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China wins royalty cuts from Qualcomm

Posted: 11 Feb 2015 ?? ?Print Version ?Bookmark and Share

Keywords:royalty? 4G? 3G? 28nm? antitrust case?

Qualcomm has agreed to pay $975 million in fine to Beijing authorities, putting an end to its nearly two-year patent fight in China.

China's National Development and Reform Commission (NDRC) called the investigation "antitrust case." But more accurately, it successfully haggled with Qualcomm to get the royalty rate cuts for Chinese handset vendors.

The financial community showed signs of relief after the settlement announcement, sending Qualcomm's shares up 3 per cent in after-market trading.

Let's do the math

Qualcomm's Chinese settlement calls for a 5 per cent royalty rate on multi-mode 3G/4G devices (including multi-mode 3G/4G devices) and a 3.5 per cent rate on other 4G hardware (including 3-mode LTD-TDD devices). The key change is that now rates will be derived from a royalty base of 65 per cent of a device's net selling price, instead of an OEM's full sales price. Qualcomm's royalty rates are typically based on 100 per cent of the net selling price of a handset.


So, let's do the math. The 5 per cent royalty when multiplied by .65 equals an effective royalty rate of 3.25 per cent for 3G. The 4G royalty is 3.5 per cent of the net selling price of the device, which results in a net royalty rate of 2.275 per cent.

Some analysts view the deal favourably as "an outcome that could have been worse." After all, Qualcomm will be still receiving a 3.25 per cent royalty rate on every 3G phone sold in China, and 2.275 per cent for every 4G device.

However, Qualcomm's existing customers outside China continue to pay a royalty fee based on 100 per cent of the net selling price. What if Qualcomm's non-Chinese customers starting asking for the same deal?

Qualcomm simply asserts that the resolution "requires no licensing changes outside China."

Qualcomm's assumption is that regulators in the United States and the European Union, where Qualcomm is under investigation for monopolistic practices, won't interfere with pricing.

Maybe so, but it's hard to imagine that Qualcomm's customers outside China will quietly acquiesce to a double standard.

Real beneficiary

Curiously (or not so curiously), one company benefitting mightily from the Qualcomm-NDRC settlement is China's largest foundry, Semiconductor Manufacturing International Corporation (SMIC) in Shanghai. As part of the settlement, Qualcomm has agreed to expand its partnership with SMIC. Qualcomm struck a deal with SMIC last summer covering the production of 28nm Snapdragon processors.

T.Y. Chiu, CEO at SMIC, in announcing Tuesday (Feb. 10) its fourth-quarter financial results, said, "We achieved our 11th consecutive profitable quarters, and this is the third consecutive year of positive earnings. And we are able to maintain a healthy utilisation of 93 per cent."

During the earning's call, Chiu also cited SMIC's relationship with Qualcomm. He said, "We were happy to announce in December the successful fabrication of 28nm for Qualcomm's Snapdragon 410 processor, which signifies the own time and the steady progress of our 28nm product qualification. We continue to anticipate production to begin in Q2 this year, with revenue recognition in the second half."

As a result of the Qualcomm-NDRC deal, Taiwan Semiconductor Manufacturing Co. (TSMC), up to now Qualcomm's primary foundry, could lose some of its businessbased on older processesto SMIC.

- Junko Yoshida
??EE Times

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