Apple seeks a bigger bite of mobile market

Apple is piling onto lawsuits that attack the way Qualcomm licenses technology for mobile phones in a widespread effort to rake back profits in a slowing market.

The latest suit by Apple, which it filed last week, alleges that Qualcomm has unfairly used the power of its patents, which cover the fundamentals of phone systems, and its chip business to prop up its dominant position in the industry.

Apple’s legal actions follow regulatory investigations and fines on three continents, including a lawsuit announced last week by the US Federal Trade Commission.

“It feels like another coordinated attack on Qualcomm,” said Mike Walkley, an analyst at Canaccord Genuity. The mobile phone business is “a mature industry, they’ve got to get their margins higher”.

Qualcomm shares fell as much as 14% yesterday, the most in 15 months, while Apple shares were little changed. Underpinning the US government actions is a drive to shake loose Qualcomm’s grip on the smartphone business.

In its last five fiscal years, Qualcomm has turned $37bn (€34.5bn) of licensing revenue into $32bn of pretax profit. Its gross margin, or the percentage of revenue remaining after deducting the cost of production, is 61% and is predicted to widen.

Contrast that with Apple’s gross margin of 39% in its most recent fiscal year, a number that’s predicted to narrow in 2017.

Samsung Electronics, the biggest maker of mobile phones ahead of Apple, also had a margin of 39% in its most recent fiscal year.

Apple, Samsung and LG Electronics have all been hit by slowing growth. Handset shipments likely increased 0.6% to 1.45 billion units in 2016, according to researcher IDC. As recently as the second quarter of 2015, the market was growing in double-digit percentages.

Samsung and LG are based in South Korea, where antitrust regulators announced in December a record 1.03 trillion won (€822m) fine against Qualcomm for violating antitrust laws and called for the chipmaker to change its business practices.

In China, the biggest mobile phone market, antitrust regulators accused Qualcomm of abusing its dominant position. Rather than risk being locked out, Qualcomm in February 2015 paid $975m to settle the case and was given the right to charge handset makers licensing fees, at a lower rate, for phones sold in the country.

Apple last week added its weight to the call for a change in the way licensing revenue is calculated.

— Bloomberg