Record fine to have little impact on Qualcomm

Smartphone firms may gain from chip giant's decision to reduce patent licensing charges

Though Qualcomm Inc has agreed to pay a record fine of about 6.08 billion yuan ($975 million) for antitrust violations, the move is likely to have little impact on the United States-based chipmaker's revenue from China, industry experts said on Tuesday.

Instead, the lower patent fees will help grow the chipmaker's client base and boost earnings in the world's largest smartphone hub.

The chip giant is also expected to lower royalties on third-generation devices to 5 percent and to 3.5 percent for some fourth-generation devices. The royalty base was earlier set at 65 percent of the net selling price of the devices, and in most cases Qualcomm charged Chinese 4G devices makers around 5 percent.

Although Qualcomm has lowered royalties, it will still collect patent fees based on the whole price of the device, a significantly higher valuation method than charging the fees based on different models of the device.

Nicole Peng, research director at Canalys China, a market research firm, said the two categories in which Qualcomm plans to lower the royalty rates are those with products at low price points and hence would not have a significant impact on overall revenue.

"We expect these two categories to account for less than 40 percent of the total 4G device shipments this year and even less in the subsequent years," Peng said.

The fastest business driver for Qualcomm's 4G business are the devices using the TD-LTE, a technology supported by China Mobile Ltd, the country's largest telecom carrier and a number of other State-owned telecom equipment makers. The TD-LTE technology also supports the biggest 4G network in China.

"Qualcomm is receiving most of its license revenue from TD-LTE devices and these are expected to see rapid growth in the coming years," she said. The San Diego, California-based company did not disclose how it plans to charge royalties for TD-LTE devices.

Bryan Wang, principal analyst and country manager of Forrester Research Inc, said: "I think in general Qualcomm will actually benefit from this settlement. More local phone makers will partner with Qualcomm in the future as they try to tap into the international market.

"Qualcomm's advantage in cross licensing will help Chinese vendors go overseas without being trapped in patent lawsuits."

Derek Aberle, president of Qualcomm, said because the National Development and Reform Commission's investigation has concluded, the company's licensing business is now "well positioned" to fully participate in the country's rapidly accelerating adoption of the 3G/4G technology.

The NDRC said "unfair" and "excessively high" royalties Qualcomm collected from Chinese smartphone makers were the key factors behind the record fine. Other factors include the company's violation of the nation's Anti-Monopoly Law, including product bundling and imposing unreasonable conditions for the sale of baseband chips.

The reduction of royalty and removal of the standards-essential patents from the non-essential ones in the license will not change the handset vendor landscape in the short term. All the major players will enjoy a reduction in patent costs and be able to enjoy higher profit margins, the experts said.

Qualcomm narrowed its financial guidance for fiscal year ending Sept 27, after the antitrust penalties were announced. The company's annual revenue was estimated to be $26.3 billion to $28 billion compared with the prior guidance range of $26 billion to $28 billion.

Meanwhile, local smartphone makers have expressed mixed feelings about the NDRC decision.

ZTE Corp, one of the largest smartphone makers in China, said it welcomes the NDRC move.

Steven Mao, vice-president of ZTE, said: "The resolution will have a deep influence on the global communication industry and is good for China to build a business environment that focuses on protection of intellectual property rights."

ZTE, Lenovo Group Ltd, Huawei Technologies Co Ltd and Xiaomi Corp are among Qualcomm's biggest customers in China. Though the companies rely on the US firm for mobile chips, they had expressed concern about the high patent fees charged by the US company and said it hurt their profitability.

Qualcomm said in a statement that the rectification plan only applies to devices that are sold in China and not to Chinese vendors in other markets. Therefore it will not directly improve the competitiveness of Chinese vendors in overseas markets, said Peng from Canalys.

In addition, the NDRC resolution did not revoke Qualcomm's right of counter-licensing, meaning the US company can still use the smartphone vendors' patents for free. Counter-licensing prevents smartphone makers from charging patent fees to other Qualcomm partners if they use the patent.

Aberle, the Qualcomm president, said in an interview with Chinese media that if Qualcomm seeks a counter-licensing deal from a Chinese vendor, it will negotiate with the licensee in good faith and provide fair consideration for such rights.

Milly Xiang, a researcher from International Data Corp, said calling off counter-licensing may benefit Huawei, ZTE and Lenovo because they have invested in innovation.

But for smaller companies without strong patents, it will be a disastrous situation. "Traditionally, the small players used those counter-license patents after buying Qualcomm's chips. Now, they may face legal risks," Xiang said.

Qualcomm is trying to diversify its business in China by introducing technologies used in the Internet of Things and new energy car sectors.

"The emerging segments such as wearable devices and automobile, are all going to need chips, it's the next billion-dollar market we are talking about," said Wang from Forrester Research.