Apple vs. Qualcomm Litigation and the Nuclear Option

    I’m fascinated by litigation, largely because much of it isn’t necessary and occurs because one side or the other is delusional. Two sides go in, both believing they can’t lose, and one side comes out the winner. Since you rarely actually go to court, the entire effort becomes an expensive form of negotiation, with negotiators (attorneys) whose financial interest is tied to prolonging an incredibly expensive process. Or, put differently, litigation like this results because one of two negotiating teams didn’t do their job and you don’t know which until a judgement or settlement. In short, at least one of the teams was unreasonable.

    The dispute that has caught my attention recently is between Apple and Qualcomm. The cause of this appears to be an effort by Apple to pressure Qualcomm into providing a unique discount, largely because Apple has run into an innovation wall, is under increased competition from firms like Samsung, and has moved to a massive cost reduction strategy. (I’ve never known this to end well ,as it causes suppliers to create unreliable components and outright fail.)

    These two companies are heavily interdependent, but Apple appears to need Qualcomm more than Qualcomm needs Apple. My read is that, while Apple is Qualcomm’s largest customer, Qualcomm also gets revenue from all of Apple’s competitors. Were Apple to stop buying, Qualcomm would initially be hurt but would survive. But Apple has become dependent on its iPhone revenue and, without Qualcomm, that product wouldn’t be competitive (I’ll explain this further later), with potentially deadly impact on Apple’s revenue. Qualcomm has diversity in licensees but Apple doesn’t have the same diversity in suppliers because Qualcomm’s IP is critical to its smartphone. I doubt Apple agrees, which is why it started this war. At the heart of this is the fact that Apple’s perception of reality is very different from what it actually is.

    I’ll break this down as I see it. (You can read the latest filing here.)

    Qualcomm’s Problem

    We think, and I expect so does Apple, that Qualcomm is in the parts business. That should be a surprise because the only big campaign it has done had to do with its Snapdragon processor. It’s actually far more powerful as a modem vendor, but both of those are parts and there are clearly others that can sell processors and modems. But in reality, Qualcomm isn’t in the parts business, it’s in the IP (intellectual property) business. It makes its money from licensing technology, without which your smartphone, and the iPhone, would be a brick. If Apple could pull Qualcomm’s IP out of its iPhones, there wouldn’t be a case. Apple would simply do that.

    But humans as a group just don’t seem to get the whole IP thing. Most companies don’t license their IP (though they will defend it), and while we license IP individually (for instance, we don’t own the music, movies or software, we “buy” when license it), we often violate those licenses (pirating media and software) because we seem to think we actually own it, thus often unintentionally committing crimes. No one outside of Qualcomm really sees the company for what it is nor understands that the smartphone wouldn’t exist without Qualcomm’s IP inside it, even if it doesn’t have Qualcomm’s processor, radio, modem, or graphics technology.

    Qualcomm’s other problem is that while it will protect its IP aggressively, it isn’t scary. It doesn’t even have a CMO to fight fights like this in the public domain which, against a marketing driven company like Apple, makes it look incredibly weak and vulnerable to just such an attack.  A lot of people still think of Apple the way it was under Steve Jobs and that was one scary company. Jobs made Donald Trump look like a wimp. But…

    Apple’s Problem

    Apple actually needs Qualcomm more than Qualcomm needs it. I don’t think Apple sees this at all. The biggest example of this should be when the new iPhone 8 runs against the new Samsung S8 in market. Apple has been crippling the Qualcomm-equipped phones so that those that test the phones don’t realize that iPhones, which look the same but use another vendor’s technology, are significantly inferior. It got away with this largely because the phone that most showcased this from Samsung, the Note 7, had a “burst into flames” problem that killed any comparisons but that won’t be the case (we hope for Samsung’s benefit) when the iPhone 8 launches. This practice of using inferior parts and crippled technology was part of Apple’s strategy to showcase, by creating a false argument, that it didn’t really need Qualcomm’s better technology, and it could backfire badly.

