Monday , September 20 2021

Here's How Much Apple Was Paying Qualcomm in Royalties – The Motley Fool



It's been almost two years since Apple (NASDAQ: AAPL) and the Federal Trade Commission filed separate, but concurrent legal complaints against Qualcomm (NASDAQ: QCOM). The FTC's anticompetitive case is now at trial, with Apple COO Jeff Williams testifying against the mobile chip giant for its controversial "no license, no chips" policy.

Many of the key facts – such as the per-device royalty-within Apple's original complaint were redacted. Williams just shared some new details about financial arrangement.

White iPhone XR

Image source: Apple.

An "exorbitant" amount per device

CNET reports that Apple was paying Qualcomm $ 7.50 per device in royalties. Apple initially wanted to pay just $ 1.50 per device, which it thought was a fair rate based on the value of the modems it was buying from Qualcomm. But Qualcomm charges royalty rates based on the value of the entire device, not just that component.

Apple has previously noted that it has been trying to negotiate a direct license with Qualcomm for almost a decade, but Qualcomm has refused to offer it a license. Instead, Qualcomm licenses its intellectual property (IP) to contract manufacturers, who in turn get reimbursed by Apple. But those manufacturing partners do not negotiate, and simply accept terms that Apple has previously described as "exorbitant." Before Apple instructed them to stop paying, contract manufacturers were paying Qualcomm 5% for every iPhone, translating into $ 12 to $ 20 per device.

In exchange for exclusivity and other marketing concessions, Qualcomm used to give Apple rebates that effectively reduced its royalty burden. Those rebates brought the per-device royalty down to $ 7.50.

A gun for Apple's head

To get a sense of how much Apple was paying royalties, here are how many iPhones the company sold each year along with estimated royalty costs. Note that Apple was paying these royalties even before Qualcomm became its exclusive modem supplier in 2011, and it stopped paying the royalties (through reimbursements to contract manufacturers) in 2017. Additionally, hardware modem sales are separate.

Year

iPhone Units

Estimated Royalty Expense

2011

93.1 million

$ 465.5 million

2012

135.8 million

$ 679 million

2013

153.5 million

$ 767.5 million

2014

192.7 million

$ 963.3 million

2015

231.5 million

$ 1.16 billion

2016

215.4 million

$ 1.08 billion

Data sources: SEC filings and author's calculations.

As Apple's iPhone business grew, it did its royalty burden. For reference, the $ 1.08 billion in royalties that Apple paid in 2016 were a meaningful chunk of the $ 7.9 billion in total licensing revenue that Qualcomm reported for that year.

Qualcomm unsuccessfully tried to massively increase its per-device royalty rate in 2013 when the contract was up for renewal, hoping to add another one $ 8 to $ 10 per device, according to the report. That would have more than doubled what Apple owed to Qualcomm in royalties annually. Instead, Apple has accepted exclusivity as one of several provisions to keep the per-device rate at $ 7.50.

"We were staring at an increase of over $ 1 billion per year in licensing, so we had a gun to our head," Williams said.

Evan Niu, CFA owns shares of Apple. The Motley Fool owns and recommends Apple shares. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $ 150 calls on Apple and short January 2020 $ 155 calls on Apple. The Motley Fool has a disclosure policy.


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