
The Qualcomm 'Tax' Rebellion (2017) - drtillberg
https://www.bloomberg.com/gadfly/articles/2017-01-24/qualcomm-s-tax-collection-days-are-looking-numbered
======
projektfu
In a way it's better than the Microsoft tax which set, for a time, a lower
bound on the price of a computer because one had to pay approximately the same
amount for a low-spec computer as for a high-spec one. Eventually if you're
making 20% margin on the components and that margin is lower than the cost of
the Windows license, you have two options: use an incompatible operating
system or not sell the computer. From what I understand, in the 80s and 90s,
if you sold computers with Windows or DOS OEM, your license agreement probably
said that you had to pay the tax on every system sold, regardless of the
actually installed operating system.

~~~
mdasen
That's an argument that Qualcomm would push. If Qualcomm charged a flat
$25/phone, that would hugely drive up the price of low-cost phones. However,
why should Qualcomm get more money if a manufacturer includes a better display
or camera? Qualcomm isn't adding more value, the better display or camera is
adding the additional value. Qualcomm is just demanding more money.

Microsoft is saying that Windows makes a computer better by $N and so
manufacturers need to pay that. If you sell a computer with an integrated
monitor (rather than an external display), there's no reason for Microsoft to
get more money.

One big difference between Microsoft and Qualcomm's situation is that
technologies like CDMA, UMTS, and LTE are official standards that only use
patents from those willing to commit to FRAND licensing (fair, reasonable, and
non-discriminatory). Microsoft never agreed to FRAND licensing while Qualcomm
did.

Because Qualcomm wants a percentage of the selling price, it refuses to
license the patents to, say, Intel or MediaTek. If they licensed the patents
to Intel, Qualcomm couldn't then ask for royalties from Apple on devices that
use the Intel modem. For example, when you buy an iPhone, Qualcomm can't come
up to you and say, "you're using our patents so you owe us money." Likewise,
if you sell the iPhone to someone else, they similarly can't ask for money
from that person. But Qualcomm wants to get a percentage of Apple's selling
price, not a percentage of Intel's selling price on the modem alone.

You brought up Microsoft's practice of requiring an OEM that uses Windows on
some machines to pay for Windows for all machines, even ones shipped without
Windows. In fact, Qualcomm has a similar arrangement called "no license-no
chips". If you want access to Qualcomm's modems for your high-end phones, you
must agree to elevated royalty rates for Qualcomm's patents even on your
devices that don't use Qualcomm chips.

Much of the information in this comment comes from:
[https://www.ftc.gov/system/files/documents/cases/170117qualc...](https://www.ftc.gov/system/files/documents/cases/170117qualcomm_redacted_complaint.pdf).
It's a decent read.

