In 2005, Apple contacted Qualcomm as a potential supplier of modem chips in its first iPhone. Qualcomm's reaction was unusual: a letter asking Apple to sign a patent license agreement before Qualcomm even thought about delivering chips.
"I've been in the industry for 20 years, I've never seen such a letter," said Tony Blevins, Apple's vice president of procurement.
Most suppliers are eager to talk to new customers ̵
Blevins commented when he testified against Qualcomm in the Federal Trade Commission's blockbuster antitrust case earlier this year. The FTC filed this lawsuit in 2017, in part at the insistence of Apple, which had chafed under the supremacy of Qualcomm's radio chips for a decade.
Last week, a California federal judge provided the FTC and Apple with sweet justification. In a devastating 233-page statement [PDF]Judge Lucy Koh decided that Qualcomm's aggressive license tactics violated US antitrust laws.
I read every word of Judge Koh's book-long statement, which portrays Qualcomm as a reckless monopolist. The legal document describes a nearly 20-year history of the overload of smart phone manufacturers for mobile communication chips. Qualcomm has structured its contracts with smart phone manufacturers to make it difficult for other chip makers to question the dominance of Qualcomm. Customers who did not follow Qualcomm's unilateral conditions threatened with a sudden and crippling loss of access to modem chips.
"Qualcomm has the monopoly power for certain cell phone chips and uses that monopoly power to charge individuals too much money," says Charles Duan, patent expert at the Market R Street Institute. "Instead of just demanding more for the chips themselves, people had to buy a patent license and pay an overpayment for the patent license."
Now all this dominance could come to an end. In their decision, Koh Qualcomm ordered customers no longer to threaten with chip cutoffs. Qualcomm now needs to renegotiate all of its agreements with customers and license its patents to competitors on reasonable terms. And if Koh's decision survives the appeal process, it could, for the first time in this century, create a truly competitive wireless chip market.
Qualcomm's Perfect Winning Machine
Different mobile networks use different wireless networking standards and these standards change every few years. For the past 20 years, Qualcomm has had a head start – and in some cases a stranglehold – on chips that support key mobile standards. If a smartphone company wanted to sell its goods around the world, it had no choice but to do business with Qualcomm.
For example, at the beginning of the 2010s, Qualcomm had a big lead over the chips for Verizon and Verizon's favored Sprint CDMA standards in the US and several other carriers overseas. Qualcomm Chief Technology Officer James Thompson bluntly told CEO Steve Mollenkopf in an internal email in 2014 how the company's leverage impacted Apple.
"We are today the only provider that can enable a global market launch," Thompson wrote. "In fact, without us, they would lose much of North America, Japan, and China, which would really hurt them."
It was not just Apple. BlackBerry was in a similar situation around 2010. In a statement, BlackBerry Manager John Grubbs said that without access to Qualcomm's chips, "30 percent of our device sales would have gone overnight if we had not delivered any CDMA devices."  Over the past two decades, Qualcomm has signed contracts with most of the world's leading handset manufacturers, including LG, Sony, Samsung, Huawei, Motorola, Lenovo, ZTE and Nokia. These deals gave Leiccomm tremendous leverage over these companies – leveraging Qualcomm's royalty for patents that far outstrip those of other companies with similar patent portfolios.
Qualcomm's patents for patents have been calculated on the basis of the total value of the phone, not just the value of the chips that embody Qualcomm's patented technology. This effectively meant that Qualcomm received a cut across all the components of a smartphone, most of which had nothing to do with Qualcomm's patents.
"Qualcomm charges us more than anyone else," said Apple executive Jeff Williams. "We have never seen such a high license fee tied to another IP licensed by us," said Todd Madderom of Motorola.
Internal Qualcomm documents supported these allegations. One showed that Qualcomm's patent licensing in 2016 brought in $ 7.7 billion, more than the combined patent licensing revenues of 12 other companies with significant patent portfolios.
No license, no chips
unusual negotiating tactic called "no license, no chips." Nobody was able to buy Qualcomm's mobile communications chips without first signing a license to Qualcomm's patent portfolio. And the conditions for these patent agreements were heavily tilted in favor of Qualcomm.
After a phone manufacturer signed its first contract with Qualcomm, Qualcomm gained even more influence. Qualcomm had the right to unilaterally terminate the chip supply of a smartphone manufacturer after the expiration of the patent license agreement.
