WEBVTT - Apple and Qualcomm Face off Over Tech Pricing (Audio)

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<v Speaker 1>The global legal battle between Apple and Qualcom is escalating,

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<v Speaker 1>and with Qualcom's core business model and billions of dollars

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<v Speaker 1>at stake, it promises to be long and nasty. Qualcom

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<v Speaker 1>is accusing Apple of lying to regulators to push them

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<v Speaker 1>to investigate the chip maker, and of threatening it to

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<v Speaker 1>cover up the use of inferior parts in some iPhones.

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<v Speaker 1>These counterclaims were filed in response to Apple's one billion

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<v Speaker 1>dollar antitrust lawsuit accusing Qualcom of illegally trying to control

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<v Speaker 1>the market for chips and charging at least five times

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<v Speaker 1>more than the going rate for patent fees. Here to

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<v Speaker 1>help us analyze these competing claims are Matt Larson, Bloomberg

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<v Speaker 1>Intelligence litigation analyst and Andrea Mattwitian professor at Northeastern University. Matt,

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<v Speaker 1>let's start with the basics. Explain why Qualcom is allowed

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<v Speaker 1>to charge phonemakers like Apple, whether or not they use

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<v Speaker 1>its chips, and what those charges are. Certainly so, Qualcom's

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<v Speaker 1>business is fairly unique. It's it's twofold. The first art

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<v Speaker 1>is the chip sets they sell ships that um that

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<v Speaker 1>go into wireless devices and basically allow the phones to

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<v Speaker 1>communicate with with radio and wireless networks. So the other

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<v Speaker 1>half of their business um about a third of their

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<v Speaker 1>business by revenue realistically, is patent licensing. So qual Calm

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<v Speaker 1>invests a tremendous amount of money and doing research and

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<v Speaker 1>development and then participates in standard setting organizations that essentially

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<v Speaker 1>dictate what kind of technologies are going to be put

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<v Speaker 1>into three G standards, four G lte um. You know

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<v Speaker 1>there are groups talking about five G. So Qualcom participates

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<v Speaker 1>in these groups. It contributes the technology that it's done,

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<v Speaker 1>that it's developed through its research programs, and then in turn,

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<v Speaker 1>once companies start implementing those technologies, UH, Qualcom asks for

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<v Speaker 1>compensation in the form of patent licensing. So it says,

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<v Speaker 1>we'll let you use these technologies. Uh. In fact, you

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<v Speaker 1>have to use them because they're required to communicate with

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<v Speaker 1>other devices, and in return you pay us licensing fees

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<v Speaker 1>for the use of our patented tech. So, Andrew, before

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<v Speaker 1>we get to Qualcom's lawsuit that follows on the heels

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<v Speaker 1>of a lot of litigation by Apple, So what what

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<v Speaker 1>is Apple suing Qualcom about? Andrea voiced their repeated frustrations

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<v Speaker 1>about their allegedly not getting a stream of payments back

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<v Speaker 1>from Qualcom in accordance with what were the previously stipulated

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<v Speaker 1>deal terms pursuant to their agreements, which the court will

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<v Speaker 1>undoubtedly dig into the minutia of those contracts and will

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<v Speaker 1>learn a lot about the nature of this relationship as

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<v Speaker 1>the case moves forward. And so this relationship between Apple

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<v Speaker 1>and Qualcom also was part of the concerns that are

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<v Speaker 1>reflected in the Federal Trade Commission's recent activity filing UH

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<v Speaker 1>against Qualcom in California accusing Qualcom of anti competitive practice

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<v Speaker 1>and violation of Section five of the Spare Traits of

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<v Speaker 1>the FTC Act. As well, So Matt tell us about

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<v Speaker 1>Qualcom's claims that Apple threatened it and lied to regulators. Yeah,

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<v Speaker 1>as a result of this two fold business UH, namely,

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<v Speaker 1>Qualcom says you can either buy our chips or if

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<v Speaker 1>you buy somebody else's chips, you're gonna have to pay

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<v Speaker 1>us because those chips use our technology. UM. That rubs

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<v Speaker 1>a lot of handset makers the wrong way. UM. And

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<v Speaker 1>so Qualcom has been subject to UM two investigations in

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<v Speaker 1>the EU, in the KFTC and Korea. UM there are

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<v Speaker 1>their investigations it was subject to in China that came

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<v Speaker 1>out with a large settlement deal with the n d

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<v Speaker 1>r C that basically set licensing rates UM and one

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<v Speaker 1>of the allegations that Qualcom has set forth you know,

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<v Speaker 1>kind of in defense of itself and as at striking

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<v Speaker 1>back at Apple in this lawsuit is saying that Apple

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<v Speaker 1>UM participated in these investing gation specifically, the KFTC investigation

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<v Speaker 1>UM inflated facts kind of made a made a case

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<v Speaker 1>that wasn't based in how Calcolm's licensing and chip business worked.

