21 00:01:02,640 --> 00:01:05,319 Speaker 1: clarity is actually, pretty much any phone you own today 22 00:01:05,640 --> 00:01:09,480 Speaker 1: relies on this Qualcom technology, which is the technology that 23 00:01:09,520 --> 00:01:13,440 Speaker 1: allows you to send and receive data through a cellular connection. 24 00:01:13,560 --> 00:01:17,680 Speaker 1: So if you're making a phone call or or sending 25 00:01:17,720 --> 00:01:20,279 Speaker 1: a mobile message, or going on Snapchat, or doing pretty 26 00:01:20,319 --> 00:01:23,080 Speaker 1: much anything you do in the modern world that is 27 00:01:23,160 --> 00:01:25,880 Speaker 1: that is using a three G or four G connection, 28 00:01:26,280 --> 00:01:30,320 Speaker 1: you rely on basically this this big basket of patents 29 00:01:30,360 --> 00:01:32,760 Speaker 1: that that Qualcom developed, which which sort of figures out 30 00:01:32,920 --> 00:01:36,520 Speaker 1: how to squeeze data into radio signals and to do 31 00:01:36,560 --> 00:01:39,840 Speaker 1: it efficiently. Um. It's it's really an amazing uh sort 32 00:01:39,880 --> 00:01:44,920 Speaker 1: of miracle of of of modern technology. The contention here, though, 33 00:01:45,040 --> 00:01:47,800 Speaker 1: is that Qualcom has basically been been asking too much 34 00:01:47,840 --> 00:01:51,960 Speaker 1: for this. Uh. They charge a a flat royalty on 35 00:01:52,000 --> 00:01:56,080 Speaker 1: the on the price of every handset that's sold around 36 00:01:56,120 --> 00:01:59,880 Speaker 1: the world. Um. And Apple uh, and it appears maybe 37 00:02:00,040 --> 00:02:01,800 Speaker 1: there there may be a couple other companies joining them. 38 00:02:01,800 --> 00:02:04,559 Speaker 1: Has has basically said enough enough and and they're fighting 39 00:02:04,560 --> 00:02:07,800 Speaker 1: this uh, this this big legal battle. Yeah. So walk 40 00:02:07,920 --> 00:02:11,919 Speaker 1: me through the relationship between Apple and Qualcom. In your story, 41 00:02:12,000 --> 00:02:15,519 Speaker 1: you talk about how they a little while back had 42 00:02:15,520 --> 00:02:18,000 Speaker 1: a deal. Um. But but but I guess that's that 43 00:02:18,080 --> 00:02:21,760 Speaker 1: deal maybe breaking down. So what's what's kind of ingenious 44 00:02:21,880 --> 00:02:25,480 Speaker 1: or maybe, depending on your perspective, diabolical with with Qualcom's 45 00:02:25,480 --> 00:02:28,000 Speaker 1: business model is they so so they do two things. 46 00:02:28,000 --> 00:02:29,560 Speaker 1: One is they have the patents and the other is 47 00:02:29,600 --> 00:02:33,560 Speaker 1: they manufacture the chips that are used in many phones. 48 00:02:33,600 --> 00:02:35,880 Speaker 1: But they don't they don't. They're not the only manufacturer 49 00:02:35,880 --> 00:02:39,480 Speaker 1: of chips. They're just the manufacturer of the best chips basically. 50 00:02:39,919 --> 00:02:43,120 Speaker 1: And whether you buy your chips from Qualcom or from 51 00:02:43,120 --> 00:02:45,800 Speaker 1: one of its competitors, you still have to pay that 52 00:02:45,800 --> 00:02:48,320 Speaker 1: that royalty. And what happened with Apple, and this is 53 00:02:48,360 --> 00:02:52,880 Speaker 1: Apple's contention in in the lawsuit UM is that Qualcom 54 00:02:53,040 --> 00:02:57,640 Speaker 1: used it's basically basic power as a chip manufacturer to 55 00:02:57,800 --> 00:03:00,600 Speaker 1: force Apple to agree to terms that that it now 56 00:03:00,639 --> 00:03:04,560 Speaker 1: says our our ownerous. So Apple was afraid that if 57 00:03:04,600 --> 00:03:06,920 Speaker 1: it complained about this thing, which is known in the 58 00:03:06,919 --> 00:03:10,720 Speaker 1: industry as the Qualcom tax. Um. Apple's contention is that 59 00:03:10,720 --> 00:03:13,560 Speaker 1: that then Qualcom would be able to withhold its modems 60 00:03:13,600 --> 00:03:16,160 Speaker 1: and basically your iPhone would not you know, stream