Qualcomm Inc (QCOM)

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As top dog, Qualcomm draws fire

Its European rivals contend firm's a bully
By Kathryn Balint
UNION-TRIBUNE STAFF WRITER
November 20, 2005

http://www.signonsandiego.com/news/business/20051120-9999-1b20qcom.html

A brewing battle in the cell phone industry begs this question: Is Qualcomm a bully – or a target?

The San Diego company is the big guy on the block in the wireless industry. Its technology is on its way to being used, in one form or another, in virtually all cell phones in the world.

Qualcomm's recent patent disputes
May 18: Broadcom files two patent-infringement suits against Qualcomm.

May 19: Broadcom asks the U.S. International Trade Commission to bar Qualcomm from importing chips that Broadcom says violates its patents.

July 1: Broadcom files antitrust lawsuit against Qualcomm.

July 11: Qualcomm files patent-infringement suit against Broadcom.

Aug. 22: Qualcomm files breach of contract suit against Broadcom, accusing it of violating a previous licensing agreement.

Oct. 14: Qualcomm files another patent-infringement suit against Broadcom.

Oct. 26: Six companies – Broadcom, Ericsson, NEC, Nokia, Panasonic Mobile Communications and Texas Instruments – file complaints asking the European Commission to investigate what they call Qualcomm's "anti-competitive" conduct.

Nov. 4: Qualcomm files patent-infringement suit against Nokia.


Qualcomm developed technology known as code division multiple access, which is used by about a quarter of the cell phones in the world, including those that use the Verizon Wireless and Sprint Nextel networks in the United States.

The company makes money by licensing the technology to cell phone makers and by selling chips that power cell phones.

The circumstances mean that Qualcomm's rivals are, in many cases, also its customers because they license the company's technology.

Qualcomm's CDMA began as an alternative to GSM, or Global System for Mobile Communications, the technology used in cellular networks.

But, now, as those GSM networks around the world are upgraded to transmit video games, television and music, that next-generation standard – wideband CDMA, or WCDMA, incorporates some of Qualcomm's technology.

For the first time, wireless companies that had previously stayed at arm's length from Qualcomm are now having to not only compete with the company but also pay it licensing fees.

"Obviously, nobody likes paying royalties," said Dave Mock, author of the book "The Qualcomm Equation." "It's an expense that, if they can cut it, goes right to their bottom line."

The legal battle against Qualcomm is being waged simultaneously in the United States and Europe.

In the last six months, Qualcomm has been slapped with two patent infringement suits, an antitrust suit, and complaints lodged by six companies with European regulators about its "anti-competitive" actions.

In return, Qualcomm, no stranger to the courtroom and never one to back down from a fight, has fired back with four lawsuits of its own – three patent infringement cases and a breach-of-contract suit.

"It's common for licensing and litigation to go hand in hand," said Michael Cohen, an analyst with Pacific American Securities.

Ever since the company unveiled its CDMA technology in 1989, it has been under fire. At the time, the U.S. wireless industry was on the verge of adopting another method of cell-phone transmission as its standard.

Since then, Qualcomm has fended off lawsuits and complaints to get CDMA adopted as an alternative standard in the United States. But the standard was rejected in Europe.

Now that at least parts of Qualcomm's technology have been incorporated in next-generation cell phone networks, including in Europe, the latest legal battle has begun for Qualcomm.

And, as in the past, the stakes are high.

Money is central to the escalating dispute between Qualcomm and its competitors-turned-customers.

When the standard of WCDMA was created, it contained intellectual property developed by companies throughout the industry, including Qualcomm.

The standards-making body required those companies to license their patented technology on "fair, reasonable and non-discriminatory" terms.

"Other companies worry about, what if Qualcomm is able to exert the type of control it has had with CDMA in WCDMA," said Michael King, a San Diego-based analyst with the Gartner Group. "That's a pretty big fear."

Qualcomm's licensees promise in writing not to reveal how much they pay in royalties.

