What the Apple-Qualcomm battle means for your next iPhone (FAQ)

Apple isn't afraid of a good legal battle.

It's fought Samsung over phone patents for six years and taken accessory makers to court over counterfeit dongles.

This time around, Apple is going after one of its key component suppliers, Qualcomm. The result could put your iPhone at risk.

Qualcomm is the world's biggest provider of mobile chips, and it created technology that's essential for connecting phones to cellular networks. The company derives a significant portion of its revenue from licensing those inventions to hundreds of device makers, with the fee based on the value of the phone, not the components. Because Qualcomm owns patents related to 3G and 4G phones -- as well as other features like software -- any handset makers building a device that connects to the newer networks has to pay it a licensing fee, even if they don't use Qualcomm's chips.
That includes Apple. The Cupertino, California, giant makes its own applications processor -- the brains of the iPhone -- but it relies on third party chips for network connectivity. Since the iPhone 4S in 2011, the supplier for those chips has been Qualcomm. Because only Qualcomm designed high-end modems, it had more power when it came to the relationship.

Apple thinks it should pay a fee based only on the value of Qualcomm's connectivity chips, not the entire device. It says Qualcomm is "effectively taxing Apple's innovation" and that Apple "shouldn't have to pay them for technology breakthroughs they have nothing to do with."

Qualcomm counters that its technology is much more than just connectivity. It's also multimedia, imaging, GPS and countless other inventions that make a phone a phone. Qualcomm even filed for a patent in 2000, seven years before Apple introduced the iPhone, that the company says is the first patented description of a smartphone. Without its technology, Qualcomm says, the iPhone wouldn't be possible.

Now Qualcomm is asking for some iPhones to be banned from sale in the US because it says Apple infringes some of its patents. If Qualcomm succeeds, you may be able to get iPhones only from certain carriers, like Verizon and Sprint. And even if there's no ban, the fight between the two tech companies could have implications for the speed and features of upcoming iPhones. Here's our FAQ:

What's Qualcomm again?

You may not know the Qualcomm name (unless you live in its hometown of San Diego and frequent Qualcomm Stadium), but the odds are pretty high you've used a device with its technology. Qualcomm is best known for its chips that connect phones to cellular networks, as well as its Snapdragon processors that act as the brains of mobile devices. Last year, 59 percent of smartphone modems came from Qualcomm, followed by China's MediaTek at 23 percent, according to Research and Markets.
"We shouldn't have to pay them for technology breakthroughs they have nothing to do with."
Qualcomm is one of the key component suppliers to Apple, Samsung and other phone makers. Without a modem in your device, you wouldn't be able to hail a Lyft to take you home or check Facebook while you're waiting in line at a food truck.

What technology does Qualcomm make?

Along with its processors, Qualcomm invents a lot of technology that's used in mobile devices. The company says it's invested more than $40 billion in research and development over the past three decades, and its patent portfolio contains more than 130,000 issued patents and patent applications worldwide.

The technology is centered around cellular communications and includes both standard essential patents and nonessential patents. (Standard essential patents are technologies that are vital to a device. They have to be licensed at fair and reasonable terms, whereas nonessential patents don't have those requirements.)

Some Qualcomm patents relate to multimedia standards, mobile operating systems, user interfaces, displays, power management, Wi-Fi, Bluetooth and even airplane mode. The company is also the pioneer of CDMA, the 3G mobile network standard used by Verizon and Sprint, and it's innovated in 4G and 5G network connectivity.

"Qualcomm's inventions are necessary for the entire cellular network to function -- they are not limited to technologies in modem chipsets or even cell phones," Qualcomm said in a filing.
Why are Apple and Qualcomm fighting?

It all comes down to money. Apple claims Qualcomm charges too much in licensing fees for its mobile technology. Qualcomm says the iPhone (and other mobile devices) wouldn't be possible without its technology. Neither can agree on what's actually a fair licensing fee, so they're taking their battle to court.