~~~
projektfu
Interesting. It seems it should be illegal to require someone to pay for IP in
a phone that doesn't contain it. I wish the Microsoft trial had made that
practice explicitly illegal.

~~~
mdasen
All the phones contain Qualcomm IP so it's a variant of what Microsoft did.

With FRAND licensing, you can challenge the royalty rates in arbitration or
court. Let's say that a court would set the royalty rate at $5 and we somehow
know that and let's rewind a couple years before Intel was seriously making
modems.

LG comes up to Qualcomm and says, "we need those Qualcomm modems for our $650
flagship phone, but we're happy using non-Qualcomm lower-end modems in our
cheap phones." Qualcomm says, "Great! We'll sell you the chips for $N per chip
and you agree that you'll pay patent royalties of $15/phone." LG could retort,
"but the patents are only worth $5/phone and you agreed to FRAND licensing!
We'll see you in court!" Qualcomm confidently says, "well, we might be
required to FRAND license you our patents, but nothing requires us to sell you
chips. If you challenge our preferred $15 royalty rate, good luck selling a
$650 phone with a low-end modem in it. You'll be paying $5 royalties, but you
won't have a flagship phone and those are the only phones you make money on."

Because phone manufacturers had no other high-end modem option, they had to
agree to Qualcomm's preferred royalty rate rather than a true FRAND rate that
a neutral third party would say is fair. If they went without Qualcomm's
modems, they could make low-end phones with low-end modems, but the money is
in the flagship phones.

At the same time, no company had enough incentive to invest in a high-end
modem. It would take many years and many billions to get close to Qualcomm's
modems and they might still stay one step ahead. Plus, all that royalty money
could be poured into making sure their chips were always a step ahead. If
you're thinking about competing, what's your business model? Pour billions
into a few generations of LTE chips that no one buys in the hopes that you'll
produce a generation close enough that customers will dump Qualcomm? Even if
they buy your chips, unless they're willing to write-off Qualcomm, they're
still on the hook for the higher-than-fair royalties.

If Apple didn't force the issue with Intel, nothing would have happened. Apple
made a big bet there that they could break Qualcomm's hold.

It's different from Microsoft's case since the devices without Qualcomm chips
would still have to pay Qualcomm a royalty, just a lower one that was either
negotiated or set by a court/arbitrator.

Imagine if Microsoft owned the BIOS and had committed to license it to anyone
under fair, reasonable, and non-discriminatory terms of $1. Then they turned
around and said, "if you want to run Windows on any of your computers, we'll
only sell you Windows if you pay $20 for the BIOS on all the machines." If you
cut Windows out of your company entirely, you'd still need to pay Microsoft
the $1 for the BIOS. But you couldn't run a PC company without Windows - just
as you couldn't be a phone company without Qualcomm modems. Technically,
nothing requires them to sell you Windows or sell you modems. FRAND only
requires the BIOS/IP portion. By tying the two together, they can make it so
that you pay elevated rates because you can't forgo the Windows/modems on all
your devices.

To paraphrase Rick and Morty, that just sounds like what Microsoft did with an
extra step.

~~~
Fnoord
> It's different from Microsoft's case since the devices without Qualcomm
> chips would still have to pay Qualcomm a royalty, just a lower one that was
> either negotiated or set by a court/arbitrator.

Microsoft enforced every OEM of PCs should be distributed with Microsoft
Windows. Later on, they enforced every OS should be distributed with an OS.
Hence you had a few (very few) PCs which were distributed with FreeDOS.
Microsoft argued this was to combat piracy. I argue the other [more nefarious]
reason was to stop alternative OSes such as BeOS and Linux. Though I don't
know which reason makes more sense, I can say I'm glad this hegemony is over.
Too bad we apparently have different monsters to be slain.

~~~
Nomentatus
If you were to OEM Windows at all, then Microsoft charged a fee per computer
you sold whether with or without Windows, (to encourage Windows use), is how
I'd put it. That was illegal (but enforcement was VERY slow.)

------
thisisit
The article is very illuminating on how the licensing on the technology side.
But I am confused. First it said:

 _This approach had advantages for everyone involved. It meant licensees and
Qualcomm didn 't have to scrap over which parts of the phone did or didn't use
Qualcomm technology, so they could just go ahead and focus on the more
important task of developing and selling these hip new gadgets._

And then:

 _Qualcomm 's argument was that no matter what went in the phones, they
wouldn't work at all without its technology._

So, was the current licensing agreements put in place because it was
advantageous for everyone or was it because Qualcomm argued that the company's
technology enabled mobiles? The reasoning is important because if it was
former then wouldn't removing the current licensing structure remove the
intended "simplicity". But, if it was the latter then I find it surprising why
weren't people fighting an obviously dubious claim from Qualcomm.

~~~
mdasen
I think looking at it through a couple lenses might help. For the sake of
simplicity, let's say that the average royalty Qualcomm gets is $15/phone and
they're charging 5% of the MSRP (manufacturer's suggested retail price). These
are made-up royalty rates since, as the article notes, royalty rates are a
closely guarded secret.

