Trial Sheds Light on Q'comm Patent Holdings, Royalty Rates

　　Testimony in Qualcomm’s antitrust trial Friday shined sunlight on the company’s licensing practices and thinking, dispelling some of the secrecy that has bred a climate of paranoia.

　　In testimony to date, several OEMs said that they feared Qualcomm might cut off their chip supplies. They feared that they were being “gouged” by high license fees, as the head of procurement at Apple testified.

　　Next month, Judge Lucy Koh will rule on whether Qualcomm’s practices and rates harmed its customers, rivals, or consumers. Whatever she decides will be challenged in cases that could roll on for years.

　　The good news is that testimony is ending for mobile chip and systems companies at least some of the widespread secrecy that sadly can act as a weapon in patent licensing. Here’s a sampler of what was learned in just a few hours in court Friday:

　　Qualcomm had more than 140,000 patents and applications by March 2018, growing at more than 30% annually — a clip of about 35 new patents a day. Just 20% of those patents are so-called standards-essential patents (SEPs) for cellular standards such as CDMA and LTE.

　　The company currently charges smartphone makers a 5% royalty for its whole cellular patent portfolio, capped at $20/handset. For just SEPs on a singular cellular standard like LTE, it charges 3.25% with a $13/handset cap. If a handset needs more than one standard such as both 3G and LTE, the charge defaults to the 5% level.

　　Qualcomm started its licensing business charging 5% on systems-wide patents for the implementation of CDMA that it pioneered with a cap of $24/handset. It lowered its fee initially to 3.25% for SEPs on LTE because rivals hold many patents, then inched it up to 3.5% as it gained an edge in advanced LTE.

　　After an investigation by the Chinese government lowered Qualcomm’s royalties to 3.25% for a combination of SEPs on 3G and LTE, Qualcomm started offering that combo rate worldwide.

　　How Qualcomm licenses its patents is as much an issue in the trial as the size of its fees.

　　The licensing business got its start when Qualcomm built its own base stations and handsets for CDMA. It licensed operators and OEMs such as AT&T and Motorola to create a market for what was effectively the first digital cellular systems.

　　CDMA promised systems that could handle 60 times more calls than analog systems of that day, potentially lowering subscriber rates a great deal. To recoup the full value of what it was offering, Qualcomm decided to split its business into selling chips and licensing patents.

　　Qualcomm generally licenses smartphones only to makers rather than rival chipmakers, claiming that it’s an industry practice because “the handset is humongously more lucrative,” according to one Qualcomm licensing executive. It requires handset makers to take a patent license before it will ship even sample quantities of chips as part of a “no license, no chip” policy.

　　“Putting the IP cost in the chip price wouldn’t work,” said Fabian Gonell, a senior vice president of licensing strategy for Qualcomm.

　　Handset makers could buy chips from rivals and hope that, if sued, they could avoid or at least lower Qualcomm’s royalties in court. Qualcomm preferred the notion of licensing first based on fees already established in CDMA, then selling the chips.

　　With separate deals, “you can tell what the IP price is, so you can tell if fair, reasonable and non-discriminatory (FRAND) issues are arising,” testified Gonell. “If you combine prices, any changes become suspect and chip prices change more than IP prices, so avoiding those arguments is a good thing.”

　　The approach ensures that Qualcomm gets the fair market value for its R&D, he said. However, the rationale has a few holes.

　　By not widely licensing chipmakers, rivals are left exposed to patent infringement suits. In addition, handset makers wind up paying the freight for R&D that might be better apportioned to carriers, chipmakers, or others in the cellular ecosystem. Base station makers such as Ericsson, Huawei, and Nokia who tend to design their own cellular ASICs are outside of Qualcomm’s calculus.

　　So far, both Qualcomm and the U.S. Federal Trade Commission showed parts of video depositions from handset makers Apple, Blackberry, Huawei, Lenovo, LG, Samsung, and others. The FTC’s clips made it clear that the handset makers feared Qualcomm’s prowess.

　　None of the OEMs contradicted the company’s clear testimony that it never cut off a customer’s chip supply. However, evidence from several emails raised the possibility of such cuts.

　　Qualcomm attorneys called into question an expert for the FTC because he did not quantify harms that he alleged from its practices. But fear is a hard thing to quantify. It’s potentially a powerful weapon in negotiations in which a licensee does not know how much rivals are being charged or what exactly they are buying in a massive patent portfolio.

　　Under the sunshine of open court proceedings, OEMs and rivals are beginning to see more clearly at least the outlines of what Qualcomm charges and why. It’s just a small piece of a large licensing market that largely operates in the dark.