Apple Inc thinks US$7.50 is more than enough to pay for technology that Qualcomm Inc says is essential to making the iPhone functional.
Testimony in the US Federal Trade Commission’s (FTC) antitrust case against the chipmaker reveals that Apple’s chief executive officer in 2006, Steve Jobs, did not object to paying licensing fees amounting to US$7.50 a phone.
However, when that deal was on the cusp of lapsing in 2012, a possible fee increase threatened Apple’s profits, triggering renegotiations that changed the dynamic between the companies, according to Apple chief operating officer Jeff Williams.
“We had a gun to our head,” he told US District Judge Lucy Koh on Monday during a trial over whether Qualcomm has abused its global dominance in the smartphone market.
It “may not sound like a lot. We’re selling hundreds of millions of phones and paying billions of dollars a year,” he said.
The fee is at the heart of the government regulator’s case against Qualcomm.
The chipmaker owns patents it says underpin how all modern, high-speed data phone networks work. Fees provide the company with the majority of its profit, enabling it to fund technology development that helps cement its position as the leading chipmaker in the industry.
The commission and Qualcomm’s customers are arguing that it is exacting too high a price for only one part of what makes smartphones so attractive to consumers — and doing so by illegally bullying its customers into paying up.
Qualcomm has countered that it is a relatively small amount for something that is so fundamental to smartphones.
Its technology determines how handsets are able to efficiently access high-speed data — without which the iPhone would be just an expensive iPod, the San Diego-based chipmaker has said.
Qualcomm maintains that it continues to contribute technology to other areas of the industry and its practices follow industry norms.
A US$7.50 fee is a drop in the bucket considering that iPhones sell, on average, for US$793 each, but it adds up.
Qualcomm’s licensing revenue peaked in 2015 at US$7.9 billion. In its most recent financial year, Qualcomm had revenue of US$5.16 billion from its licensing division, even in a year when Apple had stopped paying fees.
Apple sold 217 million iPhones in its most recent fiscal year.
William also told the court that Qualcomm refused to provide cellular modems for the 2018 iPhones after Apple sued it.
Williams’ testimony indicates the chipmaker forced Apple to use Intel Corp modems exclusively in the iPhone XS, iPhone XS Max and iPhone XR released in September and October last year, rather than the decision being a choice by Apple.
Williams said he tried to negotiate with Qualcomm to provide Apple with chips for the latest iPhones, but it refused.
However, in October 2017 Qualcomm said it had already “tested and released to Apple” modems that could be used in the new iPhones.
“We are committed to supporting Apple’s new devices consistent with our support of all others in the industry,” the chipmaker said at the time in a statement to Bloomberg News.
Apple executives had testified earlier on Monday that the company prefers to source components from multiple providers.
Dual-sourcing chips allows Apple to drive down costs, but also provides a contingency plan if there is an issue with one of the suppliers.
Williams testified that Qualcomm continued to provide chips for Apple’s older iPhones.
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