A trade ruling partially blocks the importation of phones using chips that violate a Broadcom patent—and leaves wireless carriers and handset makers in the lurch
There was scant consolation for chipmaker Qualcomm (QCOM) in a long-awaited court decision on its patent dispute with rival Broadcom (BRCM). On June 7, the U.S. International Trade Commission (ITC) announced a ruling on the punishment to be meted out to Qualcomm for violating a patent held by Broadcom.
The ITC issued a partial ban on the importation of mobile phones that contain the offending Qualcomm chips. True, that's better than the full ban some had feared would be handed down. Qualcomm shares rose in extended trading amid relief Qualcomm doesn't face a worst-case scenario. The stock gained 1.7%, or 69¢, to $41.02. "There's no immediate impact," says Cody Acree, an analyst with Stifel Nicolaus.
Handsets on Hold
It's what comes next that's likely to hurt Qualcomm—and a lot of the companies that rely on its chips to run their mobile phones and provide wireless calling to millions of customers. As a result of the ITC ruling, companies can still import phones that contain the chips in question, provided the models are already on the market. But no new phone models that contain the chips can be brought into the U.S. Nor can companies import the chips by themselves.
So while the supply of phones won't immediately be interrupted, plans to introduce new handsets could be disrupted. "This is bad news for Qualcomm," Blair Levin, an analyst with Stifel Nicolaus, wrote in a research note. "They revise and turn over their handset models rapidly." Big cell-phone manufacturers typically introduce 20 to 30 new phones a year, and they usually refresh existing lines at least once a year.
Qualcomm chips are used in phones made by companies including Motorola (MOT) and South Korea's LG Electronics. Those handsets in turn are used by customers of such carriers as Sprint Nextel (S) and Verizon Wireless, owned by Verizon Communications (VZ) and Vodafone Group (VOD). Qualcomm Chief Executive Paul Jacobs said in a statement that "tens of millions" of handsets could be barred from entering the U.S. because of the ruling. Virtually all of Qualcomm's chips are made abroad and then brought into the U.S. by handset makers who want to reach the attractive U.S. market.
iPhone Rivals Go Missing?
The ruling couldn't come at a worse time for service providers such as Verizon Wireless and Sprint Nextel, which had been expected to unveil a slew of new phones in the coming months. While the North American summer is usually a slow season for handset introductions, this year is an exception because on June 29, AT&T (T) will start selling Apple's (AAPL) iPhone. Competing handset makers including LG, HTC, Samsung, and others were expected to provide the other carriers with new models, based on Qualcomm's chips, to compete with the new arrival.
Verizon Wireless is thought to be planning a release of LG's high-end Prada touch-screen phone. The import ban may stymie those plans. "This is a bad order for the industry and American consumers," says Nancy Stark, a Verizon Wireless spokeswoman. "It's going to freeze innovation." Verizon Wireless does not discuss phones in the pipeline.
The partial ban could be no less a hardship for handset makers. The ITC's decision stands to interfere with sales of Motorola's much-hyped RAZR2 phone, a successor to the best-selling slim RAZR, says Larry Harris, an analyst with Oppenheimer & Co. "The impact is less severe than a blanket restriction," he says. "But it has the potential to hold back progress." RAZR2 was scheduled for introduction in the U.S. in July to revive Motorola's flagging sales.
Search for a Solution
At issue is software designed to extend battery life in chips while users make out-of-network calls. In October, an ITC administrative judge made an initial ruling that Qualcomm violated the Broadcom patent covering that feature and the commission later affirmed the decision (see BusinessWeek.com, 10/11/06, "Qualcomm's Temporary Reprieve").
So what is Qualcomm's recourse? Qualcomm will first ask a Federal Circuit Court to stay the decision, pending appeal. Verizon Wireless will file its own stay request. Qualcomm and some of its customers, including Verizon Wireless, have also asked President Bush to veto the commission's decision—though analysts say that's a long shot. "The President is very unlikely to do something," says Charles Schill, a partner at law firm Steptoe & Johnson. In the past 600 cases going through the commission, the President chose to get involved only five times.
As for handset makers, they could futz with Qualcomm's chips so they no longer infringe on Broadcom's patent, says Lyle Vander Schaaf, partner at law firm Bryan Cave and a former ITC attorney. Then the chips and the handsets would be allowed to enter the country, he believes. That solution could take months, he adds.
Then There's Licensing
Another possible solution: Qualcomm could come up with an alternative method for the feature covered by the Broadcom patent. During a conference call following the ITC announcement, Qualcomm didn't provide any information on the timing of workaround development.
Of course, Qualcomm could also start licensing Broadcom's patent and end the court fight (see BusinessWeek.com, 5/30/07, "Qualcomm Under Fire"). "We simply want to be adequately compensated for the use of our intellectual property," Broadcom said in a statement. "To that end, we have made it clear to Qualcomm that we are open to discussions regarding the potential for licensing of our patent. The ball is in Qualcomm's court."
Qualcomm executives on the call indicated they weren't keen on playing. "What they are seeking are terms that would be destructive to our business model," Qualcomm General Counsel Louis Lupin said. But if the company can't devise a workaround and loses on appeal, holding out may prove more harmful still.