Speaker 1: Those of us with iPhones all love what they can do,
Speaker 1: but most of us don't think much about the components
Speaker 1: inside the device. Depending on which phone you have, there's
Speaker 1: a good chance that relies heavily on technology created by
Speaker 1: a company called qual Colm. Qualcomm invented key technologies that
Speaker 1: let phones send and received data, and it has a
Speaker 1: mass more than a hundred and thirty thousand patents, some
Speaker 1: of which let Qualcom collect royalties as high as five
Speaker 1: percent of the selling price of mobile phones. That adds
Speaker 1: up to billions of dollars from better known companies like Apple.
Speaker 1: It's big money, and it has led to a high stakes,
Speaker 1: worldwide legal battle between Qualcom and Apple. The fight is
Speaker 1: the subject of a story in the upcoming edition of
Speaker 1: Bloomberg Business Week, and here with us to talk about
Speaker 1: it is Max Chafkin, who's one of the reporters who
Speaker 1: wrote that story. Max, thanks for being here. Yeah. So,
Speaker 1: as my kids could tell you, I am pretty much
Speaker 1: technologically illiterate. So tell us tell explained to me what
Speaker 1: Qualcomm's great technology is and why it is so important
Speaker 1: to my my iPhone. Sure so, so one point of
Speaker 1: clarity is actually, pretty much any phone you own today
Speaker 1: relies on this Qualcom technology, which is the technology that
Speaker 1: allows you to send and receive data through a cellular connection.
Speaker 1: So if you're making a phone call or or sending
Speaker 1: a mobile message, or going on Snapchat, or doing pretty
Speaker 1: much anything you do in the modern world that is
Speaker 1: that is using a three G or four G connection,
Speaker 1: you rely on basically this this big basket of patents
Speaker 1: that that Qualcom developed, which which sort of figures out
Speaker 1: how to squeeze data into radio signals and to do
Speaker 1: it efficiently. Um. It's it's really an amazing uh sort
Speaker 1: of miracle of of of modern technology. The contention here, though,
Speaker 1: is that Qualcom has basically been been asking too much
Speaker 1: for this. Uh. They charge a a flat royalty on
Speaker 1: the on the price of every handset that's sold around
Speaker 1: the world. Um. And Apple uh, and it appears maybe
Speaker 1: there there may be a couple other companies joining them.
Speaker 1: Has has basically said enough enough and and they're fighting
Speaker 1: this uh, this this big legal battle. Yeah. So walk
Speaker 1: me through the relationship between Apple and Qualcom. In your story,
Speaker 1: you talk about how they a little while back had
Speaker 1: a deal. Um. But but but I guess that's that
Speaker 1: deal maybe breaking down. So what's what's kind of ingenious
Speaker 1: or maybe, depending on your perspective, diabolical with with Qualcom's
Speaker 1: business model is they so so they do two things.
Speaker 1: One is they have the patents and the other is
Speaker 1: they manufacture the chips that are used in many phones.
Speaker 1: But they don't they don't. They're not the only manufacturer
Speaker 1: of chips. They're just the manufacturer of the best chips basically.
Speaker 1: And whether you buy your chips from Qualcom or from
Speaker 1: one of its competitors, you still have to pay that
Speaker 1: that royalty. And what happened with Apple, and this is
Speaker 1: Apple's contention in in the lawsuit UM is that Qualcom
Speaker 1: used it's basically basic power as a chip manufacturer to
Speaker 1: force Apple to agree to terms that that it now
Speaker 1: says our our ownerous. So Apple was afraid that if
Speaker 1: it complained about this thing, which is known in the
Speaker 1: industry as the Qualcom tax. Um. Apple's contention is that
Speaker 1: that then Qualcom would be able to withhold its modems
Speaker 1: and basically your iPhone would not you know, stream video
Speaker 1: or something like that, so it would be pretty much useless. Um.
Speaker 1: And and and the thing that changed, and this is
Speaker 1: Ian King, and I'm a co writer report is basically
Speaker 1: that Apple got a second supplier. Apple convinced Intel uh
Speaker 1: to invest some money to make a competing modem, which
Speaker 1: which is now in some iPhones but not all iPhones.
Speaker 1: And it was that, um, that sort of buying power
Speaker 1: that allowed Apple to turn around and and and now
Speaker 1: um you know, start negotiating harder, which led to this dispute.