1) Let's look at it from Apple's perspective. Their current device lineup
costs $700, $800, $850, $950, $1,000, or $1,150 (iPhone 8, iPhone 8+, iPhone 8
256GB, iPhone 8+ 256GB, iPhone X, iPhone X 256GB). Qualcomm is taking $35 to
$57.50 per phone. Increasing the storage from 64GB to 256GB means Qualcomm
gets an additional $7.50 for doing nothing. They didn't make the LTE faster on
the devices with more storage. It's the exact same technologies, why should it
cost more? In fact, Apple is paying 2.3-3.8x more per phone than the average.
So, you can imagine that Apple wants to pay less. They're a manufacturer that
only makes high-end phones.

2) Let's look at it from LG's perspective. They sell a variety of phones and
let's say they have a $100 phone, a $300 phone, and a $509 phone and they sell
equal amounts of each. They have to pay a $25.45 royalty on the $509 phone and
only a $5 royalty on the $100 phone, but they're paying on average $15/phone
in royalties so it doesn't really matter.

Before Apple, most device manufacturers created a variety of devices at a
variety of price points so it didn't really matter if it was a percentage or a
fixed cost. In fact, being a percentage meant that you didn't have to worry as
much going down-market. If you create a cheap device, you could capture some
of that market without as much worry about what the royalties would do to your
margins.

I think the article is a bit fuzzy there. It's hard to argue that a percentage
is really better for everyone. It does offer a certain flexibility in a market
where people might be feeling things out. For example, let's say I want to
make the next IoT LTE-connected thing - you want sensors around your home
connected by LTE measuring micro-humidities and you'll need at least 100 of
them per house. I'm planning on selling them for $10/sensor. It's going to be
the next-gen of home comfort automation! If Qualcomm just has a straight
royalty fee of $15, I can't get my business of the ground. New, innovative
uses of LTE can't come to the forefront because while a $15 royalty is totally
manageable for something like a smartphone with a high selling price, it's
unduly burdensome for something like my sensors.

You can also say that the value-add of LTE in a smartphone is higher than the
value add of LTE in my sensors. Why not just use WiFi for the sensors? Even if
LTE is needed, they're going to be transmitting a lot less data, don't really
need fast data or low latency (old GPRS would provide enough bandwidth to send
the tiny updates). LTE is adding less value to these sensors than it does to a
smartphone.

I think that's part of the argument from Qualcomm's perspective. They want me
to be able to create my micro-humidity sensing IoT with affordable royalty
rates while still raising enough money to pay for the technology development.
If they had to charge $0.50/device to everyone (5% of my $10 selling price),
they wouldn't make back their investment in developing new wireless
techniques. If they had to charge me $15/device, I couldn't make a viable
business model.

So, in that way, it can benefit everyone and make it simple. There's no
arguing about how much value-add that Qualcomm is adding to my sensors vs your
smartphone. I think most people would agree that the value-add proposition of
LTE in a smartphone vs WiFi-only is way above my sensors having LTE or WiFi
only.

I think one way one could measure the value-add is by how much data is
consumed by the device. If the device's user is using more LTE data, they're
getting more value from the Qualcomm IP than a device that's always on WiFi.
If I agree to turn off LTE/CDMA/UMTS and just use WiFi, should I get a rebate
of the Qualcomm royalty? While that's impractical, it makes sense - I'm not
getting any value add from that IP.

Ultimately, we only have imprecise approximations. As phone prices have
skyrocketed in recent years, the fact that the royalty is a percentage has
become a bigger issue. For years, the prices of phones would have been going
down as technology became cheaper. Smartphones changed that as phones went
from something where a good one was $100-200 to where a decent smartphone
started at 5 to 10x that. I'm guessing that's part of the big issue now.
People are looking at Qualcomm as getting fat off of their smartphone
innovations rather than Qualcomm's wireless innovations. A better display or
more memory doesn't make Qualcomm's IP better.

Of course, to play Qualcomm's side of the argument, a better camera means that
fast data is a bigger value-add since you don't want to be waiting forever for
uploads; a better display means more pixels and more data to send over the
network; a better phone means a device you're going to be using more data
with.

