The Trump administration’s hopes of finding a national technology champion for the coming wave of 5G wireless communications may finally be bearing fruit.
Qualcomm’s landmark legal settlement with Apple this week has resolved a serious question hanging over the leading supplier of modem technology for smartphones, prompting a further 10 per cent bounce in its share price on Wednesday morning.
News that the iPhone maker had dropped its barrage of legal actions came in the same week that Huawei, the Chinese telecoms company thought to be leading the race to superfast connectivity, revealed it had no commercial contracts for 5G equipment in mainland China.
In the space of two days, the tech landscape around 5G appeared to have shifted.
Concerns have been increasing in DC that China will seize an insurmountable advantage in both the development and deployment of a communications technology with important national security implications.
The news from each side of the Pacific will not resolve all those concerns, but it removes a cloud over a key US tech supplier while also suggesting that China may not be as far ahead in the race to roll out 5G networks as had been feared.
As the supplier of a significant part of the intellectual property in the 5G communications standards, a financially stronger Qualcomm could secure the US a stronger voice in the future of mobile communications. But it will still do little to resolve a nagging concern in the White House: that Huawei, which, unlike Qualcomm, also makes the infrastructure on which mobile networks depend, still poses a serious competitive threat and a national security risk.
Tuesday’s settlement between Apple and Qualcomm put an end to one of the most acrimonious and expensive legal fights in US corporate history.
The rivals announced they would drop “all litigation” worldwide and begin a new era of co-operation. After years of refusing to pay Qualcomm royalty fees on grounds the prices were too high, Apple agreed to a settlement in which it would once again license Qualcomm’s patents.
It will also buy modem chips — the wireless radios inside smartphones — from Qualcomm, dropping supplier Intel. That announcement was quickly followed by the disclosure that Intel is abandoning plans to develop 5G smartphone chips of its own.
“Qualcomm, in the matter of a day, has gone from embattled to emboldened in smartphone modems,” said Geoff Blaber, analyst at CCS Insight.
The deal may finally bring an end to a troubled period for the mobile tech company. Early last year, under legal fire from Apple and after years of unhappiness on Wall Street over its underperforming chip business, Qualcomm was on the receiving end of a hostile bid from Broadcom, which was legally based in Singapore.
Worried that the US was about to lose its position in 5G altogether, the Trump White House blocked the deal. America’s leading wireless infrastructure maker, Lucent, had already succumbed to a takeover by France’s Alcatel in 2006, and Huawei, with its links to the Chinese government, has since taken the lead in that market.
Eighteen months later, Qualcomm appears victorious. Its reconciliation with Apple strengthens the licensing business that supplies the bulk of its profits, and ends a $30bn claim from the phonemaker over its licensing practices.
The settlement is also a relief for Apple, which had looked unlikely to release a 5G iPhone alongside competitors in 2020 as rumours had circulated that Intel would not be ready with a modem chip of its own.
Though details of the deal with Apple were notably light, Qualcomm estimated the agreement would increase its earnings per share by $2 annually — a total of $2.4bn, and more than half its $3.69 pro forma earnings per share in 2018.
It did not say how quickly its earnings would recover, however, leaving a question over whether it will see the full benefit of the extra income from Apple before the 5G mobile business takes off fully — something that could still be years away.
But its forecast suggested it expects its relationship with Apple to get back to where it was before the legal war broke out: revenue from Qualcomm’s licensing business — almost all of which falls into profit — plunged by $2.5bn between its 2016 and 2018 fiscal years, the period of the Apple dispute.
Apple had complained about Qualcomm’s practice of charging a royalty fee on all mobile handsets, calculated as a percentage of each handset’s total price rather than just the value of the chips it contains. Qualcomm also makes money by selling modem chips.
It was unclear from this week’s settlement whether Apple would return to the old arrangement of paying a licence fee tied to iPhone sales prices, and how much of the money it pays to Qualcomm will instead be for buying that company’s chipsets.
But Qualcomm’s success in returning its profits broadly to pre-dispute levels represents an accomplishment, since throughout the litigation Apple was bent on cutting its royalty payments for the mobile technology.
Who blinked first — Apple or Intel — and prompted the settlement and Qualcomm’s resurgence is not yet clear. If Intel’s decision to withdraw from the 5G smartphone market pushed Apple to seek a deal, Qualcomm has not revealed at what price it acquiesced.
Amid already-slowing iPhone sales, Apple was “running out of options” and “feeling the pressure” to keep up with its competitors and release a 5G phone in 2020, said Ben Bajarin, analyst at Creative Strategies.
Patrick Moorhead, analyst at Moor Insights, said the price Apple agreed to “can’t be radically different” from what Qualcomm negotiated with its other 5G customers. If it were, “that would cause a big problem for Qualcomm. The pricing is on Qualcomm’s side.”
Meanwhile, Intel’s abrupt retreat from smartphone modems — Apple was its only customer, and Intel had maintained until Tuesday it was on track for the 2020 deadline — appeared to please investors, and its shares closed up 1 per cent following the news.
In recent weeks, new chief executive Bob Swan has emphasised that Intel’s 5G future is in its growing networking and data processing business — though it had also placed an expensive bet on its smaller, riskier and unprofitable modem business.
“For Intel to be successful in 5G has never been hinged upon being successful in 5G modems,” said Mr Blaber.
Mr Moorhead said all three US companies appeared now to be where “they’re going to be most successful”.
The settlement — which involves a six-year contract between Qualcomm and Apple, with a potential two-year extension — may not resolve tensions between the companies in the long run. Many tech observers still expect the company to explore developing its own 5G modems — a process that took Samsung and Huawei nearly a decade, and a product on which it would still need to pay Qualcomm royalties for the use of certain chip technology.
But at least for now, a serious speed-bump in the run-up to 5G appears to have been removed. “Qualcomm had the most to gain and the most to lose,” said Mr Moorhead. “But they both ended up in a better place.”