Apple’s Sinister Plan To Squeeze Qualcomm IP Royalty Payments Was Hatched Years Ago

Earlier this week, Qualcomm and Apple settled their differences that arose over royalty payments, inking a multi-year deal for licensing and hardware distribution. But thanks to court documents that were presented on the opening day of the blockbuster trial between the two companies, we're learning that Apple's public comments on the worth of Qualcomm patents were in stark contrast to private comments. In addition, Apple seems to have instigated its plan to cut off Qualcomm royalty payments well before it even filed a lawsuit against its supplier.

In internal documents obtained by Qualcomm during discovery, a 2009 memo from an Apple accounting claimed that Qualcomm is "widely considered the owner of the strongest patent portfolio for essential and relevant patents for wireless standards." Furthermore, Apple SVP for Hardware, Johny Srouji, added in a 2015 email that "engineering wise, they have been the best."

Despite these acknowledgements, Apple wasn't content with the amount that it was forking over to Qualcomm in royalty payments (which for quite some time was pegged at $7.50 per device) and cooked up a plan to cut Qualcomm off at the knees even before its first lawsuit was filed. According to The Washington Post, an internal Apple documents dated June 2016 was circulated entitled "Qualcomm Royalty Reduction," which had this specific purpose goal in mind, "Reduce Apple’s net royalty to Qualcomm."

The language in the document made it clear that Apple was going to attack Qualcomm's lucrative royalty revenue stream and pinpointed key ways to "hurt Qualcomm financially" and "put Qualcomm's licensing model at risk."

Rather slyly, Apple didn't file its initial lawsuit against Qualcomm – which claimed that the company was using its dominant position as a modem supplier to extract hefty patent licensing fees -- until early 2017. The lawsuit came after Qualcomm had paid Apple billions as a result of a cooperative agreement that the two firms had previously signed.

Apple also took steps to undermine the value of Qualcomm's patents by citing how it was able to obtain patent licenses from companies like Huawei and Ericsson at a fraction of the cost. Apple lawyer Ruffin Cordell tried to pin down Qualcomm for exorbitant licensing fees by showing that it was able to purchase a horde of patents that were more than twice the size of those that it was on the hook for from Qualcomm, but they were priced at a fraction of the cost. 

“Does that make any sense? Is that fair and reasonable?" asked Cordell of the jury.

However, this was all part of a ploy by Apple outlined in the document in which it would "selectively filter" patents at an incredibly low price to provide "evidence as a comparable" to show Qualcomm in an unfavorable light. One could argue that Apple was able to score such an excellent deal on those other patents because none of them were as critical and pertinent to the operation of modern smartphones as the incredibly powerful patent war chest held by Qualcomm.

But for now, the bitter dispute between Apple and Qualcomm is over, and the former paid an undisclosed (and probably enormous) settlement to the latter. We may never know who truly got the better deal from this arrangement, but all signs so far are pointing towards Qualcomm, which saw its stock soar after the deal. Qualcomm's fortunes were also buoyed by Intel's decision to exit the 5G modem market (before ever releasing a production chip), leaving Qualcomm as the sole supplier of 5G modems for future iPhones.

In the end, consumers will be the ones that stand to benefit (at least performance wise) by the burying of the hatchet between these two companies. Qualcomm clearly has (in the past and today) superior modem hardware than the competition. In fact, in years past, Apple had to cripple the performance of iPhone 7 smartphones with Qualcomm modems so that they would perform the same as variants that included inferior Intel modems. Apple did this so that all iPhone 7 users would experience the same performance across wireless networks no matter what chip was inside their smartphones.

With Intel out of the game, Apple won't have to make that decision again as all of its 5G devices will be sporting Qualcomm 5G hardware.