But analysts believe that Qualcomm charges a royalty of about 5 percent of the sale of cell phones using its next-generation CDMA technology and about the same for cell phones using WCDMA technology.


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There's the rub.

The six companies that asked the European Commission to investigate Qualcomm – Broadcom, Ericsson, NEC, Nokia, Panasonic Mobile Communications and Texas Instruments – said that fewer of Qualcomm's patents are used in WCDMA than in third-generation CDMA cell phones.

They argue that by charging the same royalties for WCDMA, Qualcomm's pricing is "excessive and disproportionate."

"If everybody who had essential patents for WCDMA charged the same kind of royalties that Qualcomm does, the royalties would be totally prohibitive," said Maurits Dolman, an attorney representing mobile phone maker Nokia in its European Commission complaint.

Qualcomm disagrees with the suggestion that it has contributed less significant technology to the WCDMA standard. It said that efforts by others in the industry to design a standard without using Qualcomm's technology had failed.

The company also said it has provided licenses on a fair basis.

Lou Lupin, Qualcomm's senior vice president and general counsel, sees the complaints to European regulators as a way for competitors to protect their turf.

"Ironically, they file a complaint with an authority that alleges anti-competitive activity and, in fact, they are complaining about the very activities that are creating competition," he said. "I think this complaint is a reaction by essentially the same group of companies that have been trying to keep Qualcomm out of Europe for decades."

The first signs of the latest squabble appeared when Broadcom, a semiconductor maker based in Irvine, began to break into the market for cell-phone chips. It needed an agreement with Qualcomm to incorporate its technology into those chips.

Talks between the two companies broke down, apparently because, as Broadcom explained later in court documents, it thought Qualcomm was charging too much for its intellectual property.

In May, Broadcom filed two lawsuits accusing Qualcomm of infringing on its patents, followed by a complaint with the U.S. International Trade Commission.

Two months later, Broadcom fired its biggest shot across Qualcomm's bow.

It hired the law firm of David Boies, nicknamed "The Microsoft Slayer" after he represented the U.S. government in its antitrust case against the software behemoth, to take on Qualcomm for stifling competition.

The suit said that Qualcomm's actions "are aimed to cripple Broadcom as a competitor."

Qualcomm responded with three lawsuits of its own, two patent infringement cases and one alleging breach of contract.

The fight intensified last month when the six companies, including Broadcom, complained to the European Commission that Qualcomm is overcharging for its technology and stifling competitors.

All but Broadcom already have licensing agreements with Qualcomm. Nokia and Ericcson have a long history of opposing Qualcomm's efforts to enter the European market.

Qualcomm believes that complaints may have been in the works for years, and were filed by coincidence after the Broadcom lawsuits. According to Qualcomm, the companies that complained had tried to get some of Qualcomm's 130 other licensees to join in.

The European Commission is the entity that fined Microsoft $605 million after a five-year antitrust investigation.

The latest move in the fight came from Qualcomm. It sued Nokia this month for patent infringement.

Qualcomm, Broadcom and Nokia all deny the accusations made against them.

It's no secret that Qualcomm isn't necessarily loved in the wireless industry.

"If you talk to one person, they're a bully and their demands are too high," said Mock, the author. "But if you look at it from the other side, these companies agreed to go along with Qualcomm's terms. Whenever you're the top leader in the industry or a segment of the industry, you're just automatically a target."

King, the Gartner analyst, said Qualcomm's rivals will play up the bully angle to get sympathy from the European Commission.

"It will be portrayed as the big American bully comes in and beats up these helpless European companies, like Nokia and Ericsson," he said.

As in many disputes, both sides may have a valid point.

"Bottom line, you're going to see both parties are right in some way," King said. "Qualcomm has very tightly controlled the narrowband CDMA market and, in doing so, has produced tremendous profit. People are looking at that and saying, 'I don't want to pay that much for wideband CDMA.' "



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Kathryn Balint: [phone]; [e-mail]