What does Apple say in its complaints?

In part: "For many years Qualcomm has unfairly insisted on charging royalties for technologies they have nothing to do with. The more Apple innovates with unique features such as TouchID, advanced displays, and cameras, to name just a few, the more money Qualcomm collects for no reason and the more expensive it becomes for Apple to fund these innovations."

What does Qualcomm say?

In part: "Apple's goal is clear -- to leverage its immense power to force Qualcomm into accepting less than fair value for the patented technologies that have led innovation in cellular technology and helped Apple generate more than $760 billion in iPhone sales."

What's happened so far in this legal battle?

There's been a lot of legal back and forth, but here are the basics. Apple initially filed suit against Qualcomm in January in the US, saying the company didn't offer fair licensing terms for its mobile technology. Qualcomm fired back in April, denying all Apple's allegations and accusing Apple of breach of contract and of interfering with agreements and relationships Qualcomm has with contract manufacturers.

"Apple continues to use our technology and not pay for it. They've really left us no choice but to say, 'You've got to stop this.'"

Apple, through its manufacturers, stopped paying Qualcomm's licensing fees for iPhones sold in the March quarter.

"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," Apple said at the time. "Qualcomm's demands are unreasonable and they have been charging higher rates based on our innovation, not their own."

That caused Qualcomm to pursue legal action to get paid. Qualcomm also filed a complaint with the US International Trade Commission in early July, asking that some iPhones be banned from import and sale in the US because Apple infringes six of Qualcomm's patents. It also filed suit against Apple in the Southern District of California.

"Apple continues to use our technology and not pay for it," Don Rosenberg, Qualcomm's general counsel, said in an interview. "They've really left us no choice but to say, 'You've got to stop this.'"

Patents and more patents

How does Qualcomm's licensing business work?

Some companies license patents on an individual basis; Qualcomm licenses all its patents as a group. For a set fee -- based on the selling price of the end device, typically a phone -- the device maker gets to use all of Qualcomm's technology.

It's been the norm in the mobile industry for patent holders to base their licensing fees on the total value of a handset, so Qualcomm isn't alone there. Ericsson, Huawei, Nokia, Samsung and ZTE also charge licensing fees based on the total device.

Any company that makes a device that connects to a mobile network has to pay Qualcomm a licensing fee, even if it doesn't use Qualcomm chips. That's because other chipmakers and the handset vendors themselves are using Qualcomm intellectual property.

Part of the dispute between Apple and Qualcomm is that Apple believes its licensing fee should be based on the Qualcomm chip used in the device, not the entire phone.

"They do some really great work around standards-essential patents, but it's one small part of what an iPhone is," Apple CEO Tim Cook said in May. "It has nothing do with the display or the Touch ID or a gazillion other innovations that Apple has done. And so we don't think that's right, and so we're taking a principled stand on it."

So what's Qualcomm's licensing fee?

Qualcomm's licensing fees are based on the total value of a device ($650 in the case of the iPhone) versus the value of a chip (closer to $20), but they're also capped at a certain level. Neither company has disclosed the limit, but it's lower than the actual $650 price of the iPhone. They also haven't said what royalty rate is currently charged for the iPhone.
Analysts estimate the fee paid to Qualcomm averages about $10 to $20 per iPhone. Apple has said that Qualcomm charges it "at least five times more in payments than all the other cellular patent licensors we have agreements with combined."

By comparison, in one of its patent battles with Samsung, Apple argued it deserved $40 per device for Samsung's infringement of five patents, as well as lost profits, for a total of $2.19 billion. A jury ultimately ordered Samsung to pay $119.6 million for infringing three of Apple's five patents that related to software features like "quick links" and "slide to unlock."

In China, handset makers pay Qualcomm royalties for its 3G and 4G patents at 3.25 percent of the selling price of every phone sold in that country, but that's believed to be a lower amount that many other handset vendors pay. Qualcomm has said its royalty rates have always been less than 5 percent of the total selling price of a device (that amount excludes tax and some other items and still falls under the per-unit cap).

