The Pain Is Only the Beginning for Qualcomm, Inc. (QCOM) Stock

Qualcomm's monopoly is threatened by both Apple and governments

Qualcomm, Inc. (NASDAQ:QCOM) fell 13% in early trade on Monday after Apple Inc. (NASDAQ:AAPL), its largest customer, dropped a large legal bomb on it this past Friday.

The Pain Is Only the Beginning for Qualcomm, Inc. (QCOM) Stock
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The lawsuit, filed in southern California late on Jan. 20, alleges that Qualcomm withheld $1 billion in rebates in retaliation for Apple cooperating with Korean efforts to open the radio chip market.

The lawsuit follows a Federal Trade Commission (FTC) suit charging Qualcomm with cutting its prices to Apple in exchange for exclusivity, then using that deal against other cell phone companies.

The suits are direct assaults on Qualcomm’s business model, which is to license patents essential for getting into the mobile phone business and use those agreements to create a virtual monopoly in the chips needed for the phones to work.

Governments Weigh In

In December, for instance, Korean regulators fined Qualcomm $864 million over its patent licensing practices.

Korea acted after Samsung Electronics Co. Ltd. (OTCMKTS:SSNLF), a major chip supplier, backed down in its ongoing dispute with Qualcomm, which has tied its patent rights to its production of chips for decades. Samsung returned to Qualcomm as a supplier of modem chips for the Galaxy 7 after making its own chips for the Galaxy 6.

Earlier, China had gotten Qualcomm to accept a $975 million fine and to adjust business practices after a multi-year dispute concerning its licensing practices.

At the time, investors took this to be an all-clear concerning Qualcomm’s business practices, with the stock rising almost 20% in a month and hitting a high of $70 in November, when Qualcomm announced net income of $1.6 billion on revenues of $6.184 billion, meaning $1 in each $4 brought into the company was reaching the net income line. Those margins had been under pressure in 2015, during the worst of the company’s fight with China.

Early this month it seemed the China deal was opening up vast new markets for Qualcomm, after it signed patent deals with other Chinese cellphone makers, most recently with Meizu and Gionee. 

Now it would seem that the China agreement meant Qualcomm’s legal problems were just starting, which is why QCOM stock is under pressure.

Monopoly Rights Threatened

In addition to the Apple and Korean actions, European regulators have their own charges pending, claiming that Qualcomm is using patents essential to industry standards to maintain an illegal monopoly over the production and sale of the required chips.

Those charges could imperil Qualcomm’s pending purchase of NXP Semiconductors NV (NASDAQ:NXPI), a Dutch company, announced in late October at a price then described as being $110/share. As of today, NXPI was trading at $96.31/share.

What’s of greatest concern in the Apple suit is that Qualcomm was Apple’s sole chip supplier until last year, when Intel Corporation (NASDAQ:INTC) got contracts to supply half those needed for the iPhone 7. It was after that action that, Apple alleges, Qualcomm took actions against it; actions it now says were illegal.

While Qualcomm does make substantial profits from making and selling its Snapdragon line of modem chips, most of its profits come from licensing basic technologies essential to entry into the business, such as 3G and 4G, to phone makers.

Standards Essential Patents (SEPs), patents that are essential to a market operating are supposed to be licensed under what are called Fair, Reasonable and Non-Discriminatory terms (FRAND). But what is fair, what is reasonable and what is non-discriminatory can be subject to dispute, and that’s what the war with Qualcomm is about.

With governments weighing-in alongside its biggest customer, a deal that Qualcomm thought meant the end of its legal troubles may turn out to have been just the beginning of them. Thus, the stock is falling. Qualcomm’s existence as a major supplier is not threatened, but its monopoly profits may be.

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 [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in INTC and AAPL.


Article printed from InvestorPlace Media, https://investorplace.com/2017/01/qualcomm-inc-qcom-stock-apple-cellphone-patents/.

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