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<v Speaker 1>UM and Qualcom is basically alleging that Apple came forth

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<v Speaker 1>UM and saw this as an opportunistic endeavor whereby it

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<v Speaker 1>could effectively negotiate against Qualcom's high royalty demands by putting

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<v Speaker 1>pressure on them via these the KFTC, the FTC UM

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<v Speaker 1>and similar investigations. We've been talking about the billion dollar

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<v Speaker 1>legal battle between Apple and Qualcom over loyalty over royalties,

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<v Speaker 1>and just today BlackBerry announced that it was awarded nearly

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<v Speaker 1>eight hundred fifteen million dollars after an arbitration hearing concluded

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<v Speaker 1>that Qualcom had been overcharging for royalty payments on smartphone technology.

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<v Speaker 1>Our guests are Bloomberg Intelligence litigation analyst Matt Lawson and

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<v Speaker 1>Professor Andrew Mtwittion of Northeastern University. Matt is the BlackBerry

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<v Speaker 1>award a good sign for Apple and its legal fight

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<v Speaker 1>with Qualcom, or are the circumstances different. Apple will certainly

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<v Speaker 1>parade this decision in its dispute with Qualcom UM. Apple's

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<v Speaker 1>main contention, you know, despite all the the antitrust concerns,

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<v Speaker 1>the the key behind the Apple Qualcom dispute in my

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<v Speaker 1>view is the royalty payments. UM. Apple would love to

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<v Speaker 1>negotiate a very low direct license where it pays Apple

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<v Speaker 1>Qualcom directly for the use of its patents UM, and

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<v Speaker 1>in doing that, it's going to need to show comparable

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<v Speaker 1>licenses that have low roll royalty rates, and so by

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<v Speaker 1>BlackBerry UM apparently in its arbitration securing a lower cap

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<v Speaker 1>on Qualcom royalties UM. That's something that will will certainly

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<v Speaker 1>be highlighted by Apple and UH and will be front

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<v Speaker 1>and center in its UH and its contentions as the

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<v Speaker 1>Qualcom dispute moves forward. But again, you know that dispute

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<v Speaker 1>is going to be a long time in the making

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<v Speaker 1>apps and some kind of settlements, so it'll be lurking

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<v Speaker 1>in the background and we may we may see this

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<v Speaker 1>again in a in a year, a couple of years, Andrea,

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<v Speaker 1>A lot of the time, actually probably almost all the

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<v Speaker 1>time that you see this kind of litigation and counter

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<v Speaker 1>litigation between companies that have had long standing relationships as

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<v Speaker 1>a business matter, it's really a breakdown of the relationship

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<v Speaker 1>that's going on. And so if if uh, if, as

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<v Speaker 1>Matt says, Apple's motivation here is to try to lower

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<v Speaker 1>the fees it's paying, what does you know kind of say,

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<v Speaker 1>you know, if you look at the legal claims of

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<v Speaker 1>qualcom is making, what are there? What's their position in

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<v Speaker 1>terms of why they're really right here? So I think

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<v Speaker 1>you're right that it is a flag that the relationship

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<v Speaker 1>is struggling, particularly since Tim Cook made a statement that

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<v Speaker 1>this was a move of last resort to bring litigation

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<v Speaker 1>reviewing Qualcom's reply to the Apple pleadings. What we're talking

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<v Speaker 1>about here is not simply a single con tract. Even

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<v Speaker 1>though portions are redacted, we can deduce that we're talking

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<v Speaker 1>about at least seven different, undoubtedly extensively negotiated agreements, and

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<v Speaker 1>they'll all come to play when we try to reconstruct

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<v Speaker 1>this relationship. And as the court seeks to evaluate the

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<v Speaker 1>different dynamics that were present in this um set of

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<v Speaker 1>exchanges and in these contracts, and the allegations are everything

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<v Speaker 1>from Apple seeking to UH wind up regulators to bring

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<v Speaker 1>charges and claims against Qualcom versus Apple alleging the Qualcom

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<v Speaker 1>UH sanctioned Apple for cooperating with regulators by withholding the

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<v Speaker 1>stream of payments that the subject of of Apple suit.

