Rumored Qualcomm Acquisition Signals Turn Against Licensing

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By Joseph Marks

Sept. 30 — Qualcomm Inc.’s rumored acquisition of NXP Semiconductor NV signals a move away from the patent licensing model that has helped make Qualcomm a giant of the smartphone world and a major advocate for strong patent protections in Washington.

The move comes as declining smartphone prices are challenging Qualcomm’s revenue from both licensing and chip sales, and as the company is facing lower royalty rates in numerous jurisdictions.

Standards-setting bodies have deemed Qualcomm’s patented innovations vital components of most smartphones, allowing the company to capture royalties even on smartphones that don’t use its chips.

The average price of a smartphone is projected to drop about 4.6 percent, per year, through 2019, however, according to a 2015 study by IDC Research Inc. Those lower prices will mean lower royalties for Qualcomm.

The company is also facing increased challenges from competitors such as Intel Corp., Samsung Electronics Co. Ltd. and Huawei Technologies Co. Ltd. And Qualcomm's licensing model has faced administrative reviews in China, where Qualcomm agreed to reduce some royalty rates last year, and in South Korea.

“Combine those factors and Qualcomm wants to get away from the handset business,” Bloomberg Intelligence Senior Industry Analyst Anand Srinavasan said.

From Autos to Connected Cars

The Dutch firm NXP produces computer chips for a broad range of sectors, including smartphones and other consumer technology. The company acquired Freescale Semiconductor Ltd. for $12 billion late last year, aiding its position in the market for chip technology that undergirds connected cars.

The auto sector won’t offer such an attractive model for licensing royalties, but it will insulate Qualcomm from falling licensing revenues in smartphone chips, Srinavasan said.

An analysis by Srinavasan and Bloomberg Intelligence Associate Eshani Gupte suggested the Qualcomm-NXP deal may close at around $40 billion, if it goes through.

Qualcomm’s licensing division currently accounts for roughly 31 percent of the company’s revenue, according to its latest annual filing with the Securities and Exchange Commission. Wireless communications account for 92 percent of Qualcomm sales, according to the Bloomberg Intelligence analysis.

The Wall Street Journal first reported Qualcomm and NXP were in talks about a possible acquisition Sept. 29. Neither company has confirmed the talks.

A Qualcomm spokesperson declined to comment, saying that “as a matter of corporate policy, Qualcomm does not comment on rumors or speculation.” NXP did not respond to a Bloomberg BNA request for comment on the deal.

Hefty Patent Portfolios

Qualcomm holds over 100,000 granted patents and patent applications worldwide, according to a 2015 press release.

The company fiercely defends strong patent protections, including by helping to fund The Innovation Alliance, an industry group that lobbied strongly against patent reform bills this Congress. Qualcomm itself spent roughly $988,000 lobbying on intellectual property issues during the past year, according to Bloomberg Government data.

NXP has a global portfolio of roughly 9,000 patent families, according to the Dutch company’s most recent annual report. NXP defines a patent family as a collection of patents and patent applications originating from the same invention.

To contact the reporter on this story: Joseph Marks in Washington at jmarks@bna.com

To contact the editor responsible for this story: Mike Wilczek at mwilczek@bna.com

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