Apple’s legal assault on Qualcomm is part of the phone’s sideline grab

Apple is mounting lawsuits attacking the way Qualcomm licenses mobile phone technology in a widespread effort to claw back profits in a slowing market.

Apple’s latest lawsuit, filed on Friday, alleges Qualcomm unfairly used the power of its patents, which cover the fundamentals of phone systems, and its chip business to bolster its dominant position in the industry. Apple’s lawsuits follow regulatory investigations and fines on three continents, including a lawsuit announced last week by the Federal Trade Commission.

“This looks like another coordinated attack on Qualcomm,” said Canaccord Genuity analyst Mike Walkley. The mobile phone sector is “a mature industry, they need to increase their margins”.

The government’s actions are based on a desire to shake Qualcomm’s grip on the smartphone sector. In its last five fiscal years, Qualcomm has turned $37 billion in licensing revenue into $32 billion in pretax profit. Its gross margin, or the percentage of revenue remaining after deducting the cost of production, is 61% and analysts expect it to widen.

Compare that with Apple’s gross margin of 39% in its last fiscal year, a number that is expected to decline in 2017. Samsung Electronics, the largest mobile phone maker ahead of Apple, also had a 39% margin in his last exercise. year.

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Apple, Samsung and LG Electronics are part of an increasingly competitive smartphone market amid slowing growth. Handset shipments likely rose 0.6% to 1.45 billion units in 2016, according to researcher IDC. As recently as the second quarter of 2015, the market experienced double-digit growth.

Samsung and LG are based in South Korea, where antitrust regulators in December announced a record KRW 1.03 trillion ($880 million) fine against Qualcomm for violating antitrust laws and called on the chipmaker to change its business practices.

In China, the biggest mobile phone market, antitrust regulators have accused Qualcomm of abusing its dominant position. Rather than risk being locked out, Qualcomm in February 2015 paid $975 million to settle the case and won the right to charge handset makers licensing fees, at a lower rate, for phones sold in the country.

Apple on Friday added its weight to the growing call for a change in the way licensing revenue is calculated. Now, phone makers pay Qualcomm a percentage of the phone’s total selling price – a sum measured in the hundreds of dollars – whether or not they use Qualcomm chips. Phone makers, backed by regulators, want a change that would force Qualcomm to charge the fee on the price of its components – an amount based on tens of dollars.

Qualcomm said Apple was “actively encouraging” government actions by “distorting facts and withholding information” from regulators.

“We welcome the opportunity to have these baseless claims heard in court where we will be entitled to full discovery of Apple’s practices,” Don Rosenberg, Qualcomm’s general counsel, said in a statement.

For Apple investors, any means necessary to reduce costs for the iPhone maker is the right decision.

“Strategically, if your enemy is somewhat hurt, it’s not very surprising that he’s much more aggressive,” said Erick Maronak, chief investment officer at Victory Capital Management in Brooklyn, Ohio, which owns Apple stock among its $55 billion under management. “Anytime they can cut costs, whether it’s legal, operational or through new technology, they’ve always been happy to pursue them.”

iPhone sales fell 8.3% to 212 million devices in the 12 months to September, the first annual decline since the smartphone was introduced in 2007. average of its iPhones has gone from a peak of $687 in 2015 to $619 the most recent. fiscal quarter as it introduced lower-cost handsets to fend off the threat from Chinese rivals such as Huawei, Xiaomi and Oppo.

Qualcomm was a double threat. Its patent stance took a chunk out of the sale price of each phone, and the money generated from that helped the chipmaker fund industry-leading research and development for better processors.

Apple typically uses two or more vendors for a given component, creating competition and driving down prices. But Apple had relied exclusively on Qualcomm’s baseband chips – parts that connect the phone to networks – until the introduction of the iPhone 7 last year, when it replaced some versions with modems from Intel Corp.

Ultimately, a direct legal fight will take years to unfold, according to Canaccord’s Walkley. Apple would be much more likely to settle the deal in exchange for lower rates.

It’s a better bet considering the San Diego-based chipmaker has been fighting similar legal battles for more than two decades and won.

“It’s Apple’s posture to get a lower rate in the future,” Walkley said. “Apple is trying to reverse 20 years of history and if they do, Qualcomm is in big trouble because then everyone will want their money back.”