Qualcomm’s controversial royalty policy still unsettled

Qualcomm may have to shell out $891 million to Broadcom over the next four years and fork over licensing rights to its wireless patents, but one key element of Qualcomm’s business strategy has been preserved intheirbrokered peace: handset vendors using Broadcom chips must still pay Qualcomm royalties.

In an interview with the Wall Street Journal, Qualcomm general counsel Don Rosenberg said that while thesettlementallows Broadcom to use Qualcomm’s CDMA intellectual property without fees, the same isn’t true for the handset makers that use Broadcom’s chips. Qualcomm will be able to seek royalties from those vendors, essentially preserving the two-tieredroyalty systemthat Broadcom and others have railed against for the last several years.

Qualcomm earns its CDMA royalties two ways: bylicensing its core CDMA technology to chip-makers and through royalties collected from the handset vendorsthat use either Qualcomm or another vendor’s chips. Broadcom and other critics have accused Qualcomm of basically double-charging for its technology–in legalese:exhausting its patents.By settling out of court, Broadcom and Qualcomm did nothing to settle the fundamental controversy around Qualcomm’s business model. Their settlement functions as a joint-licensing agreement, giving Broadcom a pass on royalty payments but ensuring that Qualcomm will continue to exercise its two-tiered royalty model elsewhere.

That modelhasbeena profitable one for Qualcomm. According to a San Diego Union Tribune article, Qualcomm makes about two-thirds of its profits from handset and chipset-licensing fees. While $891 millionmay be a high cost to pay, it was probably worththe expense to Qualcomm toensure the decision stayed out of the courtroom where a judge could have invalidated its entire business model.

Ultimately Qualcomm may have to fight this battle again with other handset makersas the industry moves toward 4G. Qualcomm not only holds key intellectual property in 3G CDMA and wideband-CDMA technologies it hasskinin the orthoganal frequency division multiplexing (OFDM) technologiesthat power long-term evolution (LTE) and WiMax networks. As the first LTE handsets emerge–particularly dual-mode LTE-CDMA handsets for Verizon Wireless’ 4G network–disputes over what Qualcomm can charge royalties for, and how much, will likely flare up again.

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