Five weeks ago, we reported how Qualcomm have powered one billion Android devices and have become one of the largest largest system-on-chip manufacturers for our beloved ‘phones and tablets. However, Qualcomm don’t just sell their processor packages but also derive considerable income from licence fees. In their 2012 / 2013 results, Qualcomm showed that around one third of their income was from patent licence fees. Half of this was from China: essentially, sixteen percent of their revenue comes from other manufacturer’s device sales. Qualcomm charge a fee of between 3% to 6% for manufacturers to use its patents in addition to selling their chipsets, but the exact amount is not disclosed. However, what makes this sixteen percent especially important is that the Chinese market is rapidly growing.
Qualcomm are in hot water with the Chinese antitrust authorities after a ten month cat and mouse game. The verdict hasn’t been released but it’s expected to be announced next month. Tencent Tech has learnt that it is expected to include fines, patent fee adjustments and the elimination of non-exclusive and non-sublicense clauses in licensing agreements. Fines may financially hurt Qualcomm in the short term; we’ve seen rumors of a billion dollar fine! Qualcomm made $23 billion last year; a billion here or there is small beans! A reduction in payment licence fees will cause a longer term pain and benefit the Chinese ‘phone manufacturers. It is, however, unclear what the impact of removing the non-exclusive and non-sublicense clauses would be. Let me explain what this means, although it is not an easy, clean definition! These clauses cover sharing of a license; it means that manufacturers who own the patent on additional aspects of the device are unable to charge other businesses a fee if the patent is related to the Qualcomm technology. This greatly simplifies the licensing agreement: sign with Qualcomm and build your device!
This has stifled development of the Chinese industry: Secretary-General of the Mobile China Alliance, Wang Yanhui, explained that, “through this retention of patent control, Qualcomm is able to integrate all related patents and avoid disputes over patent rights. This makes Qualcomm chips even more attractive.” In other words, Qualcomm provide a nice, easy, clean fit with no messy additional negotiations. This, in the eyes of the Chinese authorities, is an anti-competitive behaviour: handset manufacturers will license Qualcomm technology and be done with it. If these clauses are invalidated, this would encourage domestic (Chinese) ‘phone manufacturers to research and develop core technology patents. We’ve already seen some great handsets from China and this development could be good news for the industry, but would complicate matters. For the Chinese manufacturers, it may mean that several businesses will need to rapidly develop their own technologies and this would be a significant cash drain. One might argue that not investing in core technologies is a short term business strategy and perhaps we’ll see some shake ups in the Chinese ‘phone market.
For Qualcomm, ultimately the business might be forced to establish cross-licensing agreements with other manufacturers with their own patents on core technology. Qualcomm may lower licensing fees based on the number of patents, but in the longer term and without these advantageous clauses, Qualcomm’s profits might take a knock. This must be offset: a smaller share of a rapidly growing market may well be worth more of a larger share of a stagnant market. China is critical to Qualcomm’s medium term business development and into powering the next billion Android devices.