Sidestepping the Qualcomm Ban

Verizon Wireless' licensing deal with Broadcom sets a precedent that could leave consumers paying more for new mobile phones or service

by Olga Kharif

By shaking hands with Qualcomm's worst enemy, Verizon Wireless is not just undermining Qualcomm's hard-line legal strategy, but setting a precedent that could have far-reaching consequences for wireless service providers, handset makers, and mobile-phone users for years to come.

On July 19, Verizon Wireless struck a licensing pact with Broadcom (BRCM), the victor in a patent-infringement suit against Qualcomm (QCOM) that has led to an import ban on all new phone models containing Qualcomm's next-generation wireless chips. Under the deal, Verizon Wireless agreed to pay Broadcom a $6-per-device licensing fee, subject to certain caps, to bypass the ban and continue importing new phones.

Simply put, the arrangement is unprecedented. No wireless chipmaker, be it Broadcom, Qualcomm, or Texas Instruments (TXN), has ever charged a mobile-service provider for royalties on phones containing its components or technology. Until now, only handset makers, like Nokia (NOK), Samsung, Motorola (MOT), and LG have paid these licensing fees.

But the deal with Verizon Wireless, owned jointly by Verizon Communications (VZ) and Vodafone (VOD), introduces a new model for licensing arrangements. Think of it as a shift in how royalties in the wireless industry are administered, collected, and paid—a shift that could leave U.S. consumers paying more for new mobile phones.

Passing On Costs, but to Whom?

It appears unlikely that Verizon would be willing to eat the entire $6 extra cost. It's possible the company may seek or has already arranged to recover all or some of the expense from its handset suppliers, Qualcomm, or even its subscribers. "I'd speculate that Verizon will ultimately have to pass these costs on to their customers," says John Lau, an analyst with Jefferies. Verizon begs to differ: "The price of handsets to consumers won't increase as a result of this agreement," says spokeswoman Nancy Stark.

Either way, the licensing deal could force rivals like Sprint Nextel (S) to follow suit as the critical holiday shopping season approaches for an industry that's already scurrying to compete with AT&T's (T) flashy new iPhone from Apple (AAPL). The import ban, ordered by the International Trade Commission (ITC) in June, only affects new phone models containing Qualcomm chips with a speedier technology for wireless Internet access. But with revenue from wireless calls declining, such cutting-edge devices are precisely what carriers are depending on to boost usage of mobile-data services.

The inability to introduce devices containing Qualcomm's next-generation chips would strike hard at Verizon Wireless and Sprint Nextel because their networks are based on Qualcomm's core wireless technology. And unlike Verizon, the best performer in the U.S. wireless industry, Sprint can ill-afford the ITC ban. Sprint's subscriber base has been shrinking in recent quarters, and with the iPhone selling fast, that exodus could turn into a flood, unless Sprint can spring a new best-seller of its own.