I tend to take Apple's side in this argument, but I can also see how Apple's
side is self-serving. I think FRAND (fair, reasonable, and non-discriminatory)
should be FRAND. Everyone should pay the same price and, in fact, hidden
royalty prices should be enough evidence alone that a company is violating
FRAND. Apple making better software or a better display doesn't mean Qualcomm
should get to leach off that. Of course, that's kinda self-serving for Apple:
a non-percentage royalty rate would mean royalties would have to rise on
cheaper, non-Apple devices. It would also stifle innovation in areas we don't
even know LTE might be useful yet. Maybe there's some hot new use for the
technology just waiting to be invented, but if it requires a fixed fee, it
won't get off the ground. Should a farm sensor that uploads maybe 1MB/day
really require the same royalty as an iPhone where I slog through a couple
hundred MBs/day? Do we want to say, "sorry, IoT is cancelled due to
royalties"?

Maybe we just need categories. Phones cost $15/device, sensors cost
$0.50/device, etc. based on some notion of value add.

~~~
dis-sys
Apple doesn't pay Qualcomm directly, thus the retail price you see in apple
stores means nothing here. Companies like Foxconn pay Qualcomm to make those
phones, because they are the M (Manufacturer in MSRP) here.

Open data such as custom export data indicates most iphones shipped by
companies like Foxconn are valued at around half of the retail price you see
in apple stores.

~~~
icebraining
Yeap. In fact, Apple pays Foxconn which pays Qualcomm which pays Apple!
[https://appleinsider.com/articles/17/09/21/qualcomm-loses-
tw...](https://appleinsider.com/articles/17/09/21/qualcomm-loses-two-key-
rulings-in-its-patent-royalty-fight-with-apple)

------
mankash666
This is much like the multiple Apple tax(es) in place today:

1\. 30% cut on apps regardless of their price (an assumption that Apple's
channel reach is the one enabling the sale, not the merit of your app)

2\. A $5 or more price on licensing to build a MFI authorized Apple accessory

3\. Complete lockdown of apps not distributed via the app store (for iOS)

4\. Ominous warning while launching an app on the Mac, if app was downloaded
outside the app store

~~~
mdasen
Apple certainly puts taxes in, but Apple never agreed to FRAND terms. Qualcomm
did. That's a huge difference.

When an industry group sets a standard, everyone must disclose their patents
and agree to FRAND terms. If they don't, they'll work around their patents and
they'll get no licensing fees. This is because everyone will be forced to use
that standard. Rather than being a competitive market, it's a monopoly. As
such, FRAND licensing is so important.

Apple, by contrast, doesn't force you to use their technology and is far from
a monopoly. That doesn't mean that what Apple does is good or fair or just.
However, I can buy an Android phone if I dislike what Apple is doing. I can't
decide I'll buy a phone without Qualcomm's tech in it.

While Apple has significant market power, it doesn't have the type of market
power that a monopoly gives you. If Apple has patents on a lot of iPhone
things, competitors can work around it. While Apple still has power, it's much
more limited.

Without the FRAND threat, once a standard had gotten traction like LTE, a
company like Qualcomm could start charging $200/phone. Cell networks have
invested at least $25 billion per carrier in the US into LTE networks. They
have a huge installed base of LTE phone users. They can't move to a different
technology even if they wanted to.

By contrast, while Apple has power, they don't have that kind of power. When
the iPhone was AT&T-only, sure it helped AT&T, but Verizon countered with
Android devices. Sure, some people might have left Verizon for the iPhone, but
it didn't have any lasting impact on Verizon.

If Qualcomm decided to cut off Verizon from all its LTE patents and license
them exclusively to AT&T, that would kill Verizon.

Apple's biggest power-move was AT&T exclusivity, and while it helped AT&T, it
didn't change the dynamic of the industry. If Qualcomm did the same, it would
change the industry.

That's not to say you should like Apple's exercise of power. It's to note that
there's a difference between standards-essential patent licensing which is a
bedrock of how we can have these industries and Apple's somewhat annoying
practices which we wish they'd be nicer about.

~~~
tooltalk
>Apple certainly puts taxes in, but Apple never agreed to FRAND terms.
Qualcomm did. That's a huge difference.

