The future of the mobile industry hangs in the balance as a battle over intellectual property and royalties between technology titans Nokia (NOK) and Qualcomm (QCOM) comes to a head. Billions of dollars in revenues and profits are at stake. And once again, a dispute involving U.S. companies has landed in the lap of the Brussels-based European Commission, known for its high-profile antitrust victory over Microsoft (MSFT) and more recent pursuit of U.S. chipmakers Intel (INTC) and Rambus (RMBS).
In one corner is Qualcomm, which has built its highly profitable business on developing and licensing intellectual property for mobile communications, especially the CDMA standard, which it invented. Though admired in the industry, Qualcomm also engenders resentment for the rich royalties it collects on its patents. Indeed, rivals say the 'supernormal' profits Qualcomm earns from royalties on third-generation (3G) mobile technology amount to a kind of 'tax' on the entire mobile industry that trickles down to higher prices for consumers.
Qualcomm's intellectual property is at issue because when the 3G mobile standard was being developed a decade ago, the San Diego company held key patents on the underlying technology, known as W-CDMA, that was adopted by the industry. Qualcomm agreed to license those technologies to other companies on reasonable terms, and as a result, its patented inventions became an integral part of 3G.
A formal case against Qualcomm
In the other corner is Nokia, the giant of handsets, with more than 35% market share and plenty of intellectual property of its own. Nokia already pays lots of royalties to Qualcomm. Investment bank Nomura Securities in London figures the fees could amount to nearly $1.1 billion in 2008 alone. But Nokia argues that the royalties are too high relative to the value of Qualcomm's patents, and has teamed up with a half-dozen other tech firms to try to force them down.
Two years ago, Nokia and its allies asked the European Commission's antitrust division to investigate Qualcomm's licensing fees, and on Oct. 1, the Commission opened a formal case against Qualcomm. In their original complaint, Nokia, Broadcom (BRCM), Ericsson (ERIC), Texas Instruments (TXN), NEC (NYPNY), and Panasonic Mobile Communications (MC) alleged that Qualcomm overcharges for its intellectual property and has used potentially abusive techniques to prolong its position in mobile-phone technology.
If antitrust officials find Qualcomm's behavior has breached European competition rules, the Commission could impose fines as high as 10% of Qualcomm's annual revenues. In a worst-case scenario, it could even break apart Qualcomm's chipmaking and licensing businesses.
Holding the industry hostage
The Commission case comes amid a welter of private squabbles between Qualcomm and its adversaries. The company is embroiled in a long-running series of lawsuits with Broadcom, a rival U.S. maker of communications chips. One of the disputes led to a temporary ban on importing handsets containing Qualcomm technology into the U.S. The company devised a way to work around it, but admits that the solution won't solve all of the legal issues in the case (BusinessWeek.com, 8/7/07).
Another dispute led a federal judge to quash two of Qualcomm's patents on compressing video signals, ruling in August that Qualcomm's behavior exposed 'a carefully orchestrated plan and deadly determination to hold hostage the entire industry.' Qualcomm, which is appealing that decision, is so mired in these and other legal battles that it will spend an estimated $200 million in lawyers' fees in 2007 alone.