Apple and Qualcomm settle licensing dispute amid trial's opening arguments
Consumers are the biggest winners, with Apple's iPhone likely to get 5G sooner than expected. Late Tuesday, Apple supplier Intel said it's exiting the 5G smartphone modem business.
Apple and Qualcomm have been battling over licensing fees.
Apple and Qualcomm have settled their patent licensing battle, ending a two-year dispute the day after their trial kicked off in San Diego.
The two sides announced the surprise agreement through a joint press release Tuesday at the same time lawyers were presenting their opening arguments in a courthouse in Southern California. Apple and its contract manufacturers had given their statements, and Qualcomm's head lawyer had nearly finished his remarks when the courtroom buzzed with the unexpected news.
The CEOs of both companies -- Apple's Tim Cook and Qualcomm's Steve Mollenkopf -- were expected to testify. As recently as January, Cook said the iPhone maker wasn't in talks with Qualcomm.
The settlement marks a big win for Qualcomm, which could have been forced to change its entire business model had it lost to Apple. The agreement is also a victory for consumers, who will once again have access to fast Qualcomm modems in their iPhones. That likely includes Qualcomm's 5G modems as soon as 2020.
Later Tuesday, Qualcomm rival Intel said it would exit the 5G smartphone modem business. An Intel spokesman declined to say if Intel had planned to exit the business before the settlement or whether it was because of the new agreement between Apple and Qualcomm. If the decision came before the settlement, it would've forced Apple to make some concessions to Qualcomm.
As part of the agreement, Apple will make a payment to Qualcomm for an undisclosed sum. The licensing pact, taking effect April 1, 2019, will last for six years and includes a two-year extension option. Apple and Qualcomm also signed a multiyear chipset supply agreement, which means Qualcomm modems could soon make their way back into iPhones.
As a result of the settlement, all worldwide litigation will be dismissed, including claims involving Apple's contract manufacturers. The companies were battling in courts in China, Germany and other regions.
Apple and Qualcomm declined to comment beyond the press release.
The settlement marks a sudden and surprise ending to the two-year battle. Apple in January 2017 had accused Qualcomm of anticompetitive practices that have raised chip prices, restricted competition and hurt customer choice. Qualcomm had countered that the iPhone wouldn't be possible without its technology and it deserved to be paid for its innovation.
"I do think this was last minute," Creative Strategies analyst Carolina Milanesi said. Neither side could have known this early that they would be defeated, she said.
Consumers win
The settlement is a boon for iPhone buyers. Apple and Qualcomm previously were close partners, with Qualcomm supplying high-end modems for iPhones. None of its rivals in the mobile chip business -- like Intel -- could match Qualcomm's processor connection speeds, and it's currently the only company that makes 5G modems to sell to third-party handset makers. (Samsung and Huawei build 5G chips but only use them in their own devices.)
Starting in 2016, Apple used Qualcomm modems in about half of its iPhones but switched to Intel for the rest. That continued in 2017, but because of the licensing dispute, Apple's latest iPhones, the XS, XS Max and XR, use only Intel chips. It was believed there wouldn't be a 5G iPhone until 2020 or even 2021, whenever Intel's modems were ready. That would put Apple a year or two behind Android vendors, forcing iPhone users to wait for a device that taps into the ultra-fast network. It's expected that every major flagship Android phone by the end of this year will have 5G.
Now that Apple and Qualcomm have settled their disputes and have signed a multiyear chipset supply agreement, it's likely 5G will be coming to iPhones sooner than thought. A report from Nikkei said 2020 iPhones will have Qualcomm's 5G modem. The settlement could also indicate that Apple didn't have confidence in Intel's ability to supply 5G modems for iPhones coming in 2020. An analyst earlier this month said he doesn't think Intel's chips will be ready for iPhones until 2021. Apple is believed to be working on its own modem designs.
It's unclear who caved and sought the settlement. But analysts speculate that it may have been Apple. That speculation gained further weight when Intel said Tuesday that it would stop 5G smartphone modem development.