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<v Speaker 1>This is a very complicated set of business dynamics, and

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<v Speaker 1>the reply brief from Qualcom reminded me a little bit

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<v Speaker 1>of my first year law students contracts class because they

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<v Speaker 1>raised a whole most of defenses that are very classic

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<v Speaker 1>contract law defenses. So it will be interesting to see

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<v Speaker 1>how this all plays out, Matt, Qualcom's core business model

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<v Speaker 1>is part of this whole lawsuit. Would it be if

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<v Speaker 1>Apple did win way down the line, would that business

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<v Speaker 1>model be in jeopardy? That's the concern that a lot

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<v Speaker 1>of a lot of people who are watching Qualcom have. Um.

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<v Speaker 1>As I mentioned earlier, you know, roughly a third of

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<v Speaker 1>Qualcom's revenue comes from very high margin patent licensing dollars.

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<v Speaker 1>You know that you're not making products, there's very low

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<v Speaker 1>cost um and so as royalty rates go down, you

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<v Speaker 1>eat into that high margin business, and I think that's

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<v Speaker 1>what um that's what people are concerned about is is

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<v Speaker 1>looking at at Apple pushing back kind of testing, the testing,

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<v Speaker 1>the waters and patent licensing. Generally, a lot of the

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<v Speaker 1>handset makers are are being a little bit more defensive

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<v Speaker 1>of their margins, especially as we've moved from the earlier

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<v Speaker 1>iterations of cell phones that really just acted as phones

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<v Speaker 1>that connected to radio networks, whereas now we've got basically

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<v Speaker 1>handheld computers that we're carrying around, and we're looking at

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<v Speaker 1>the advent of of five G where pretty much every

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<v Speaker 1>device is going to be connected to the Internet, and

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<v Speaker 1>so people who are making those products are saying, well,

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<v Speaker 1>you know, the licensing that we're paying for some of

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<v Speaker 1>these technologies should be a lower percentage of the overall

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<v Speaker 1>device or capped at some set limit. And so when

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<v Speaker 1>you're looking at Qualcom, that's a concern is how much

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<v Speaker 1>do those trends start to eat into its licensing business. Andrea,

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<v Speaker 1>one of the interesting parts of all this is that

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<v Speaker 1>the licensing from Qualcom to Apple actually runs through Apple's subcontractors.

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<v Speaker 1>Is it possible that this litigation is sort of the

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<v Speaker 1>prelude to negotiating a more direct licensing deal between the

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<v Speaker 1>two companies. That certainly will be one of the operative

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<v Speaker 1>moving pieces here. So Qualcom and its reply alleges that

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<v Speaker 1>Apple has had opportunities negotiate a direct license or set

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<v Speaker 1>of licenses with Qualcom, and that Apple has not previously

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<v Speaker 1>been interested in doing that kind of direct licensing. That's

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<v Speaker 1>a question of fact that the Court will need to

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<v Speaker 1>decide whether they the Court believes that that is in

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<v Speaker 1>fact the case. But certainly this may end up as

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<v Speaker 1>the first volley across the court to trigger a renegotiation

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<v Speaker 1>of this relationship. And that's something that courts sometimes do

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<v Speaker 1>in terms of handling complex litigation like this. Sometimes courts

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<v Speaker 1>say to the parties, look, we're going to pause things here.

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<v Speaker 1>You need to talk to each other about this and

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<v Speaker 1>uh come back when you've resolved this piece and more

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<v Speaker 1>that piece or uh try to work things out between yourselves,

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<v Speaker 1>and the Court will get involved if it needs to,

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<v Speaker 1>but to provide a nudge for a renegotiation of sorts

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<v Speaker 1>when the court feels that there's room for that kind

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<v Speaker 1>of a renegotiation. I want to thank you both for

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<v Speaker 1>being on Bloomberg Law. I'm sure we're going to be

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<v Speaker 1>coming back to you with more chapters in this a

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<v Speaker 1>long legal battle between Apple and Qualcom