A long simmering battle between two tech giants, Apple and Qualcomm, burst out in the open when Apple sued Qualcomm for $1 billion and other demands Friday.
But even though Apple is asking for $1 billion that it says Qualcomm owes it because of agreements between the two companies, Bernstein analysts Stacy Rasgon and Tony Sacconaghi believe the money Apple is seeking is a "sideshow."
Instead, Apple is seeking a "direct assault on Qualcomm's basic licensing business model," the analysts say.
Basically, Qualcomm not only sells chips that let devices connect to wireless networks, but it also licenses the intellectual property and patents that underpin that technology.
Both Apple and the Federal Trade Commission, which also accused Qualcomm of monopolizing its part of the chip market, say that Qualcomm is "double-dipping" on charging for its technology, and has been for the better part of the past decade.
What Apple wants to do is reduce the amount of royalties and fees it pays Qualcomm. The analysts estimate Apple may have been paying Qualcomm $15 per phone in licensing fees.
But more importantly, Apple wants to change how Qualcomm determines what to indirectly charge Apple, write the Bernstein analysts:
"Similar to recent regulatory cases, Apple is alleging that Qualcomm is using their dominant chipset positioning to extort higher levels of royalties (including refusing to sign supply agreements and conditioning rebates on exclusivity).
More worrisome, they are directly attacking the structure that underpins Qualcomm's business."
Apple bought Qualcomm chips for its iPhones and iPads for years, partially due to an exclusivity agreement, but that started to change last year with the iPhone 7. Apple started to use Intel modem chips in addition to Qualcomm's in iPhones.
The Bernstein analysts believe this suit suggests that Apple may drop Qualcomm as a supplier completely. "The filing also doesn’t read well for the future of Qualcomm's chipset business with Apple. It alleges that Apple has been willing, and able to use competing solutions for years," the analysts wrote.
The analysts are bearish on Qualcomm, lowering their target price to $65 from $80 ahead of the company reporting earnings later this week. "But we have a hard time spinning a war with [Apple, Qualcomm's] largest customer as anything but a clear negative," the analysts wrote.
"Apple has intentionally mischaracterized our agreements and negotiations, as well as the enormity and value of the technology we have invented, contributed and shared with all mobile device makers through our licensing program," Qualcomm General Counsel Don Rosenberg said in a statement last week.
"All of this is, simply put, an all-out assault on Qualcomm's licensing business structure," the analysts wrote. "The gloves appear to be off this time around."
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