Patent wars are harmful to corporations and other growing things.
Apple Inc. (NASDAQ:AAPL) has now gone to patent war with Qualcomm, Inc. (NASDAQ:QCOM), knocking 13% off the modem chip maker’s market cap in less than a week.
The war has now extended to China, where two Apple suits are seeking $145 million in damages (about 1 billion Yuan) over how Qualcomm licenses patents there.
This being early in the war, the response of Qualcomm CEO Steve Mollenkopf is “bring it on.” But, he hasn’t seen the legal bills, yet. Shareholders, however, seem to have a clue about what they might be, and apparently feel they will be huge.
Apple has yet to be hurt by any of this. AAPL stock price is up about 1.7% since the court papers were filed. But, the march to its record high of $132.54 per share, achieved in May 2015, may now be disrupted.
What the War Is About
Qualcomm controls standards essential patents (SEPs), including those for the Code Division Multiple Access (CDMA) system used by carriers such as Verizon Communications Inc. (NYSE:VZ). This means that every CDMA phone chip maker, and CDMA base station maker, is paying license fees to Qualcomm for using those patents. Apple began doing so in 2011 when it opened the iPhone to Verizon’s network.
Qualcomm used its CDMA patents to become the sole supplier of modem chips for the iPhone. It liked this position and refused to join industry-wide agreements covering Fair, Reasonable and Non-Discriminatory (FRAND) access to its patents, giving QCOM the power to constrict Apple’s supply of modem chips.
Apple eventually found another supplier for the chips, Intel Corporation (NASDAQ:INTC), while still paying license fees to Qualcomm.
Qualcomm, meanwhile, won an expensive fight with China over its patent rights, and is fighting with South Korea after getting Samsung Electronics (OTCMKTS:SSNLF) to back down and use Qualcomm gear in its phones.
The short version is that Qualcomm uses its patents to control the global phone market and Apple doesn’t like that.
The Risk to Apple
While the market has discounted the risks in these fights to Qualcomm, it has not considered the potential impact on Apple. Credit the $642 billion market cap of Apple, against Qualcomm’s $76 billion.
There is also a whisper number on Apple earnings, due out January 31, of $77.04 billion in revenue and profit of $3.23 per share. Combine that with over $200 billion in cash and the market may be anticipating a raise in the Apple dividend, currently 57 cents per share. AAPL stock price is still floating on Christmas.
But, the risks in a patent war are real. Intel had to turn itself inside-out to make those iPhone modem chips. Another generation of phones and networks is coming, and Qualcomm will have patents to fight with there, too.
Apple has already suffered, the company claimed in court, losing a $1 billion rebate it says Qualcomm owed it after AAPL helped a South Korean investigation into Qualcomm’s business practices, one that resulted in South Korea imposing $864 million in fines.
So far, Qualcomm has won in China and it has won against Samsung, and Apple’s legal arguments don’t scare it. If Korea can get Qualcomm to pay the fine, Samsung may feel emboldened, but SSNLF is in disarray and may not be in a position to fight Qualcomm any time soon. Apple has taken up its sword.
Given Apple’s market size, the cost of lawyers to fight Qualcomm business practices may appear to be a rounding error, but this is going to be a nasty and costly fight. Apple’s autonomy in its supply decisions is at stake, as is Qualcomm’s control over the market.
The market has yet to discount Apple stock over the costs of this war, but I suspect that will happen soon. Probably right after earnings.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in INTC and AAPL.