video 61 00:03:16,240 --> 00:03:18,880 Speaker 1: or something like that, so it would be pretty much useless. Um. 62 00:03:19,120 --> 00:03:21,080 Speaker 1: And and and the thing that changed, and this is 63 00:03:21,320 --> 00:03:24,080 Speaker 1: Ian King, and I'm a co writer report is basically 64 00:03:24,080 --> 00:03:28,760 Speaker 1: that Apple got a second supplier. Apple convinced Intel uh 65 00:03:28,800 --> 00:03:32,400 Speaker 1: to invest some money to make a competing modem, which 66 00:03:32,440 --> 00:03:35,000 Speaker 1: which is now in some iPhones but not all iPhones. 67 00:03:35,200 --> 00:03:38,240 Speaker 1: And it was that, um, that sort of buying power 68 00:03:38,240 --> 00:03:40,520 Speaker 1: that allowed Apple to turn around and and and now 69 00:03:40,840 --> 00:03:43,920 Speaker 1: um you know, start negotiating harder, which led to this dispute. 70 00:03:44,600 --> 00:03:47,720 Speaker 1: You also in the story talk about um some conversations 71 00:03:47,760 --> 00:03:52,240 Speaker 1: between Apple and Samsung, which of course is uh Apple's 72 00:03:52,280 --> 00:03:55,400 Speaker 1: big rival in the smartphone market. But um also somebody 73 00:03:55,400 --> 00:04:00,800 Speaker 1: who who um uh supplies uh Apple for some components 74 00:04:00,840 --> 00:04:03,760 Speaker 1: for the Yeah, this is a pretty juicy allegation. So 75 00:04:04,280 --> 00:04:08,880 Speaker 1: in Qualcom's complaint, UH, Qualcom alleges that counterclaim, sorry that 76 00:04:08,960 --> 00:04:13,560 Speaker 1: Qualcomm alleges that at a conference in Idaho in the 77 00:04:13,560 --> 00:04:16,719 Speaker 1: summer of which almost certainly was the Sun Valley Conference, 78 00:04:16,760 --> 00:04:20,640 Speaker 1: which is this big con confab held by an investment bank, 79 00:04:20,680 --> 00:04:23,039 Speaker 1: it's it's only it's like top level people go there. 80 00:04:23,360 --> 00:04:26,400 Speaker 1: You know, an Apple executive and a Samsung executive had 81 00:04:26,440 --> 00:04:29,640 Speaker 1: a conversation during which Court and Qualcom. The Apple executive 82 00:04:30,000 --> 00:04:35,520 Speaker 1: urged Samsung to complain to the Korean regulatory body that 83 00:04:35,520 --> 00:04:38,359 Speaker 1: that that regulates uh, you know, all this stuff in 84 00:04:38,400 --> 00:04:42,640 Speaker 1: South Korea. Now this is particularly uh juicy and a 85 00:04:42,680 --> 00:04:44,120 Speaker 1: little and you know, as we say in the story, 86 00:04:44,160 --> 00:04:47,520 Speaker 1: kind of explosive because of course Samsung's um you know, 87 00:04:47,600 --> 00:04:51,839 Speaker 1: de facto ceo j Lee uh you know, was convicted 88 00:04:51,839 --> 00:04:55,000 Speaker 1: of bribing the president and as part of this whole inquiry, 89 00:04:55,279 --> 00:04:58,640 Speaker 1: one of the commissioners on that group uh stepped down. 90 00:04:58,920 --> 00:05:01,360 Speaker 1: So so you know, it's it's not clear that anything 91 00:05:01,360 --> 00:05:05,120 Speaker 1: inappropriate happened. UM CEOs you know talk all the time. 92 00:05:05,440 --> 00:05:07,920 Speaker 1: On the other hand, Qualcom is kind of saying that 93 00:05:08,040 --> 00:05:11,159 Speaker 1: Apple basically went around the world and and sort of 94 00:05:11,160 --> 00:05:14,960 Speaker 1: whispered in the ears of regulators and and and got 95 00:05:15,000 --> 00:05:17,280 Speaker 1: a bunch of these regulators, including in South Korea and 96 00:05:17,360 --> 00:05:20,120 Speaker 1: also in the US. There there's also regulatory inquiries and 97 00:05:20,440 --> 00:05:23,720 Speaker 1: in the EU and in Taiwan to uh to basically 98 00:05:23,760 --> 00:05:26,240 Speaker 1: go after Qualcom. So they're alleging this kind of vast 99 00:05:26,320 --> 00:05:30,320 Speaker 1: international conspiracy. Apple of course says like, that's that's crazy. 