Apple's need for 5G spurs end to legal battle with Qualcomm

People outside an Apple store at Grand Central Station in New York. Apple needs chips that will connect the iPhone to the new 5G wireless networks being introduced now. Qualcomm's modems are leading a potential revolution in mobile Internet, and Appl
People outside an Apple store at Grand Central Station in New York. Apple needs chips that will connect the iPhone to the new 5G wireless networks being introduced now. Qualcomm's modems are leading a potential revolution in mobile Internet, and Apple could have been forced to play catch-up without them.PHOTO: REUTERS

NEW YORK • Apple put its flagship product, the iPhone, ahead of distaste for the way Qualcomm does business in settling a two-year legal dispute with the chipmaker.

Apple needs chips that will connect the iPhone to the new 5G wireless networks being introduced now or will risk falling behind its rivals. It had bet on Intel, but recently decided its would-be 5G supplier was not up to the task.

That led Apple back to Qualcomm - and spurred a sudden end to a long-running court fight over patents, component costs and royalties for one of the most critical parts of an iPhone. Modems, or baseband processors, are what connects all iPhones and some iPads and Apple Watches to cellular networks and the Internet on the go.

Throughout the fight, which centred on Apple's accusations that Qualcomm overcharges for patents on its technology, the iPhone maker played down the importance of the modem and Qualcomm's inventions.

Just before the settlement was announced on Tuesday, Apple's lawyers were in a San Diego courtroom saying the component was just another method of connecting to the Internet. In reality, Qualcomm's modems are leading a potential revolution in mobile Internet - and Apple could have been forced to play catch-up without them.

Intel, which dominates the market in personal computer chips, has struggled for decades in mobile. The company pledged that its 5G part was coming to phones next year. But within hours of Apple's deal with Qualcomm, and with it the loss of its prime mobile customer, Intel announced it would end its effort to produce a 5G modem for smartphones.

Apple's rival Samsung already has a 5G-capable phone on sale using Qualcomm's products. The San Diego-based chipmaker has also said it will have a better 5G modem ready by the year end - plenty of time for Apple to introduce a 5G phone in September 2020.

"If they didn't settle with Qualcomm soon they'd miss next year's product," said Mr Mike Walkley, an analyst at Canaccord Genuity. "Building their own baseband will take years and Intel is behind. Maybe that was the final thing that got this done."

APPLE'S MOTIVATION

If they didn't settle with Qualcomm soon they'd miss next year's product. Building their own baseband will take years and Intel is behind. Maybe that was the final thing that got this done.

MR MIKE WALKLEY, an analyst at Canaccord Genuity, on Apple's decision to settle its legal dispute with Qualcomm.

Apple already faces falling iPhone sales and a saturated global smartphone market. The company in January reported that holiday revenue declined year on year for the first time since the iPhone was introduced in 2007. As it pushes more services tied to its smartphone, Apple cannot afford to lose potential customers because its technology was not up to speed.

As in previous generations of wireless technology, Qualcomm is the market leader in 5G, which will let phones and tablets download videos and music, and open webpages much faster than the current 4G LTE standard.

Amid the litigation, Apple and Qualcomm ended their chip relationship. Intel was given exclusive orders for all new-model iPhones. Apple also held off paying Qualcomm billions of dollars in licensing fees. That high-margin revenue fuels Qualcomm's industry-leading research and design budget, helping it field the most capable parts.

The settlement with Qualcomm clears Apple's path to launching a 5G phone as early as next year. Given that the settlement occurred in April, or about five months before Apple plans to introduce the next iPhones, it is unlikely the company would be able to unveil a 5G device this year.

Apple and Qualcomm's agreement is a six-year pact, according to the joint statement from the companies. Mr Gene Munster, a long-time Apple analyst and now co-founder of Loup Ventures, believes Qualcomm won the showdown, but it may be a short-term victory. He said the chipmaker may lose Apple as a customer in three years because the iPhone maker will be able to manufacture its own modems by then.

Qualcomm's stock had its best day since 1999 on the news. The agreement will contribute US$2 a share to Qualcomm's earnings when shipments to Apple kick in, the company said.

"This is a home run for Qualcomm," said Mr Jerome Dodson, a fund manager at Parnassus Investments in San Francisco. "It really gives the company a monopoly position which Apple won't like."

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on April 18, 2019, with the headline 'Apple's need for 5G spurs end to legal battle with Qualcomm'. Print Edition | Subscribe