    In addition, according to the Qualcomm filing, Apple used a powerful argument that promised to do Qualcomm damage if Qualcomm didn’t capitulate. And then it went ahead and did most of what it had threatened to do, removing that behavior as a bargaining chip. For instance, if I tell you to do something for me or I’ll key your car, and then I key your car, I no longer have that as leverage. The two things Apple did were bad-mouth Qualcomm to regulators and attempt to get other licensees to organize against Qualcomm.

    Now the one threat it hasn’t executed yet is to turn its entire marketing engine into destroying Qualcomm’s brand, but given that it didn’t do that to Google, which effectively stole the entire iPhone idea (and which Jobs wanted destroyed), and it would pull from its ability to promote its own products, I think, and likely Qualcomm thinks, that is an empty threat (though, were I Qualcomm, I’d have a CMO staffed and funded to counter in case that assumption was wrong). I also think that Qualcomm knows this isn’t Jobs’ Apple and Tim Cook is nowhere near as scary, so the typical fear factor of running against the company won’t kick in. So, Apple doesn’t even have the base leverage it thinks it has.

    Finally, I think Apple is basing its strategy not just on a false belief as to what business the company is in but the firm’s willingness to fight. Over the last several years, there has been a huge influx of Intel employees into Qualcomm and, unlike the old Qualcomm, which was pretty passive, Intel has a reputation for being far more willing to fight to the death. Given that Apple’s chief counsel is also out of Intel, rather than backing down, Qualcomm could choose the nuclear option of denying Apple Qualcomm’s IP, which could have a massive adverse impact on Apple’s revenue long term and on its valuation short term.

    Wrapping Up: Fake News

    Winning a case like this comes down to three things: the believability of the evidence presented, how well each side presents the reality that supports them, and who is the most delusional as to what the dispute actually is. You’ll note I didn’t say who is right and who is wrong. That is a misconception of how courts actually work.

    Apple does have an incredibly strong legal team and I think it can argue its case compellingly, but I don’t think it has a firm grasp on the reality of its own risk or how Qualcomm is likely to respond. That suggests the foundation for taking this path is false and thus its anticipated outcome is unlikely to occur. That doesn’t mean it can’t hurt Qualcomm, only that it may find that it will be hurt far more than it now anticipates and that might not only cause this action to fail but make a pre-trial settlement impossible.

    One other item: While the heart of this appears to be an ill-conceived effort to force Qualcomm to give Apple a unique discount and competitive advantage, that now seems unachievable due to the public nature of this dispute. Instead, the best-case scenario would be a crippled Qualcomm and generically lower prices for all Qualcomm licensees, which would lower Qualcomm’s ability to innovate and thus remove a lot of the reason for folks to buy new smartphones semi-annually. In short, on this path, it may not only not gain a unique advantage but could significantly reduce churn, which would put pressure on prices and massively reduce annual revenues. And that is the best case.

    This is why I titled this the “nuclear option,” because while both sides clearly lose as a result of this going to litigation, I think this resulted because one side didn’t realistically assess the likely outcome of just pushing the litigation button. Bad assumptions, or fake news, can lead to some really bad decisions, particularly when it comes to litigation.

    Rob Enderle is President and Principal Analyst of the Enderle Group, a forward-looking emerging technology advisory firm.  With over 30 years’ experience in emerging technologies, he has provided regional and global companies with guidance in how to better target customer needs; create new business opportunities; anticipate technology changes; select vendors and products; and present their products in the best possible light. Rob covers the technology industry broadly. Before founding the Enderle Group, Rob was the Senior Research Fellow for Forrester Research and the Giga Information Group, and held senior positions at IBM and ROLM. Follow Rob on Twitter @enderle, on Facebook and on Google+

    Rob Enderle
    Rob Enderle
    As President and Principal Analyst of the Enderle Group, Rob provides regional and global companies with guidance in how to create credible dialogue with the market, target customer needs, create new business opportunities, anticipate technology changes, select vendors and products, and practice zero dollar marketing. For over 20 years Rob has worked for and with companies like Microsoft, HP, IBM, Dell, Toshiba, Gateway, Sony, USAA, Texas Instruments, AMD, Intel, Credit Suisse First Boston, ROLM, and Siemens.

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