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According to a U.S. Federal judge, Qualcomm has played an unfair game when it comes to its patents and technologies that power millions of smartphones both in the U.S. and worldwide.
We reported back in January that Qualcomm was on trial for anticompetitive practices and now five months later we have our ruling.
U.S. District Judge Lucy Koh stated that Qualcomm violated antitrust laws by threatening to withhold vital chips from customers if they did not pay "unreasonably" high royalty rates for its patents and chip licenses.
Koh issued her ruling in a 233-page report that said, “Qualcomm’s licensing practices have strangled competition” causing harm to rivals, smartphone makers, and consumers.
Qualcomm was ordered by Koh to renegotiate its licensing agreements with customers, allow patent licenses to its rivals at reasonable rates, and comply with a seven-year probationary period that will allow Federal auditors to monitor the company. Koh also took specific issue with Qualcomm charging royalties based on a percentage of a device's price, something that Apple has complained about repeatedly for quite some time.
Qualcomm's business model may change dramatically
Qualcomm shares immediately plunged on the news, trading as far as 13 percent down on the day before settling to down nearly 11 percent. Its been a wild ride for shares of the company, as just a month ago prices spike after a nearly $5 billion settlement with Apple was reached. Today's drop erased every bit of those gains.
The drop in Qualcomm stock isn't shocking. The news is simply devastating for the company. While Qualcomm does indeed have a thriving chip business with its widely popular Snapdragon brand in addition to modem chips, it makes a large percentage of its money off licensing and royalties. Qualcomm divides this into QCT - CDMA Technologies (a carryover from older network technology), and QTL - Technology License.
The company reported on May 1st, 2019 that QTL revenue was $1.12B, while QCT reported $3.72B. Of course, revenue only paints part of the picture, and keep in mind that QTL's earnings before taxes were 15 percent, while QCT commanded an EBT of 60 percent! Qualcomm actually earned $674 million from its licensing group versus $542 million from its chip group. We can't overstate how bad this is for Qualcomm's overall value since their cash cow is now going to get chopped down - just to what effect we cannot say quite yet.
The ruling means that the U.S. Federal court system has sided with the Federal Trade Commission, who sued Qualcomm in 2017 over alleged abuse of its dominant position in the market, i.e. engaging in behavior feared from a monopoly.
Qualcomm wasted no time in calling for a hold on the ruling. Don Rosenberg, general counsel for the San Diego, CA-based company said, "We strongly disagree with the judge’s conclusions, her interpretation of the facts and her application of the law" in a prepared statement.
We may not be hearing the end of this since the Justice Department has generally sided with Qualcomm according to Berstein analyst Stacy Rasgon. The Justice Department has previously said they would hold a hearing on the verdict if Qualcomm was found liable, so there will be further developments to this story.