"If we can not get the modem, we can not deliver the handset," said Todd Madderom, Motorola's executive. "Developing a replacement solution takes many months, if there is any viable solution on the market."
This made Qualcomm's customers extremely vulnerable just before the expiration of a patent license agreement. If a customer seeks to negotiate more favorable terms – not to mention the formal challenge to Qualcomm's claims in court – Qualcomm could disrupt the company's chip supply abruptly.
"We have stated that we are considering terminating the license," Lenovo CEO Ira Blumberg said during the trial. A Qualcomm senior executive "was very calm and said we should feel free to do so, but if we do that we would not be able to buy any Qualcomm chips."
"You see months and months, if not a year or more, without care," Blumberg said in a statement. That would be "almost deadly to almost every business in this business, if not deadly."
Judge Koh noted that Qualcomm continued to use this tactic over the last 20 years: Qualcomm threatened to disrupt the supply of Samsung chips. In 2001, LG's chip was introduced in 2004, and the chip came from Sony and ZTE in 2012, the chip from Huawei and Lenovo delivered in 2013 and the chip from Motorola in 2015.
Qualcomm's Chip deals ousted the competition
An obvious question is how Qualcomm retained its stranglehold over the supply of modem chips. Partly, Qualcomm employed talented engineers and spent billions of dollars to keep its chips up to date.
Qualcomm also strengthened its dominant position by selling systems on a chip that included a CPU and other functions as well as modem functions. This resulted in significant cost and energy savings, and it was difficult for smaller chip manufacturers to keep up.
In addition to these technical reasons, Qualcomm has also entered into agreements with customers that make it difficult for other companies to enter the mobile modem market.
Qualcomm's First Weapon Against Competitors: Patent licensing requirements that require customers to pay a license fee for each phone they sell – not just to phones that contain Qualcomm's wireless chips. This gave Qualcomm a competitive advantage over other chip manufacturers. If another chip maker tried to undercut the price of Qualcomm's chips, Qualcomm could easily afford to cut prices on its own chips, knowing that the customer would still be paying Qualcomm a high patent license fee for each phone.
Judge Koh draws a direct payment Parallel to the licensing behavior that brought Microsoft into legal trouble in the 1990s. Microsoft would offer PC manufacturers a discount if they agreed to pay Microsoft a license fee for each PC sold, regardless of whether the PC was shipped with a copy of MS-DOS or not. This effectively meant that a PC maker would have to pay double when delivering a PC with a non-Microsoft operating system. In 1999, a federal judge ruled that a judicial panel could conclude that this agreement violated antitrust laws by making it difficult for Microsoft's competitors to enter the market.
Some Qualcomm licensing agreements contained provisions that explicitly discouraged companies from using non-antitrust laws. Qualcomm radio chips. Qualcomm would offer mobile phone manufacturers discounts on every Qualcomm chip they sell. However, cell phone manufacturers would only receive these rebates if they used Qualcomm chips for at least 85 percent – or in some cases even 100 percent – of the phones they sell, ensuring that Apple uses only the Qualcomm wireless chips. Under the agreement, Qualcomm paid Apple hundreds of millions of dollars in discounts and marketing incentives between 2013 and 2016. However, Qualcomm would stop these payments if Apple began selling an iPhone or iPad with a non-Qualcomm cellular chip.
Apple Some of this money even had to be repaid, if non-Qualcomm mobile chips were used before February 2016. An internal Qualcomm email estimated that Apple would owe $ 645 million if it launched an iPhone in 2015 with a non-Qualcomm mobile chip.  Qualcomm has signed similar contracts with other major mobile phone manufacturers. In 2003, Qualcomm signed a 10-year contract that granted Huawei a reduced royalty of 2.65 percent when Huawei purchased 100 percent of its Qualcomm China CDMA chips. If Huawei bought non-Qualcomm-based CDMA chips, the royalty increased to five percent or more.
A deal in 2004 granted LG discounts when LG bought at least 85 percent of its Qualcomm CDMA chips. The agreement also stipulated that LG had to pay a higher patent fee if it sold phones with non-Qualcomm mobile chips. A 2018 contract grants incentive payments to Samsung if it buys 100 percent of Qualcomm's "premium" chips – as well as lower thresholds (the exact percentages are reduced) for lower chips.