WEBVTT - Apple and Qualcomm Feud Grows Over $18 Part (Audio)

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<v Speaker 1>Those of us with iPhones all love what they can do,

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<v Speaker 1>but most of us don't think much about the components

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<v Speaker 1>inside the device. Depending on which phone you have, there's

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<v Speaker 1>a good chance that relies heavily on technology created by

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<v Speaker 1>a company called qual Colm. Qualcomm invented key technologies that

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<v Speaker 1>let phones send and received data, and it has a

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<v Speaker 1>mass more than a hundred and thirty thousand patents, some

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<v Speaker 1>of which let Qualcom collect royalties as high as five

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<v Speaker 1>percent of the selling price of mobile phones. That adds

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<v Speaker 1>up to billions of dollars from better known companies like Apple.

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<v Speaker 1>It's big money, and it has led to a high stakes,

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<v Speaker 1>worldwide legal battle between Qualcom and Apple. The fight is

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<v Speaker 1>the subject of a story in the upcoming edition of

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<v Speaker 1>Bloomberg Business Week, and here with us to talk about

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<v Speaker 1>it is Max Chafkin, who's one of the reporters who

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<v Speaker 1>wrote that story. Max, thanks for being here. Yeah. So,

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<v Speaker 1>as my kids could tell you, I am pretty much

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<v Speaker 1>technologically illiterate. So tell us tell explained to me what

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<v Speaker 1>Qualcomm's great technology is and why it is so important

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<v Speaker 1>to my my iPhone. Sure so, so one point of

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<v Speaker 1>clarity is actually, pretty much any phone you own today

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<v Speaker 1>relies on this Qualcom technology, which is the technology that

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<v Speaker 1>allows you to send and receive data through a cellular connection.

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<v Speaker 1>So if you're making a phone call or or sending

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<v Speaker 1>a mobile message, or going on Snapchat, or doing pretty

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<v Speaker 1>much anything you do in the modern world that is

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<v Speaker 1>that is using a three G or four G connection,

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<v Speaker 1>you rely on basically this this big basket of patents

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<v Speaker 1>that that Qualcom developed, which which sort of figures out

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<v Speaker 1>how to squeeze data into radio signals and to do

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<v Speaker 1>it efficiently. Um. It's it's really an amazing uh sort

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<v Speaker 1>of miracle of of of modern technology. The contention here, though,

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<v Speaker 1>is that Qualcom has basically been been asking too much

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<v Speaker 1>for this. Uh. They charge a a flat royalty on

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<v Speaker 1>the on the price of every handset that's sold around

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<v Speaker 1>the world. Um. And Apple uh, and it appears maybe

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<v Speaker 1>there there may be a couple other companies joining them.

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<v Speaker 1>Has has basically said enough enough and and they're fighting

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<v Speaker 1>this uh, this this big legal battle. Yeah. So walk

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<v Speaker 1>me through the relationship between Apple and Qualcom. In your story,

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<v Speaker 1>you talk about how they a little while back had

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<v Speaker 1>a deal. Um. But but but I guess that's that

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<v Speaker 1>deal maybe breaking down. So what's what's kind of ingenious

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<v Speaker 1>or maybe, depending on your perspective, diabolical with with Qualcom's

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<v Speaker 1>business model is they so so they do two things.

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<v Speaker 1>One is they have the patents and the other is

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<v Speaker 1>they manufacture the chips that are used in many phones.

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<v Speaker 1>But they don't they don't. They're not the only manufacturer

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<v Speaker 1>of chips. They're just the manufacturer of the best chips basically.

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<v Speaker 1>And whether you buy your chips from Qualcom or from

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<v Speaker 1>one of its competitors, you still have to pay that

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<v Speaker 1>that royalty. And what happened with Apple, and this is

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<v Speaker 1>Apple's contention in in the lawsuit UM is that Qualcom

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<v Speaker 1>used it's basically basic power as a chip manufacturer to

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<v Speaker 1>force Apple to agree to terms that that it now

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<v Speaker 1>says our our ownerous. So Apple was afraid that if

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<v Speaker 1>it complained about this thing, which is known in the

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<v Speaker 1>industry as the Qualcom tax. Um. Apple's contention is that

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<v Speaker 1>that then Qualcom would be able to withhold its modems

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<v Speaker 1>and basically your iPhone would not you know, stream video

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<v Speaker 1>or something like that, so it would be pretty much useless. Um.

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<v Speaker 1>And and and the thing that changed, and this is

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<v Speaker 1>Ian King, and I'm a co writer report is basically

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<v Speaker 1>that Apple got a second supplier. Apple convinced Intel uh

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<v Speaker 1>to invest some money to make a competing modem, which

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<v Speaker 1>which is now in some iPhones but not all iPhones.

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<v Speaker 1>And it was that, um, that sort of buying power

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<v Speaker 1>that allowed Apple to turn around and and and now

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<v Speaker 1>um you know, start negotiating harder, which led to this dispute.