Qualcomm CEO Steve Mollenkopf has said that while the value of Qualcomm's patents has "tangibly and meaningfully increased over time," the company has never raised its royalty rates.

"Apple's complaint contains a lot of assertions, but in the end, this is a commercial dispute over the price of intellectual property," Mollenkopf said during Qualcomm's quarterly earnings report in January. "They want to pay less for the fair value that Qualcomm has established in the marketplace for our technology, even though Apple has generated billions in profits from using that technology."

Who licenses Qualcomm's technology?

Qualcomm licenses its technology to more than 340 companies, particularly phone vendors. It doesn't license its patents to chipmakers, though, which is something governments and Apple have taken issue with. Chip companies are able to use Qualcomm's technology without paying licensing fees since the handset makers cover those costs.
In the case of Apple, it licenses Qualcomm's technology through its manufacturers, like Foxconn, instead of having a license of its own. Apple says it's been trying for five years to negotiate a direct license with Qualcomm but says the terms offered weren't fair.

In April, Apple said it stopped paying Qualcomm royalties for devices sold during the March quarter. Qualcomm accused the manufacturers of breach of contract and asked a court to make them pay up until the legal battles are resolved. Qualcomm says the licensing fees Apple and its manufacturers are withholding amount to billions of dollars. Apple says it has been overpaying for Qualcomm's patents and has stopped payments until the legal dispute is resolved.

Does Intel factor into this?

When Apple first launched the iPhone a decade ago, it used modems from Infineon. It continued to use the German company's technology for the next three years until switching to Qualcomm in 2011.

Intel bought Infineon in 2011, but its chips didn't appear in the iPhone again until last year's iPhone 7 and 7 Plus. US models running on networks from AT&T and T-Mobile use Intel processors, while Verizon and Sprint versions use Qualcomm.

It's the Intel-based iPhones that Qualcomm is trying to get banned from sale in the US.

What other legal issues are facing Qualcomm?

Qualcomm has come under a lot of scrutiny in recent years for alleged monopolistic practices. Two years ago, it paid China nearly $1 billion to end a 14-month antitrust investigation in that country. Then, in December, South Korea hit Qualcomm with a $850 million fine following a three-year investigation. The South Korean Fair Trade Commission accused the chipset maker of having an "unfair business model" and creating a monopoly with its practices.

Earlier this year, the US jumped into the fray, with the US Federal Trade Commission filing a lawsuit that accused Qualcomm of forcing Apple to use its chips exclusively in exchange for lower licensing fees, excluding competitors and harming competition. It called Qualcomm a monopoly and said it extracted high royalty fees and weakened competition. Qualcomm denies the claims.

Samsung agrees with the FTC. It's one of Qualcomm's biggest customers, but it also competes with the company when it comes to mobile chips. It and Intel both filed amicus briefs in support of the FTC's case against Qualcomm.

"Because Qualcomm does not license [chipset] competitors, handset manufacturers have no choice but to accept Qualcomm's onerous terms," Samsung said in its filing. "Qualcomm directly excludes competitors and harms competition."

The next iPhone

What does this mean for my next iPhone?

Apple reportedly plans to use Qualcomm chips in the next iPhone (and Qualcomm has said it will continue selling to Apple), but if the legal battle keeps going, that could change for future generations. If Apple goes back to one chip provider, Intel, there could be issues with getting enough supply, which means you'll have to wait even longer to get your hands on a new iPhone.

Most people don't really care about what chips are inside their devices, but Qualcomm has a big advantage over Intel: speed. Its modem is the only one capable of 1 gigabit download speeds, and it's been working to get ready for 5G to show up in our mobile devices within the next couple of years. Intel also is working on a gigabit modem (as well as 5G), but the faster speed won't be ready until after the next iPhone is out.