Apple has stopped paying Qualcomm’s patent royalties to iPhone manufacturers, a move likely to cast a blow to the chipmaker’s financial forecast. The iPhone maker sued Qualcomm in January saying that the royalties imposed were excessive and has now decided to stop payments until a court resolves the dispute.
Qualcomm charges royalties for a portion of the value of every phone sold, irrespective of whether the chips inside are made by the company or rivals. These royalties bring about 80 percent of Qualcomm’s pre-tax profit. Contract manufacturers such as Foxconn pay Qualcomm for the patents that is required for connecting phones to a wireless network.
For the iPhone in particular, Qualcomm’s agreements are with Apple’s manufacturers directly, which in turn charge Apple. Now, Apple and regulators claim that the chipmaker is abusing its market position to extract more money. ALSO READ: Qualcomm slams Apple for breaching deals, urges to reject lawsuit
Following Apple’s decision, investors pushed down Qualcomm’s share price. In total, the company has lost 20 percent since Apple’s decision. The company has further cut down on its forecast for the current quarter to account for the loss of about $500 million of royalty revenue.
A report on Fortune notes that Apple had been trying to negotiate a direct licensing agreement with Qualcomm for more than five years and the chipmaker refused to negotiate on fair terms. “Without an agreed-upon rate to determine how much is owed, we have suspended payments until the correct amount can be determined by the court. As we’ve said before, Qualcomm’s demands are unreasonable and they have been charging higher rates based on our innovation, not their own,” Apple said in a statement.
Meanwhile, Qualcomm’s Executive Vice President Don Rosenberg called Apple’s decision a ‘global attack’ on the company stating that “Apple has now unilaterally declared the contract terms unacceptable; the same terms that have applied to iPhones and cellular-enabled iPads for a decade. Apple’s continued interference with Qualcomm’s agreements to which Apple is not a party is wrongful and the latest step in Apple’s global attack on Qualcomm.” ALSO READ: Qualcomm Snapdragon 835 SoC early benchmarks reveal scores higher than Google Pixel XL, OnePlus 3T
It is not the first time that Apple has withheld royalties. Apple previously withheld about $1 billion of prior royalty payments but Qualcomm offset the losses by withholding equal amounts it owed Apple under a separate agreement between the companies.
It was after Apple used Intel chips in almost half of its iPhones last year that the dispute between the company and Qualcomm broke out and as per analysts, the battle is set to get uglier.
On one hand, Apple accused Qualcomm of overcharging in royalties, on the other hand, Qualcomm has made counterclaims saying no modern handset would have been possible without relying on Qualcomm’s cellular technologies. It has also alleged Apple of breaching their contract and has asked the company to pay some amount in damages.
Following Apple’s damaging decision, Qualcomm is expected to report a revenue of $4.6 billion to $5.6 billion, which is lesser than the earlier estimate of up to $6.1 billion.