Qualcomm's Fight With Apple Remains an Overhang for Its Stock
As one more battle opens up in Qualcomm (QCOM) and Apple's (AAPL) bitter dispute over iPhone royalty rates, there's still no sign that a settlement will be arriving anytime soon.
On Monday, an eight-day patent infringement trial involving the companies is kicking off at a federal court in Qualcomm's hometown of San Diego. Qualcomm is alleging that iPhones packing Intel (INTC) modems infringe three of its non-standards essential patents, and is seeking up to $1.41 per infringing device sold between mid-2017 and the fall of 2018.
Even if Qualcomm scores a full victory in this trial, which is one of many battles the company is fighting with Apple across three continents, it's hard to imagine Apple feeling pressured to settle because of it. The company could appeal an adverse ruling, and just as importantly, the damages that Qualcomm is seeking here are equal to just a fraction of the patent royalties that the companies are fighting over.
Only about half of the iPhones sold during the time period in question are believed to have contained Intel modems. And in recent testimony, Apple COO Jeff Williams indicated his company has been paying Qualcomm a royalty of $7.50 per iPhone. Though this figure is much less than what many peers are believed to pay Qualcomm per high-end phone sale, Apple has been arguing it should pay much less; in a 2017 Bloomberg article, the company's legal chief was quoted saying Apple's per-device royalty payment should be "$4 or so."
In addition, the FTC's antitrust suit against Qualcomm, which (following hearings in January) is awaiting a ruling by a San Jose federal court, could also motivate it to keep fighting. Among other things, the FTC wants Qualcomm to license its valuable standards-essential patents (SEPs) covering 3G, 4G and 5G mobile standards to rival modem makers such as Intel, which would result in devices containing rival modems being covered by the modem licenses.
In November, Judge Lucy Koh (previously responsible for overseeing some of Apple's legal battles with Samsung (SSNLF) ) granted the FTC a partial summary judgment ordering Qualcomm to license its SEPs to modem rivals on fair, reasonable and non-discriminatory (FRAND). Should Qualcomm ultimately be required to do this -- Koh still has to issue a final ruling, and Qualcomm would presumably appeal a negative ruling -- it could seriously harm Qualcomm's licensing model. That's because the requirement would result in Qualcomm only collecting royalties on many of its patents based on a modem's selling price, rather than a phone's selling price (subject to a cap).
Throw in the fact that Apple has been able to use workarounds and software updates to sidestep recent iPhone bans won by Qualcomm in German and Chinese patent cases, and the dispute doesn't appear likely to be resolved in the near-term, at least unless one of the parties agreed to major concessions relative to its current negotiating stance.
Should Qualcomm reach a deal with Apple that doesn't require major concessions, its stock would almost certainly pop on the news. Even though Qualcomm's near-term earnings are pressured by its licensing disputes with Apple and China's Huawei, as well as by soft smartphone demand, shares only trade for 14 times a fiscal 2019 (ends in Sep. 2019) EPS consensus of $3.82. And while its licensing business is having a rough time, Qualcomm's chip business looks primed to turn a corner thanks to its investments in 5G, RF, automotive and IoT offerings.
But as the old saying goes, markets hate uncertainty. And for now, between its ongoing battles with Apple, Huawei and the FTC, there's still a lot of uncertainty surrounding Qualcomm's licensing business, which has historically produced the majority of its pre-tax profits.
Alibaba's Deal With Office Depot Could Be a Sign of Things to Come
March 4, 2019 | 1:14 PM ESTThis post has been updated with quotes from Office Depot CEO Gerry Smith and Alibaba exec John Caplan.
Many of the large U.S. retailers battling Amazon.com (AMZN) have found Alphabet/Google (GOOGL) to be a useful partner. To some extent, the same could hold true for Alibaba (BABA) .
Office Depot (ODP) , which is expected on average by analysts to see its revenue stay roughly flat in both 2019 and 2020, is hoping a new partnership with the Chinese e-commerce giant will give it a revenue boost. The tie-up, announced on Monday morning, involves the creation of an Office Depot-branded website on the Alibaba.com e-commerce platform, which caters to non-Chinese businesses looking to buy goods wholesale (often from Chinese merchants).
The website offers discounts on Office Depot purchases to customers who use it to place orders on Alibaba.com. Office Depot plans to promote it to its 10 million-plus U.S. business customers, and work with Alibaba to provide customer support for orders placed on Alibaba.com.
During a call with TheStreet, Office Depot CEO Gerry Smith said his company would use a number of approaches to promote the partnership to customers. "We're going to use 1,800 sellers, we're going to use our 1,350 stores," he said. "We're going to use every platform that we have, and we're going to use...both traditional and non-traditional media."
Interestingly, Alibaba and Office Depot also plan to collaborate on cross-border logistics and fulfillment, with the goal of shortening delivery times for overseas orders, as well as to help U.S. small and mid-sized businesses (SMBs) sell via Alibaba.com.
"One of the things that attracted us to collaborating with Office Depot is that they have a distribution footprint in the U.S. that reaches 99% of U.S. businesses next day," said John Caplan, the North American lead for Alibaba.com, during the call about the planned logistics collaboration. "Fulfillment is a point of pain for small businesses."
The move comes not long after Alipay parent Ant Financial, which Alibaba has a 33% stake in, struck a deal to buy British money-transfer firm WorldFirst, with an eye towards facilitating cross-border transactions. It also comes as the company is overhauling Alibaba.com, revamping the platform's tech infrastructure, as well as launching value-added services in areas such as logistics and financing.
Office Depot might be eager to get whatever e-commerce help it can get right now. As the company's revenue growth and stock price both flatline, Amazon's business sales appear to be growing at a brisk pace. Last September, Jeff Bezos' firm disclosed that its Amazon Business marketplace was on pace to do more than $10 billion in sales volume in 2018, just three years after it first topped $1 billion.
The disclosure arrived 11 months after Amazon launched its Business Prime service; U.S. pricing ranges from $179 to $10,999 per year, depending on how many users are supported by an account. Last October, Amazon rolled out several new perks for Business Prime accounts, including free same-day and one-day shipping for eligible, $35-plus orders and access to an Amazon-branded American Express (AXP) card that provides 5% back on Amazon Business purchases.
Alibaba certainly isn't a cure-all for the competitive threat that Amazon poses for a company like Office Depot. However, between the company's ability to connect U.S. business with Chinese buyers and sellers, as well as the expertise it has built up over the years in fields such as logistics, retail analytics and payments, there are plenty of reasons for a U.S. retailer scrambling to grow its online sales to turn to it for a helping hand.
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