Speaker 1: You also in the story talk about um some conversations
Speaker 1: between Apple and Samsung, which of course is uh Apple's
Speaker 1: big rival in the smartphone market. But um also somebody
Speaker 1: who who um uh supplies uh Apple for some components
Speaker 1: for the Yeah, this is a pretty juicy allegation. So
Speaker 1: in Qualcom's complaint, UH, Qualcom alleges that counterclaim, sorry that
Speaker 1: Qualcomm alleges that at a conference in Idaho in the
Speaker 1: summer of which almost certainly was the Sun Valley Conference,
Speaker 1: which is this big con confab held by an investment bank,
Speaker 1: it's it's only it's like top level people go there.
Speaker 1: You know, an Apple executive and a Samsung executive had
Speaker 1: a conversation during which Court and Qualcom. The Apple executive
Speaker 1: urged Samsung to complain to the Korean regulatory body that
Speaker 1: that that regulates uh, you know, all this stuff in
Speaker 1: South Korea. Now this is particularly uh juicy and a
Speaker 1: little and you know, as we say in the story,
Speaker 1: kind of explosive because of course Samsung's um you know,
Speaker 1: de facto ceo j Lee uh you know, was convicted
Speaker 1: of bribing the president and as part of this whole inquiry,
Speaker 1: one of the commissioners on that group uh stepped down.
Speaker 1: So so you know, it's it's not clear that anything
Speaker 1: inappropriate happened. UM CEOs you know talk all the time.
Speaker 1: On the other hand, Qualcom is kind of saying that
Speaker 1: Apple basically went around the world and and sort of
Speaker 1: whispered in the ears of regulators and and and got
Speaker 1: a bunch of these regulators, including in South Korea and
Speaker 1: also in the US. There there's also regulatory inquiries and
Speaker 1: in the EU and in Taiwan to uh to basically
Speaker 1: go after Qualcom. So they're alleging this kind of vast
Speaker 1: international conspiracy. Apple of course says like, that's that's crazy.
Speaker 1: The reason the regulators are looking into this is because
Speaker 1: you know, what you're doing is wrong. So so we've
Speaker 1: alluded to lawsuits, and we talked about regulators. What are
Speaker 1: the big legal cases that are out there that people
Speaker 1: should be watching. So in this dispute that they're they're
Speaker 1: sort of two key things going on. One is there's
Speaker 1: a lawsuit in UH southern California and in a federal
Speaker 1: court in San Diego where UM, Apple and Qualcom have
Speaker 1: have sued one another a should started I should say
Speaker 1: three suits. So there's that. And then there is an
Speaker 1: FTC complaint in or in California. This is the federal
Speaker 1: government looking into Qualcom's pricing. That complaint dropped in almost
Speaker 1: the exact same time that Apple brought its stuff UM.
Speaker 1: And the sort of really interesting one is this complaint
Speaker 1: in the I t C, which is the the U.
Speaker 1: S government UH group that regular that's sort of supposed
Speaker 1: to protect American businesses. Qualcoms countersuit Apple and is basically
Speaker 1: trying to prevent the import of iPhones UH that that
Speaker 1: are made without Qualcom chips. And that ruling is supposed
Speaker 1: to happen UH you know, by I think September so
Speaker 1: so sometimes soon. And the thought is that that could
Speaker 1: create some leverage that Qualcom might be able to use
Speaker 1: to to negotiate a settlement. Basically, Qualcom wants to settle
Speaker 1: this thing Apple says, you know we want to go
Speaker 1: to trial, is that because Apple has more resources? What's
Speaker 1: what started behind the motivations of either side. So, uh,
Speaker 1: you know, if you talk to Apple, they say, the
Speaker 1: reason we want to try this is because it's all
Speaker 1: about fairness. Um, if you if you look at it,
Speaker 1: maybe with a little bit of adductivity. I think one
Speaker 1: thing that's fair to say is that Apple has a
Speaker 1: lot of resources. Apple can afford a drawn out fight
Speaker 1: for Qualcom. Uh. This is very Apple is a very
Speaker 1: important customer, possibly their biggest customer. Um. And so so
Speaker 1: you know, if Apple just stops paying them, which is
Speaker 1: what has happened, you know at some point that they
Speaker 1: would have to come to the bargaining table. I want
Speaker 1: to thank Max Chafkin. He's a reporter for Bloomberg Business
Speaker 1: Week talking about the brewing legal fights between Apple and
Speaker 1: Qualcom over smartphones. Thanks very much for joining us here
Speaker 1: on Bloomberg Law