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<v Speaker 1>You also in the story talk about um some conversations

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<v Speaker 1>between Apple and Samsung, which of course is uh Apple's

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<v Speaker 1>big rival in the smartphone market. But um also somebody

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<v Speaker 1>who who um uh supplies uh Apple for some components

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<v Speaker 1>for the Yeah, this is a pretty juicy allegation. So

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<v Speaker 1>in Qualcom's complaint, UH, Qualcom alleges that counterclaim, sorry that

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<v Speaker 1>Qualcomm alleges that at a conference in Idaho in the

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<v Speaker 1>summer of which almost certainly was the Sun Valley Conference,

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<v Speaker 1>which is this big con confab held by an investment bank,

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<v Speaker 1>it's it's only it's like top level people go there.

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<v Speaker 1>You know, an Apple executive and a Samsung executive had

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<v Speaker 1>a conversation during which Court and Qualcom. The Apple executive

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<v Speaker 1>urged Samsung to complain to the Korean regulatory body that

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<v Speaker 1>that that regulates uh, you know, all this stuff in

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<v Speaker 1>South Korea. Now this is particularly uh juicy and a

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<v Speaker 1>little and you know, as we say in the story,

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<v Speaker 1>kind of explosive because of course Samsung's um you know,

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<v Speaker 1>de facto ceo j Lee uh you know, was convicted

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<v Speaker 1>of bribing the president and as part of this whole inquiry,

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<v Speaker 1>one of the commissioners on that group uh stepped down.

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<v Speaker 1>So so you know, it's it's not clear that anything

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<v Speaker 1>inappropriate happened. UM CEOs you know talk all the time.

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<v Speaker 1>On the other hand, Qualcom is kind of saying that

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<v Speaker 1>Apple basically went around the world and and sort of

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<v Speaker 1>whispered in the ears of regulators and and and got

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<v Speaker 1>a bunch of these regulators, including in South Korea and

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<v Speaker 1>also in the US. There there's also regulatory inquiries and

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<v Speaker 1>in the EU and in Taiwan to uh to basically

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<v Speaker 1>go after Qualcom. So they're alleging this kind of vast

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<v Speaker 1>international conspiracy. Apple of course says like, that's that's crazy.

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<v Speaker 1>The reason the regulators are looking into this is because

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<v Speaker 1>you know, what you're doing is wrong. So so we've

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<v Speaker 1>alluded to lawsuits, and we talked about regulators. What are

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<v Speaker 1>the big legal cases that are out there that people

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<v Speaker 1>should be watching. So in this dispute that they're they're

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<v Speaker 1>sort of two key things going on. One is there's

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<v Speaker 1>a lawsuit in UH southern California and in a federal

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<v Speaker 1>court in San Diego where UM, Apple and Qualcom have

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<v Speaker 1>have sued one another a should started I should say

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<v Speaker 1>three suits. So there's that. And then there is an

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<v Speaker 1>FTC complaint in or in California. This is the federal

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<v Speaker 1>government looking into Qualcom's pricing. That complaint dropped in almost

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<v Speaker 1>the exact same time that Apple brought its stuff UM.

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<v Speaker 1>And the sort of really interesting one is this complaint

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<v Speaker 1>in the I t C, which is the the U.

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<v Speaker 1>S government UH group that regular that's sort of supposed

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<v Speaker 1>to protect American businesses. Qualcoms countersuit Apple and is basically

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<v Speaker 1>trying to prevent the import of iPhones UH that that

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<v Speaker 1>are made without Qualcom chips. And that ruling is supposed

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<v Speaker 1>to happen UH you know, by I think September so

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<v Speaker 1>so sometimes soon. And the thought is that that could

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<v Speaker 1>create some leverage that Qualcom might be able to use

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<v Speaker 1>to to negotiate a settlement. Basically, Qualcom wants to settle

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<v Speaker 1>this thing Apple says, you know we want to go

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<v Speaker 1>to trial, is that because Apple has more resources? What's

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<v Speaker 1>what started behind the motivations of either side. So, uh,

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<v Speaker 1>you know, if you talk to Apple, they say, the

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<v Speaker 1>reason we want to try this is because it's all

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<v Speaker 1>about fairness. Um, if you if you look at it,

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<v Speaker 1>maybe with a little bit of adductivity. I think one

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<v Speaker 1>thing that's fair to say is that Apple has a

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<v Speaker 1>lot of resources. Apple can afford a drawn out fight

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<v Speaker 1>for Qualcom. Uh. This is very Apple is a very

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<v Speaker 1>important customer, possibly their biggest customer. Um. And so so

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<v Speaker 1>you know, if Apple just stops paying them, which is

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<v Speaker 1>what has happened, you know at some point that they

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<v Speaker 1>would have to come to the bargaining table. I want

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<v Speaker 1>to thank Max Chafkin. He's a reporter for Bloomberg Business

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<v Speaker 1>Week talking about the brewing legal fights between Apple and

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<v Speaker 1>Qualcom over smartphones. Thanks very much for joining us here

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<v Speaker 1>on Bloomberg Law