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Qualcomm chips and intellectual property are increasingly found in smartphones around the world, but there’s been a cloud of uncertainty hanging over the San Diego silicon firm for the past 14 months: Namely, the chance that China would boot the company out of the country or severely hamper it because of issues with a 2008 Chinese anti-trust law.
Qualcomm announced Monday that it had reached an agreement with China’s National Development and Reform Commission. As Reuters reported earlier, citing China’s state-run securities trade paper, the deal includes a 6 billion RMB fine (approximately $975 million) and Qualcomm has agreed to change its licensing practices, including a promise that it will license its “essential” 3G and 4G patents separately from its other intellectual property, at what looks like a lower rate than before. Qualcomm’s summary of the key terms is below:
Qualcomm will offer licenses to its current 3G and 4G essential Chinese patents separately from licenses to its other patents and it will provide patent lists during the negotiation process. If Qualcomm seeks a cross license from a Chinese licensee as part of such offer, it will negotiate with the licensee in good faith and provide fair consideration for such rights.
For licenses of Qualcomm’s 3G and 4G essential Chinese patents for branded devices sold for use in China, Qualcomm will charge royalties of 5% for 3G devices (including multimode 3G/4G devices) and 3.5% for 4G devices (including 3-mode LTE-TDD devices) that do not implement CDMA or WCDMA, in each case using a royalty base of 65% of the net selling price of the device.
Qualcomm will give its existing licensees an opportunity to elect to take the new terms for sales of branded devices for use in China as of January 1, 2015.
Qualcomm will not condition the sale of baseband chips on the chip customer signing a license agreement with terms that the NDRC found to be unreasonable or on the chip customer not challenging unreasonable terms in its license agreement. However, this does not require Qualcomm to sell chips to any entity that is not a Qualcomm licensee, and does not apply to a chip customer that refuses to report its sales of licensed devices as required by its patent license agreement.
China is a key market for Qualcomm — nearly half of its profits come from the country, thanks to its large smartphone manufacturing industry as well as its huge smartphone market. Given that Qualcomm’s revenue last year was nearly $27 billion, the fine won’t cripple the company, but CEO Steve Mollenkopf has warned that the settlement would have a tempering effect on the company’s fiscal 2015 outlook.
The NDRC’s main allegation was that Qualcomm had a “monopoly” on modems for cell phones, particularly those using the CDMA standard, and had “abused its dominant position,” presumably by overcharging on licensing fees. Qualcomm, in defense, has alleged that Chinese licensees selling devices with Qualcomm chips have not accurately reported sales figures — meaning that it’s hard to accurately collect licensing fees.
It’s important for Qualcomm to continue to strengthen its business ties with Shenzen’s smartphone industry, or manufacturers could turn to improving 3G and 4G chips from companies like MediaTek and Samsung.
In December, President Barack Obama discussed the 2008 anti-trust law with his Chinese counterpart, Xi Jinping. A national security spokesman said that Obama had “concerns” about China’s use of its anti-trust policy to limit royalty fees from foreign countries, turning this business issue into a matter of foreign policy.