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 China's National Development and Reform Commission (NDRC) is moving
to wrap up its 13-month investigation into the U.S. chipmaker as
soon as possible, the regulator said in a statement on Friday,
bringing to an end one of the most high profile of a slew of such
investigations by Beijing into western firms.
Any deal is likely to include a record-breaking fine, as well as
changes to how Qualcomm licenses its technology to handset makers in
China, according to industry sources and local press reports.
That could weaken the firm's prized technology-licensing business
across the global smartphone industry by increasing pressure from
regulators in other countries. Anti-trust probes in Europe and by
the U.S. Federal Trade Commission (FTC) may be related to China's
investigation, Qualcomm has said.
"It's not an overstatement to say they're under attack," said Thomas
Cotter, a patent expert and professor at the University of Minnesota
Law School. "Nobody knows how it will play out but the fact that
there is an FTC investigation tells you something."
Qualcomm declined to comment.
ROYALTY CHANGES
Qualcomm is the top patent holder for cellphone technology,
including many that form industry standards like CDMA and LTE.
Charging royalties based on the cellphones' selling prices, even
those made with competitors' chips, provided more than half of its
$8 billion net income in 2014.
As growth tapers in developed markets, the smartphone industry has
turned to China, where the rollout of LTE technology is driving
demand, and where the majority of the world's smartphones are also
manufactured.
The NDRC, one of China's anti-trust regulators, has said it suspects
Qualcomm of overcharging and abusing its market position in wireless
communication standards.
Qualcomm is expected by industry sources to agree to changes in how
it charges royalties on cellphones sold in China, which will hurt
its bottom line in its fastest-growing and most significant market.
Qualcomm earned about half of its global revenue of $26.5 billion in
China for the fiscal year ended Sept. 28.
An agreement to lower royalty rates charged by Qualcomm on phones
sold in China could affect its contractual relationships not just
with local manufacturers such as Huawei, Lenovo, ZTE and Xiaomi Inc,
but also with bigger global players that make and sell phones in
China, such as Apple Inc. and Samsung Electronics, said patent
lawyers consulted by Reuters.
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At a meeting with analysts in November, Qualcomm President Derek
Aberle did not directly answer a question about when the chipmaker's
largest licensees' contracts would be due for renegotiation, or how
those renegotiations would be affected by potential concessions
Qualcomm could make in China.
"If Qualcomm comes to an agreement with China's government to
materially reduce its royalty rates, then what happens with their
agreements with LG, Samsung and Apple?" said Ascendiant Capital
analyst Cody Acree. "It becomes a snowball that's really hard to see
the end to."
ON THE BACK FOOT
The China probe is the latest anti-trust investigation faced by
Qualcomm, which was hit with a $20 million fine in South Korea in
2009 and was forced to renegotiate licensing agreements with Nokia
and others by the European Commission in 2007.
Recent decisions by Supreme Court judges making it harder to enforce
software patents, as well as the possibility of a renewed push in
Washington for patent reform, now have the San Diego company on the
defensive at home, some patent experts believe.
The FTC's probe concerns patents on technology used in industry
standards and might require Qualcomm to change its licensing
practices, according to a company filing.
"Qualcomm has more problems than just in China," said Donald Merino,
who advises companies on patents in Asia. "They have a problem in
the US as well because the U.S. is devaluing the patent system."
(Editing by Alex Richardson)
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