Qualcomm settlement good for Broadcom, customers

With the litigation behind them, both companies can refocus their energies on product innovation

The deal announced Sunday that settled years of patent suits between chip makers Qualcomm and Broadcom is good news for consumers as well as for the companies involved, according to industry analysts.

Qualcomm will pay Broadcom $891 million over the next four years, and over that period, the companies agreed not to assert their patents against each other on their integrated circuits and certain other products and services. The out-of-court settlement ended litigation in the U.S., the European Union and South Korea. It followed a series of lawsuits back and forth, one of which nearly stopped many mobile phones based on Qualcomm chips from entering the U.S. Qualcomm is the world's biggest maker of cellular chips and owner of key technologies used in both CDMA (Code-Division Multiple Access) and 3G Wideband CDMA. Broadcom is a large communications chip vendor with a small but growing cellular business.

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"I think this is really a plus for the marketplace," said Jack Gold of J.Gold and Associates. "It allows both of them to get back to the innovation cycle, as opposed to the lawsuit cycle."

Analyst Will Strauss of Forward Concepts estimated Qualcomm was spending $200 million per year on the litigation, in addition to executives' time and attention. The company acknowledged in the financial report for its fiscal second quarter that the feud had made an impact on it.

"While this settlement adversely impacted our second-quarter results, eliminating uncertainty, employee distraction and cost related to protracted litigation is a positive for our stockholders, customers, partners and the wireless industry," Qualcomm said in its financial press release. It is scheduled to make its first payment of $200 million to Broadcom by the end of June and took a $748 million charge in the quarter for the settlement.

The deal lets Qualcomm maintain its basic business model, in which it charges handset makers royalties for its intellectual property. It charges about five percent of the price that handset makers charge mobile operators for their phones, according to Strauss. Critics have complained that those fees are too high, and this deal isn't likely to change them, analysts said.

However, the settlement could make phone makers, and the carriers that buy their products, more secure.

"You're not going to be subject to potentially having chips held up at the border, as they almost were in the past, because of patent infringement," Gold said. Verizon Wireless, the world's biggest seller of CDMA phones, agreed in 2007 to pay Broadcom to cover Qualcomm's use of the disputed technology so it could continue to import phones despite a ban imposed by the U.S. International Trade Commission. It paid Broadcom $6 for every handset, PDA, or data card that used CDMA EV-DO (Evolution-Data Optimized) mobile broadband technology. That can't have made Verizon happy and was probably the kind of situation the chip vendors didn't want to continue, analysts said.

"It's good to have the customers sort of shielded and unaffected by this kind of battling," said Joe Byrne of the Linley Group. Strauss suggested Qualcomm may have been motivated to reach this settlement with Broadcom because the Verizon arrangement is due to expire.

Qualcomm also said it had developed a workaround to avoid using the disputed technology, which would have consumed the company's engineering resources with no real benefit, analysts said. "Obviously, the workaround chips probably weren't as good as those that didn't need the workaround," Strauss said.

In addition to helping both companies, the broad new settlement may also shake up the mobile chip industry, according to some analysts. Broadcom is a much smaller player than Qualcomm in the mobile-phone chip business, with annual cellular sales under $100 million compared with billions for Qualcomm, according to Linley Group's Byrne. But the company's role could grow significantly now that it has access to Qualcomm's intellectual property.

Qualcomm supplies 95 percent or more of the chips that go into CDMA handsets, with no major competitor, according to Strauss. Broadcom could now become that competitor, selling chips to major CDMA phone makers such as Samsung, LG and Motorola, he said. It's unlikely Broadcom will grab more than 5 percent of the market or so, but having it there as a serious alternative supplier could change the market, Strauss added.

Broadcom will also have the chance to expand in the market for WCDMA, the major form of 3G across the GSM (Global System for Mobile Communications) world, and LTE (Long-Term Evolution), the next-generation data network for Verizon and most other mobile operators, Strauss said. The company is already making headway in this market. At Mobile World Congress in February, Nokia said it was extending a 2G chip partnership with Broadcom into the 3G arena.

The impact of the settlement four years out -- an eternity in the fast-changing mobile business -- is hard to foresee, analysts said. But it's likely Broadcom will be a much bigger player by then, they said.

In any case, the apparent cease-fire in patent suits for that period should be a win for cell-phone buyers, according to Ken Dulaney of Gartner.

"All this is nothing more than a tax on products," he said.

Copyright © 2009 IDG Communications, Inc.