Apple, Qualcomm Stoke China 5G Fear as Fight Hurtles Toward End

(Bloomberg) -- Apple Inc. and Qualcomm Inc. finally agree on something: the importance of 5G mobile phone technology for the U.S.

The protagonists in a wide-ranging and bitter legal battle before the U.S. International Trade Commission argue that the other’s actions are damaging the nation’s lead in fifth-generation wireless technology. The agency is scheduled to release key decisions on Tuesday in the long-running fight over patent royalties -- including one that could lead to an import ban on one of the U.S. economy’s most iconic products.

A ruling from the trade commission favoring Apple could undermine Qualcomm’s attempts to defend its business model and keep on charging billions of dollars in technology licensing fees. If Qualcomm prevails, Apple may face restrictions on its ability to import and sell some versions of the iPhone, the main source of its revenue.

The promise of 5G -- which is not yet on the market -- is not just faster speeds, but the ability to do things with connected devices not currently possible, from remote surgery via robots to self-driving cars that talk to each other. But the fear in Washington that China will get a global lead in 5G is being stoked by both Apple and Qualcomm to try to win the epic legal battle over technology that currently underpins all smartphones.

“The whole telecom and wireless industry has been made to sing the 5G song,” said Will Stofega, a mobile industry analyst at IDC, when asked about the dispute between two of the world’s largest technology companies. “There’s a sort of alarmist trend that China may get ahead of us in actual deployment.”

Their choice of 5G as a focus their arguments is on point. President Donald Trump’s administration has already intervened in Qualcomm’s affairs by banning a hostile takeover by Broadcom Inc. in a move which cited the San Diego chipmaker’s importance to the new phone technology.

At the same time, U.S. politicians and regulatory agencies also are focused on curtailing the influence of China’s Huawei Technologies Co. Apple and Qualcomm have each argued that a loss at the ITC for them would help Huawei gain an edge in 5G.

“Diminished American research and development in the baseband chipset market impacts competitive conditions in a sector that has national security implications,” Democratic Senators Ron Wyden and Jeff Merkley of Oregon and other lawmakers said in a letter to the agency, in support of Apple’s position. A dozen other politicians, both Republican and Democratic, also weighed in against an import ban.

ITC May Bite Apple’s iPhone in Ways Qualcomm’s Jury Win Couldn’t

The trade agency has the power to block imports of products that violate U.S. patent rights. In the first of two cases filed by Qualcomm, a trade judge said Apple infringed a patent for a power-saving feature, but cited the 5G race in recommending against banning iPhones. The commission is scheduled to release its final decision on Tuesday. The same day, a judge in a second case is expected to issue notice of her findings involving other Qualcomm patents lodged against Apple.

It’s rare for the agency to decline to impose an import ban if a violation is found, though in special cases it’s agreed to delay implementation of such orders. The last time it decided against any ban was in 1984, when it found that barring hospital beds designed for burn victims would harm patients who might not be able to get the equipment.

Any import ban would next go to the Trump administration for consideration, and could be overturned on public policy grounds. In 2013, the Obama administration vetoed an import ban on older iPhones won by Samsung Electronics Co., citing concerns about blocking the use of fundamental technology in mobile devices.

At the center of the overall argument between Apple and Qualcomm is a tiny chip called a modem. The smartphone component helps convert radio signals into voice and data. Qualcomm’s chips have led the way in previous transitions to 3G services and its successors in the phones and services we use today.

Apple argues that giving in to Qualcomm’s demands to have the iPhone banned would hurt competition. Apple’s current supplier, Intel Corp., would face difficulties continuing to innovate in that area if revenue from sales in the U.S. was proscribed, Apple contends.

“Without current 4G sales to Apple, Intel lacks a viable path forward to compete for coming 5G baseband chipset sales,” Apple told the agency. “Intel is now the only U.S. baseband chipset manufacturer still standing in the face of Qualcomm’s anticompetitive practices.”

Qualcomm says that’s nonsense. There’s plenty of competition, it says, mostly from overseas companies, and allowing Apple to use the patented inventions without paying up would hurt its, and the U.S.’s, leadership in 5G.

“Qualcomm is the global leader in 5G development and standard-setting, with Huawei being a close second,” Qualcomm said. “Although Apple purports to urge the Commission to keep a second runner in a two-man race, Apple is really urging the Commission to hobble the American leader in a field crowded with foreign entrants.”

All phones that will debut on nascent 5G systems this year will be based on Qualcomm chips, the company has said. Samsung, the world’s biggest phone maker, is launching a version of its flagship Galaxy line using Qualcomm components.

Intel, Samsung, Taiwan’s MediaTek Inc., Huawei and others have all announced their own plans to bring 5G-capable modems to market, but most will come no earlier than 2020, by which time Qualcomm says it’ll be on its second version.

Analysts have expressed concern that the fight with Qualcomm could delay Apple’s entry into the 5G market. The company is holding off until at least 2020 before offering an iPhone that can connect to 5G services, according to people familiar with its plans.

Royalty Rivalry

While both sides are invoking 5G before the trade agency, the case is really a royalty debate that’s become fairly common among companies in the mobile-device sector. The ITC cases are an effort by Qualcomm to put pressure on Apple to renew an expired licensing agreement.

Qualcomm not only makes the chips, but has patents on the fundamental technology that underlies all mobile devices. That means it gets paid whether a device contains a Qualcomm chip or not. The dispute with Apple is over how much Qualcomm should get in royalties from the iPhone.

The patents in the two ITC cases don’t relate to industry standards. Qualcomm says that’s to show how its research makes its phones not merely function, but work better. It also avoids the kind of legal dispute that tripped up Samsung in 2013.

Apple says the power-saving feature is for “15 extra minutes of battery life,” and it’s been able to design around the patent. Apple asked that, if an import ban is imposed, it be given time to finish the roll out of the software change and to have the redesign reviewed by U.S. Customs officials.

The animosity between the two behemoth companies spans the globe. Apple filed an antitrust lawsuit against Qualcomm and directed its component suppliers to stop paying the chipmaker, which has cost it billions of dollars in revenue. Qualcomm has won court orders in China and Germany that limit iPhone sales in those countries.

In the U.S., the trade agency is only one of the venues deciding disputes between the two companies. A trial was held in January in the Federal Trade Commission’s antitrust lawsuit against Qualcomm over its licensing practices, based in large part on the royalty fight with Apple. The two sides are awaiting a federal judge’s decision in that case.

A federal jury in San Diego on March 15 told Apple to pay Qualcomm $31 million for just three of the thousands of patents the chipmaker owns -- including the one in the first ITC cases -- while a Qualcomm lawsuit against the contractors is scheduled to begin in the same courthouse next month.

©2019 Bloomberg L.P.