When Qualcomm (NASDAQ:QCOM) announced recently it had won a favorable settlement from Apple (NASDAQ:AAPL) in its long-running legal battle, QCOM stock analysts breathed a sigh of relief and told their customers to buy, buy, buy.
In the aftermath, Qualcomm stock shot up. By the morning of May 21, it seemed clear skies were ahead.
But Apple’s lawsuit had a point.
U.S. District Court judge Lucy Koh ruled on May 21 that Qualcomm’s policy of forcing the industry to license patents on its terms in order to make communications chips violated the Federal Trade Commission Act.
Suddenly all those optimistic projections for QCOM stock are open to question.
Qualcomm continues to defend its “no license, no chips” business model, which requires companies to license its patents in order to make, or buy, modem hardware, piling on patents to make those rights eternal, and keeping companies like Intel (NASDAQ:INTC) out of the communications business.
Apple’s complaint was that Qualcomm charged it retail prices for wholesale orders. The FTC’s complaint, lodged in the dying days of the Obama Administration, was that Qualcomm was refusing to license its patents to competitors under what are called Fair, Reasonable And Non-Discriminatory (FRAND) standards.
On the merits, the FTC is right. That’s precisely Qualcomm’s business model. Before beating Apple in court, Qualcomm had forced South Korean and Chinese regulators to back down on the point, in exchange for fines.
These governments acceded to the monopolist’s demands because they needed the tech. But it was still an illegal monopoly.
Working the Refs
Like AT&T (NYSE:T), which goes from courts to states to federal regulators and back to courts in order to get its way, Qualcomm reacted to the decision politically.
Stunned Qualcomm analysts called the ruling a “gift” to China, specifically Huawei, which the Trump Administration is fighting. The American Enterprise Institute called the Justice Department’s action supporting the FTC “unprecedented” (it’s not). The Wall Street Journal called it a “coup,” claiming a decision ending a monopoly kneecaps “competition.” Legally, the Qualcomm position is simply unsustainable.
But Qualcomm isn’t concerned with the legal niceties. Qualcomm plays hardball and has even won decisions upholding its monopoly in China. This is practically a home game.
In terms of technology the Trump Administration policy has been “random” and “all over the place,” according to Reuters. A policy without principles is bad for business, Reuters adds. They’re right. Kleptocracy only benefits kleptomaniacs.
Even if the Trump Administration supports Qualcomm’s appeal, it could face a long legal road. But the Trump Administration has intervened directly on Qualcomm’s behalf before. It killed an attempt by Broadcom (NASDAQ:AVGO) to buy it in 2017, claiming national security concerns, even after Broadcom moved its headquarters from Singapore to San Jose.
If enough of the President’s friends scream at him long enough, he could make a similar decree here, law be damned.
The Bottom Line for QCOM Stock
The Koh decision doesn’t end the matter. It just makes the future of QCOM stock as uncertain as it was before the Apple settlement. And investors agree; QCOM is down 15% since the ruling.
If the company is required to renegotiate its license agreements it would be “onerous,” as critics maintain. QCOM stock’s recent rise was based on the idea that if Apple can’t beat it, and China can’t beat it, Qualcomm’s illegal monopoly must not be illegal.
But it is.
Patent rights are always limited, both in terms of time and the conditions under which they’re licensed. Qualcomm is a monopolist. Politicians may believe that opening the market to competition benefits China more than the U.S., but the principle in this case seems clear.
Monopoly rents are monopoly rents, even if a political friend is collecting them.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.