The biggest risk to Qualcomm from Apple’s lawsuit filed last week isn’t the potential $1 billion in damages, but a threat to the dominant mobile chip maker’s entire patent royalty licensing business model, according to a leading Wall Street analyst.
In a report entitled “The march to war,” Bernstein Research analyst Stacy Rasgon says Apple is seeking to undermine Qualcomm’s ability to reap a percentage of the sales price for every smartphone sold–including as much as 4% of every iPhone sold. Apple, which brought Intel (intc) on as a second supplier for mobile chips for the iPhone 7, may ultimately be moving to end its chip purchases from Qualcomm, Rasgon wrote.
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“While the $1 (billion) is what captured most of the headlines, in our opinion it is a sideshow,” Rasgon wrote in a report on Monday. “Rather, AAPL is attempting a direct assault on Qualcomm’s basic licensing business model, attacking the ‘essential’ nature of their IP, and directly targeting QCOM’s device-level royalty model. The suit doesn’t read well for the future of the chipset relationship either.”
Rasgon slashed his price target on Qualcomm (qcom) to $65 from $80. The stock closed at $62.88 on Friday after Apple (aapl) filed the lawsuit. The shares were down 4% to $60.48 in pre-market trading on Monday after Rasgon’s report was released.
On Friday, Apple filed suit against Qualcomm in U.S. District Court for the Southern District of California. Apple accused Qualcomm of refusing to pay $1 billion in promised rebates and trying to extort Apple into giving false testimony to regulators in South Korea.
Qualcomm dismissed Apple’s allegations and accused the iPhone maker of “misrepresenting facts and withholding information” when talking with regulators around the world.
Last month, the Korea Fair Trade Commission fined Qualcomm $854 million over patent licensing abuses. And last week, the Federal Trade Commission filed a suit against Qualcomm over similar allegations, citing Apple’s dealings with the chipmaker at the heart of its case. Qualcomm is disputing both cases, arguing it has abided by the law in its royalty licensing.
Typically, holders of patents that are included in industry standards agree to limit their royalty charges to amounts that are “fair, reasonable, and non-discriminatory.” Apple says Qualcomm’s practice of charging a percentage of the price of the iPhone violates that agreement, since the patents at issue are included in various mobile communications standards.
“All of this is, simply put, an all-out assault on Qualcomm’s licensing business structure,” Rasgon writes, concluding that the suit is more serious than others Qualcomm has faced in the past. “The gloves appear to be off this time around.”