Qualcomm 5G Royalty Rate Shines Light on Dispute With Apple

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Without a lot of fuss, Qualcomm Inc. (NASDAQ: QCOM) last week announced its royalty rate to smartphone makers wanting to license the company’s 5G technology for new devices. The company plans to charge a percentage of the wholesale price of the device based on whether the phone is a single-mode or multimode (2G-3G-4G-5G) device. An Apple Inc. (NASDAQ: AAPL) iPhone X would cost Apple $16.50 per phone in royalties, according to Qualcomm’s published rate.

Qualcomm’s licensing rate is two-tiered: a single-mode (5G only) branded phone pays a licensing rate of 2.275% of the wholesale price, while a multimode device costs 3.25% per phone, topping out at a wholesale price of $500. These licenses grant smartphone makers the right to use thousands of Qualcomm’s standard essential patents as required by international agreement. Qualcomm also licenses its entire portfolio of 130,000 patents for either 4% or 5% of the wholesale price, again based on single-mode or multimode capability.

Qualcomm sued Apple earlier this month, charging the iPhone maker with breach of contract for failing to protect Qualcomm’s software, and won’t allow an audit to review how Apple uses the software. Apple argues that it should not have to pay for its own innovations based on Qualcomm’s licensed intellectual property (IP).

From Apple’s point of view, Qualcomm’s licensing fees are too high and that the chipmaker is illegally leveraging its patent portfolio. This part of the dispute turns on the wholesale cost of the iPhone, which is based on the cost charged to Apple by vendors like Foxconn and is lower than the wholesale price Apple charges to its customers.

Qualcomm’s 5G royalty rates are the same as those it has charged for its 4G IP and the same as it pays for all 4G-LTE phones sold in China. Because the rates have been in use and not been challenged by any government authority, Qualcomm clearly expects no regulatory difficulty by continuing with its licensing fee. Apple may continue to dispute Qualcomm’s rates, but now we know what they are.

Qualcomm also indicated that it would charge different royalty rates for other uses of its IP, according to a report in EE Times:

For example, the license rate for automotive applications is a flat $5, not a percentage based on the price of the car. [Note] IoT [Internet of Things] will be licensed to IoT applications at a rate of only 50 cents. This addresses another misconception that all Qualcomm licensing rates are tied to the price of the end device.

Qualcomm’s patent portfolio is the largest, but other companies like BlackBerry, Ericsson, Huawei, Intel and Nokia, among others, also charge licensing fees. So far only Ericsson has announced a licensing fee for 5G phones: $5 per device, possibly dropping to $2.50 in emerging markets.

5G smartphones are expected to hit the market sometime in 2019.