Apple was in the news again this week for its efforts to create its own wireless modems. This has long been a goal of its in-house chip division, which is regarded by observers as one of its core advantages. Yet, there is another way to look at Apple’s approach here. It is not only an attempt to get around Qualcomm’s chips but also a way to get out of its patent licensing strategy.

Qualcomm’s profit margins are higher than your average chip company. And like other semiconductor majors, the San Diego-based company also protects its inventions with intellectual property. But Qualcomm has a unique model at the heart of the way it uses those patents, and that approach is different than the way that almost everyone else in its industry, let alone any industry, does it. Its strategy has allowed it to get some of the best margins in the business, and will be the subject of this week’s edition of Nonobvious.

Fishing for Licenses and Chips

Patents are an important part of many business models. Typically, there is a division between licensing and product divisions. When a company uses patent licensing, usually there will be some patents that protect products they produce while a licensing arm will license patents to noncompetitive products. A few rare companies like ARM have a business model entirely organized around patenting, which produces profit margins that exceed those of software companies—truly epic. This is separate, of course, from non-practicing entities, also known as NPEs or patent trolls, that purchase patents for the purposes of suing other companies—true licensing companies like ARM develop their own IP through R&D.

Qualcomm does not respect this dichotomy. Qualcomm is a very active firm with over 24,000 active patent families and a patent portfolio of 140,000 global patents.1 In fact, their San Diego headquarters has a wall of some of their most famous patents. They are patenting every day, from 5G and 6G modems, where they claim to have the most license agreements of any company, to AI applications. Unlike most companies, Qualcomm will not just sell you a chip. Qualcomm incorporated its patent licensing business alongside its chip business. In other words, to even purchase a Snapdragon, you have to agree to a patent license. This means that Qualcomm is able to double-dip where most companies divide their revenue streams. Because of this, they call themselves a “champion” of patent rights and engage actively with the patent community. These businesses are divided between QTL, or Qualcomm Technology Licensing, and QCT, or Qualcomm CDMA Technologies, which actually makes chips.2

The financial impact, as told on their annual 10-K filing, is staggering. In 2023, QTL brought in $5.3 billion in revenue but $3.6 billion in profits, a 68% margin. While this is only 15.9% of revenue, it is a staggering 49.3% of Qualcomm’s entire net income. Although in 2023 Qualcomm’s margins were hit, generally they achieve a profit margin exceeding 29%, which is far above the industry average of 22.74%. In an industry that is ruthlessly competitive, this is an impressive achievement and has been recognized by investors on Wall Street.

These licenses are very expensive. First, Qualcomm does not negotiate on a product-by-product basis, which makes sense in a market with millions of SKUs. Instead, they negotiate product definitions and take a cut of every product that meets that definition—so for example, Apple would not pay a license for each individual iPhone but rather would pay across all iPhone models. QTL extracts a license for its Standard Essential Patents even when the companies do not use any QCT products. They are not afraid to litigate patent infringement and even brought Apple to their heels after two years of bitter fighting, worth a reported $4.5 billion in the first year.

More astoundingly, the license is taken as a percentage of the value of the licensed product, regardless of the percentage of value that the chips, primarily modems, represent. This is incredibly aggressive. Even ARM has not accomplished that feat. But then, ARM has to contend with open-source competitors like RISC-V, while Qualcomm’s lead is so vast that no one has been able to replace them. Primarily, this is because the testing requirements are so severe: to properly test a modem, one must use it all over the world with cell towers from dozens of cell phone carriers. It is a complex task that takes years and billions of dollars.

Qualcomm’s tactics have attracted the attention of the Federal Trade Commission and faced monopoly accusations. Qualcomm actually faced an antitrust lawsuit, Federal Trade Commission v. Qualcomm, where it lost the case at the district court level (though it was reversed unanimously by the Ninth Circuit). There have been other notable and related cases over the years, most notably Continental Automotive v. Avanci, which was quite controversial and finally put to bed in 2022 while still leave many Standard Essential Patent questions unanswered. Some observers noted that the Continental case echoed Qualcomm, but unlike in Continental, Qualcomm does not try to get around its obligations as a Standard Essential Patent holder by refusing to license to suppliers.

Qualcomm’s licensing business is best-in-class and an example many companies can learn from. There is a lesson in how truly essential companies can use intellectual property to boost their business. But the use of the Qualcomm patents also shows the requirements: any company that attempts the same strategy must be prepare for ample litigation and be so technologically ahead that no one can catch it.

Notable news items

• In an attempt to cut pharma prices, the Biden administration threw its support behind aggressive “march-in rights” for the National Institutes of Health (Stat News)

• An analysis of how the famous laser patents would have held up in light of the recent Amgen decision; a very interesting example of legal alternate history (IP Watchdog)

• A new CRISPR patent fight might be brewing with the advent of a new treatment by Vertex Pharmaceuticals (MIT Tech Review)

Latter-day litigation

• VLSI Technology v. Intel Corporation, No. 22-1906 (Fed. Cir.): In a stunning reversal, the Federal Circuit undid a $2.2 billion patent verdict against Intel. Although Intel was held to infringe on some patents, this will allow Intel to argue for substantially lower damages

• Purdue University v. STMicroelectronics International N.V., U.S. District Court for the Western District of Texas, No. 6:21-cv-00727: A large European semiconductor firm was held to infringe on key Purdue MOSFET patents. Given the importance of MOSFETs and the remaining life of the patents, the royalties may exceed $100 million by 2026

• Ontel Products Corp. v. Guy A. Shaked Investments Ltd., No. 22-1938 (Fed. Cir.): A lawsuit that is not only about toothbrushes but also indirect indicia of nonobviousness

Gripping Gazette entries

• US 11807358 B2: An underwater drone and recovery system by Dallas-based Textron

• US 2022/0250562 A1: A new wiring system from Tesla that could make wiring harnesses and CAN buses obsolete

• US 11834906 B2: A ladder with a safety sensor to prevent the tragically common accident of ladders folding when the spreaders are not locked

Eventful expirations

• US 6654968 B2: A fashionable method of using zippers to change the length of clothes depending on mood without permanently altering it from Harley Davidson

• US 6654978 B2: A device for removing snow from vans, cars, and other large vehicles, just in time for the winter

• US 6654999 B2: An ultrasonic tool used to remove unwanted tissue during surgery that was both small and strong