Nonsense, that's a completely red herring. There is nothing different about
Qualcomm's or Apple's extortion-like rates. l Qualcomm can charge a percentage
per device (or unit) if this is a widely accepted reasonable industry
practice.

Further, FRAND has nothing whatsoever to do with the royalty base or rates.
Standard Setting Organizations, SSO's, aren't in the business of setting rates
or telling their members what their basis ought to be, in part for fear that
it might cross paths with regional anti-trust regulators. The IEEE has broken
the tradition recently, but it's very rare for SSO to do so. Likewise, courts
or regulators rarely want to set rates either -- for they understand their
limits in their understanding of technology and market. Where they were
exceptions (eg, Moto vs Microsoft), the courts have used the similar set of
standards industry uses to charge potential licensees.

Contrary to pro-Apple fanbois views, FRAND doesn't necessarily mean cheap or
does it imply that Qualcomm's IPs are essentially public properties. It just
means that they must be open and willing to license their IP portfolio in
fair, reasonable, and non-discriminatory manner to promote optimal
interoperability and wide-adoption.

~~~
ksec
>here is nothing different about Qualcomm's or Apple's extortion-like rates

True,except you can work with android in smart phone apps, you don't even have
a choice inn Qualcomm case.

------
pentae
I wonder when App store developers try using the same case against the Apple
tax, how far they get? Why should we care about Goliath vs Goliath when the
little guys are the ones getting screwed?

~~~
JBReefer
App developers have options - iOS is a small chunk of the market. Handset
makers don’t, because of broken ip laws.

------
garmaine
Shouldn't CDMA be out of patent?

~~~
maxerickson
Probably, but they have a whole portfolio of related patents obtained at later
dates.

~~~
garmaine
Sure. So use something cinformant to the original standard.

~~~
rhino369
Backwards compatibile with the old standard. But newer standards are very
different. If you want to use the CDMA standard from 1995, you can do so
without invalidating a patent. But nobody wants to do that.

------
madengr
Is it possible the whole push to 5G is to get out from under royalties? The
first published 5G spec was not Qualcomm. There is definitely a technical
improvement, but I’ll bet there is more to it.

~~~
kalleboo
Qualcomm has plenty of 5G patents
[http://www.ipwatchdog.com/2016/03/31/5g-mobile-networks-
next...](http://www.ipwatchdog.com/2016/03/31/5g-mobile-networks-next-big-
battleground/id=67632/)

~~~
Tempest1981
Proposed 5G royalties per device: [https://www.fiercewireless.com/5g/qualcomm-
to-charge-up-to-1...](https://www.fiercewireless.com/5g/qualcomm-to-charge-up-
to-16-25-royalties-for-every-5g-phone-more-than-ericsson-s-5-phone)

Excerpt: "2.275% of the selling price of branded single-mode 5G handsets; and
a royalty rate of 3.25% ... (for) multi-mode (3G/4G/5G) handsets"

------
wyldfire
This article is inaccurate or incomplete in that it doesn't mention the
royalty cap. A more fair argument might be "the cap is too high"

To take Qualcomm's POV, consider this analogy: if you had patented the
microwave oven and you licensed that to appliance manufacturers. Those
manufacturers then decided to offer new ones with a larger cavity for cooking
larger meals. They could charge more for this new product, and might pay more
in royalties. That's not particularly unfair.

Apparently Apple's suppliers have been making phones under this licensing
agreement since before apple entered the business.

I sympathize with apple because unlike the microwave example, they truly do
innovate a lot in this space. But they protect their inventions too.

~~~
Nomentatus
This neglects FRAND - without FRAND, a patent is precisely the right to
exclude, and you can do that in just about any way you wish, including
charging royalties according to astrological principles.

------
hownottowrite
Cached: [https://archive.is/QicI4](https://archive.is/QicI4)

------
JudasGoat
Apple could get back at Qualcomm and charge $100 for an Iphone, right?

~~~
robocat
I wonder if they could charge $100 for the phone, and have a separate $500
boxed copy of the OS to install? Or an OEM licence that the phone seller
installs for the consumer?!