"I think Apple threw in the towel," Endpoint Technologies analyst Roger Kay said. "The lever was that Apple had no viable 5G strategy without Qualcomm, and missing the window would have been deleterious. Intel was an unreliable supplier. Huawei was a nonstarter. Apple couldn't wait until 2020 or 2021."
Creative Strategies' Milanesi agreed.
"This probably signals Intel was going to be late and too late," she said. "It also could signal Apple couldn't do it on its own in time."
Intel, meanwhile, said in a press release that it plans to exit the 5G smartphone modem business. It had been working on a processor for Apple. Its departure from that market again leaves Apple with Qualcomm as its lone modem supplier.
"The company will continue to meet current customer commitments for its existing 4G smartphone modem product line, but does not expect to launch 5G modem products in the smartphone space, including those originally planned for launches in 2020," Intel said. Its only modem customer is Apple.
For Apple, it's likely too late to use Qualcomm chips in its iPhones coming later this year, but it could have them in its 2020 iPhones.
Clearing up Qualcomm uncertainty
The settlement resolves the uncertainty surrounding Qualcomm over the past couple of years. The company makes a significant amount of money from licensing its patents, and its entire business model was threatened by Apple's lawsuit. Every major mobile company was closely watching the case, which could have affected how much they paid Qualcomm for licensing.
"This was a major win for Qualcomm as fears of a loss in the courts was a major cloud over the name with Apple going after this IP issue full steam ahead," Wedbush analyst Daniel Ives noted.
Along with fighting Apple, Qualcomm also has battled Huawei over licensing terms. In January, Qualcomm said the two companies had reached a short-term pact. Now that the Apple dispute has settled, Qualcomm could soon reach a longer-term licensing agreement with Huawei.
While it has resolved its problems with Apple and its contract manufacturers, a judge still has to rule in the Federal Trade Commission's case against Qualcomm. The US government had accused Qualcomm of operating a monopoly, requiring exclusive agreements and charging excessive licensing fees for its technology. The two met in a San Jose, California, court in January, and Apple played a major role in the case.
Qualcomm and the FTC have held settlement talks. It's unclear what impact the Apple agreement will have on that case, but it could cause the companies to reach a deal before the judge issues her verdict.
Qualcomm shares soared 23% to close Tuesday at $70.45. Apple shares were little changed at $199.25.
Qualcomm said it now expects to report an additional "incremental" $2 per share in earnings as product shipments ramp up. It didn't specify the timeframe for the money but will report earnings May 1.
Battle history
Apple, which initially filed suit against Qualcomm in January 2017, argued it essentially paid Qualcomm twice, first by purchasing processors and then by paying royalty fees. The Cupertino, California, company said it should pay fees based only on the cost of the wireless chip inside its iPhones. Apple partners Foxconn and Pegatron, which assemble its devices, agreed and joined the lawsuit. Qualcomm countered that it isn't a monopoly and said its technology is more than modems so it should be compensated based on the selling price of the phone itself.
Tens of billions of dollars were at stake in the case. Apple's manufacturing partners wanted a refund of $9 billion for allegedly overpaying royalties since 2013. Under antitrust law, that amount could be tripled. Qualcomm wanted damages of its own for breach of contract, though it hasn't detailed the amount. An even bigger concern for Qualcomm was whether it'd have to change its entire business model, collecting far lower royalties based on the price of its chips rather than the phones they're in.
The five-week, $27 billion trial over licensing kicked off Monday with jury selection and continued Tuesday morning with opening statements. The jury trial was being argued before US District Court Judge Gonzalo P. Curiel of the Southern District of California. The outcome could have affected what wireless networks your phone taps into.
"This development allows these tech companies to get back to business, and it will permit you to return to your everyday affairs," Curiel said to the jury as he thanked them for their service and dismissed them at about 12:15 p.m. PT.
A handful of jurors gathered outside the courtroom after being dismissed said they hadn't yet formed an opinion in the case. Several expressed disappointment the trial ended so quickly.
Originally published April 16, 12:09 p.m. PT
Updated continuously until 3:15 p.m. PT with new details.
Update at 5:15 p.m. PT: Adds information about Intel exiting 5G smartphone modems