100 00:05:30,360 --> 00:05:33,240 Speaker 1: The reason the regulators are looking into this is because 101 00:05:33,320 --> 00:05:35,839 Speaker 1: you know, what you're doing is wrong. So so we've 102 00:05:35,839 --> 00:05:38,520 Speaker 1: alluded to lawsuits, and we talked about regulators. What are 103 00:05:38,520 --> 00:05:40,800 Speaker 1: the big legal cases that are out there that people 104 00:05:40,800 --> 00:05:44,440 Speaker 1: should be watching. So in this dispute that they're they're 105 00:05:44,480 --> 00:05:46,840 Speaker 1: sort of two key things going on. One is there's 106 00:05:46,839 --> 00:05:50,160 Speaker 1: a lawsuit in UH southern California and in a federal 107 00:05:50,240 --> 00:05:53,960 Speaker 1: court in San Diego where UM, Apple and Qualcom have 108 00:05:53,960 --> 00:05:56,160 Speaker 1: have sued one another a should started I should say 109 00:05:56,200 --> 00:05:58,719 Speaker 1: three suits. So there's that. And then there is an 110 00:05:58,720 --> 00:06:01,520 Speaker 1: FTC complaint in or in California. This is the federal 111 00:06:01,560 --> 00:06:05,440 Speaker 1: government looking into Qualcom's pricing. That complaint dropped in almost 112 00:06:05,480 --> 00:06:08,800 Speaker 1: the exact same time that Apple brought its stuff UM. 113 00:06:08,880 --> 00:06:12,120 Speaker 1: And the sort of really interesting one is this complaint 114 00:06:12,120 --> 00:06:13,919 Speaker 1: in the I t C, which is the the U. 115 00:06:14,040 --> 00:06:17,280 Speaker 1: S government UH group that regular that's sort of supposed 116 00:06:17,279 --> 00:06:22,680 Speaker 1: to protect American businesses. Qualcoms countersuit Apple and is basically 117 00:06:22,680 --> 00:06:26,440 Speaker 1: trying to prevent the import of iPhones UH that that 118 00:06:26,480 --> 00:06:29,760 Speaker 1: are made without Qualcom chips. And that ruling is supposed 119 00:06:29,800 --> 00:06:33,280 Speaker 1: to happen UH you know, by I think September so 120 00:06:33,279 --> 00:06:35,000 Speaker 1: so sometimes soon. And the thought is that that could 121 00:06:35,040 --> 00:06:37,960 Speaker 1: create some leverage that Qualcom might be able to use 122 00:06:38,000 --> 00:06:41,080 Speaker 1: to to negotiate a settlement. Basically, Qualcom wants to settle 123 00:06:41,080 --> 00:06:43,120 Speaker 1: this thing Apple says, you know we want to go 124 00:06:43,160 --> 00:06:46,880 Speaker 1: to trial, is that because Apple has more resources? What's 125 00:06:46,920 --> 00:06:50,640 Speaker 1: what started behind the motivations of either side. So, uh, 126 00:06:50,720 --> 00:06:52,520 Speaker 1: you know, if you talk to Apple, they say, the 127 00:06:52,520 --> 00:06:54,080 Speaker 1: reason we want to try this is because it's all 128 00:06:54,080 --> 00:06:57,200 Speaker 1: about fairness. Um, if you if you look at it, 129 00:06:57,240 --> 00:07:00,920 Speaker 1: maybe with a little bit of adductivity. I think one 130 00:07:00,920 --> 00:07:03,039 Speaker 1: thing that's fair to say is that Apple has a 131 00:07:03,040 --> 00:07:06,159 Speaker 1: lot of resources. Apple can afford a drawn out fight 132 00:07:06,480 --> 00:07:10,360 Speaker 1: for Qualcom. Uh. This is very Apple is a very 133 00:07:10,400 --> 00:07:14,520 Speaker 1: important customer, possibly their biggest customer. Um. And so so 134 00:07:14,640 --> 00:07:16,440 Speaker 1: you know, if Apple just stops paying them, which is 135 00:07:16,440 --> 00:07:18,600 Speaker 1: what has happened, you know at some point that they 136 00:07:18,640 --> 00:07:21,920 Speaker 1: would have to come to the bargaining table. I want 137 00:07:21,920 --> 00:07:25,160 Speaker 1: to thank Max Chafkin. He's a reporter for Bloomberg Business 138 00:07:25,200 --> 00:07:29,880 Speaker 1: Week talking about the brewing legal fights between Apple and 139 00:07:30,000 --> 00:07:34,040 Speaker 1: Qualcom over smartphones. Thanks very much for joining us here 140 00:07:34,120 --> 00:07:35,080 Speaker 1: on Bloomberg Law