Qualcomm's profits plunge as Apple patent battle begins to bite

Posted Jul 20, 2017 by James Walker
Processor manufacturer Qualcomm, the largest producer of the ARM-based chips used in smartphones, has announced a dramatic decline in its profit forecast. The company is being hit hard by an ongoing patent dispute with Apple, one of its largest customers.
A Qualcomm sign is seen at one of Qualcomm s numerous buildings located on its San Diego Campus
A Qualcomm sign is seen at one of Qualcomm's numerous buildings located on its San Diego Campus
With permission by Reuters / /Mike Blake
Through contract licensing arrangements, Qualcomm effectively supplies millions of processors to Apple for use in its iPhone and iPad devices. Earlier this year, Apple launched a lawsuit against Qualcomm after claiming its products are overpriced. It called on its partners to suspend paying their royalties to the company as the tensions in the case increased.
Apple's claim focuses on Qualcomm's long-running practice of taking royalties based on the total retail price of the finished phone. When a manufacturer such as Apple uses a Qualcomm modem, the company effectively takes a cut of what the product is sold for. Apple has become disillusioned with the model and wants Qualcomm to offer more favourable terms.
Qualcomm and Apple have filed a series of lawsuits against each other. The legal battle is now having a pronounced impact on Qualcomm's fortunes, leading to a disappointing slump in its profit predictions for the quarter. Yesterday, shares in the company fell 2.3 percent to $55.40 on the news that Qualcomm's profit has crashed by 40 percent.
Adding to the issues caused by the case against Apple, Qualcomm is facing scrutiny from governments worldwide. It has been the target of antitrust regulations that are seeking to determine whether it's abusing its dominant position. The company has allegedly sold processors below market value in an attempt to get smartphone manufacturers to exclusively use its products.
Earlier this week, the European Commission informed Qualcomm that it has lost an appeal against its ruling. Qualcomm has been threatened with a daily fine of €580,000 (around $665,000) for failing to provide investigators with documents related to the case. The company had appealed the penalty but its plea was rejected by the Luxembourg-based General Court on Monday.
There's currently no end in sight for Qualcomm's ongoing problems. With the legal disputes starting to bite into the company's finances, it needs to start proactively resolving the conflicts soon. While the product business remains strong, the licensing division is being attacked by the costly court proceedings.
CEO Steve Mollenkopf has previously said he believes an out-of-court settlement should be possible with Apple. Its case is largely focused around commercial interests and securing a lower rate, making negotiations and concessions a possibility. The company could have a harder time in closing the antitrust investigations, which remain ongoing worldwide.