Sidestepping the Qualcomm Ban

(page 2 of 2)

A Chorus of Wireless Comrades

The ITC ban is unlikely to be lifted any time soon, and Qualcomm has steadfastly refused to settle the case on Broadcom's terms (see BusinessWeek.com, 6/8/07, "Banned: New Phones With Qualcomm Chips"). On July 20, a federal appellate court dismissed Qualcomm's appeal of the ban "for lack of jurisdiction." While President George W. Bush has the authority to overturn the ITC decision by Aug. 6, such actions are rare, and most experts consider intervention in this case unlikely.

In fact, since Qualcomm has been banking heavily on a chorus of wireless comrades urging the President to act, the defection of such an influential player marks a serious setback in that strategy. With Verizon Wireless withdrawing its support for a Presidential veto, the chances of one being granted have fallen from "60% to 70%, to 10% to 20%," according to Blair Levin, an analyst with Stifel Nicolaus.

Potential Import Bottleneck

Where does that leave Sprint? In a bind, as the ban may even inadvertently delay shipments of phones not covered by the ITC order, says Lyle Vander Schaaf, a former ITC attorney and a partner at the law firm Bryan Cove. "Customs may be stopping all things that look like communications devices. And in some circumstances, delays can be devastating." As a result, he says, it may be cheaper for Sprint to just pay the same $6-per-phone licensing charge as Verizon. Sprint says in a statement, "We're continuing to focus on efforts to encourage the (White House) to disapprove the Order."

Broadcom won't say if it's negotiating similar deals with other companies. "We remain willing to talk to others," says David Rosmann, Broadcom's vice-president of intellectual property litigation.

A series of carrier licensing deals would effectively bypass Qualcomm to resolve a nasty, years-old royalty dispute that's repeatedly threatened to disrupt the industry. "If all carriers obtain similar licenses from Broadcom, it would not be necessary for Qualcomm to negotiate to pay [these] royalties to Broadcom," explains Vander Schaaf.

Broadcom Benefits From Extra Fees

And by negotiating directly with Broadcom, carriers may be able to get a better deal than Qualcomm. "This deal was dramatically better than what we have [been offered]," argues Bill Davidson, director of global marketing at Qualcomm. While Verizon Wireless' deal limits the payments to $40 million per year and $200 million over the lifetime of the patents involved, Qualcomm says it was offered no such caps by Broadcom and would have owed billions.

Yet while the Verizon deal appears to hurt Qualcomm's legal strategy, it would help the company avoid some of the near-term sales disruptions expected under the ban. In a research note, Mark McKechnie, an analyst with American Technology Research, writes that the 5% to 10% earnings drop he expected Qualcomm to suffer in the next few quarters due to the ban may be drastically lessened by the Verizon-Broadcom deal.

Broadcom, of course, will benefit from the extra licensing fees collected from Verizon Wireless. More important, the alliance may bring Broadcom more Verizon business. "We are going to pursue a whole range of potential opportunities," Rosmann says. "This may be several times more significant than the cash payments." Eventually, the alliance could help Broadcom get handset makers to use its components in place of Qualcomm's.

"If you are in bed with one of the world's largest operators, you can influence software and handset design," says David Wu, an analyst with Global Crown Capital. "It's a godsend for Broadcom."

Kharif is a reporter for BusinessWeek.com in Portland, Ore.