Friday, September 15, 2006

If You Think There's Fury Over Business Method Patents and the Internet, You Should Start Watching the Telecoms

At one point or another, every industry experiences some controversy over a patent holder that claims to be the gatekeeper for key technologies in that industry - for JPEG, it is Forgent; for streaming media it is Acacia; for MP3's it is Sisvel; for DIMM/RIMM memories, it is Rambus.

But for CDMA and W-CDMA - controversy, thy name is Qualcomm.

The San Diego company, which began 21 years ago as a tiny startup with no real product and an office over a pizza parlor, experienced a meteoric rise between 1999 and 2004 when the company championed "code division multiple access" (CDMA) technology, along with a corresponding patent portfolio, that by some estimates, covers 80 percent of the CDMA standard. Qualcomm built its business, in part, around the model of suing competitors and licensing its technology. Almost a third of its $5.7 billion in revenue in fiscal 2005 came from royalties. Much of the rest comes from selling chips for cell phones.

While CDMA accounts for only 20% of the present cellphone market (with GSM being the predominant standard), next-generation cellphones, which will be equipped to transmit music, video and games at high speeds, will rely heavily on wideband spread-spectrum 3G mobile telecommunication air interfaces (W-CDMA), which Qualcomm is rumored to hold nearly a 35% patent stake in. Industry analysts estimate 5 percent of the sale price of a cell phone can be attributed to Qualcomm's technology. As the holder of 4,800 patents and pending patents - many related to making multimedia cell phones work - Qualcomm is on the verge of collecting royalties on virtually every handset sold in the world.

However, not everyone is happy over Qualcomm's success. In fact, Qualcomm's dominance has created a fast-growing "enemies" list in the telecom industry over the company's licensing practices. In the words of Dave Mock, author of "The Qualcomm Equation," Qualcomm has become "the most-hated American corporation," second only to Microsoft.

Like Microsoft in the 1990s, Qualcomm has come under attack by competitors who allege that Qualcomm is using it's patent muscle to squeeze out competition. Furthermore, industry-standard members have claimed that Qualcomm is overcharging on royalties and giving price breaks to cell phone makers who also agree to buy Qualcomm's chips for their phones.

Over the past 3 years, a barrage of lawsuits, countersuits, and ITC/FTC complaints have been filed, asking numerous governments to step in to force Qualcomm to license at a cheaper rate:

- On July 2005, Broadcom, an Irvine, Calif.-based microchip manufacturer sued Qualcomm in the U.S. District Court in New Jersey alleging anti-trust violations. It accuses Qualcomm of charging cell-phone makers who use its chips lower royalties than cell-phone makers who use a competitor's chips (the case was recently dismissed).

- Six separate complaints were filed last fall in the European Commission by Broadcom, Ericsson, NEC, Nokia, Panasonic Mobile Communications and Texas Instruments, asking for an investigation of what the companies describe as Qualcomm's "anti-competitive conduct."

- Complaints were filed in the Fair Trade Commission of South Korea by Texas Instruments and Broadcom. The companies argue that Qualcomm is using its market dominance to demand excessive royalty rates.

- Besides the antitrust lawsuit, Broadcom and Qualcomm are embroiled in five lawsuits in which they accuse each other of infringing on patents. Last year, Broadcom also filed a complaint with the U.S. International Trade Commission is alleging that Qualcomm has engaged in unfair trade practices by selling chips that infringe on Broadcom patents.
The biggest showdown will be between Qualcomm and Nokia. Each company holds patented technology that the other needs, and cross-licenses have been made to allow Nokia and Qualcomm to use each other's intellectual property. However, those licenses are set to expire April 9, 2007.

In the meantime, the legal wrangling continues - a week after Nokia filed its complaint with the European Commission last fall, Qualcomm sued Nokia, accusing it of infringing on 12 patents. Then in June, Qualcomm complained to the United States International Trade Commission that Nokia was importing and selling cell phones that infringe on six Qualcomm patents. Nokia responded by announcing that it will stop designing and manufacturing handsets that use Qualcomm's technology in early 2007. The move was considered a blow to Qualcomm because, as the largest cell phone manufacturer, Nokia could have helped spread the use of Qualcomm technology.

If Qualcomm and Nokia can't reach agreement by the April deadline, "then both of us will be infringing on the other's intellectual property," noted Jacobs, Qualcomm's CEO.

- See Kathryn Balint's excellent article in the Paramus Post, which provides a detailed account of the issues surrounding Qualcomm's licensing controversy, along with insightful commentary by industry analysts following these issues.

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