Qualcomm's crisis

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As the world's largest mobile phone chip giant, Qualcomm has been in a bit of a bad situation recently.

Qualcomm just handed in its latest quarterly financial report in the early hours of November 2, Beijing time. Among them, net profit fell sharply by 89.7% year-on-year. Qualcomm explained that the main reason was that Apple and its suppliers did not pay patent licensing fees.

After a number of Chinese mobile phone manufacturers launched a boycott against Qualcomm in the past, the relationship between Apple and Qualcomm has recently become tense again, with the two sides filing lawsuits around the world. The core disagreement between the two sides is that Apple believes that Qualcomm's charging method is too expensive and unreasonable (because Qualcomm takes a commission based on the price of the whole device), while Qualcomm believes that if you use my products, you must accept my pricing method.

The lawsuit is unlikely to have a result in the short term, and Qualcomm CEO Steve Mollenkopf said this situation will continue for a long time.

On the other hand, industry rumors have it that Apple is also stepping up its efforts to find an alternative to Qualcomm. For example, starting with the previous generation iPhone 7, Apple has introduced Intel's baseband chips.

For a long time, Qualcomm has been invincible in the field of mobile phone chips. Manufacturers such as MediaTek can only find market share in the mid- and low-end markets, while the old giant Intel has been catching up in the mobile end and can hardly threaten Qualcomm's position.

However, the situation is changing.

Qualcomm did not lose to competitors such as MediaTek and Intel. Its biggest mistake was to stand against its own customers.

In one day, Apple iPhone X will be launched in China.

It seems that Qualcomm's ban on iPhone sales has not worked. Qualcomm filed a lawsuit and an injunction with the Beijing Intellectual Property Court on September 29, requesting that Apple be banned from producing and selling iPhones in China.

It seems a bit incredible, but this giant in the mobile phone chip field and one of its customers, Apple, have recently been fighting on a global scale.

Since January this year, Apple has filed lawsuits against Qualcomm in the United States, the United Kingdom, and China. Since July, Qualcomm has countersued Apple in the United States, Germany, China and other places, and even demanded that China stop producing and selling the iPhone.

Unlike other mobile phone manufacturers who completely use Qualcomm's chip solutions in their high-end phones, the CPU, GPU, ISP, video encoder and other modules of the A11 processor in Apple iPhone X are all designed by Apple itself. In the early years, the processors of iPhone, iPhone 3G and iPhone 3Gs were all from Samsung. It was not until the iPhone 4 that Apple used its own processor A4 for the first time and handed it over to TSMC for foundry. And this year's almost invincible A11 is also produced by TSMC.

Apple develops its own mobile processor chips, but it still has to rely on Qualcomm for communication-related baseband chips, because Qualcomm has a monopoly on most CDMA patents and does have a leading edge in technology.

However, the cooperative relationship between the two sides is deteriorating step by step.

In order to get rid of Qualcomm's control, Apple has introduced Intel solutions since the last generation of iPhone 7. On the other hand, Apple has started to file a lawsuit against Qualcomm and mobilized its suppliers to refuse to pay patent fees before the outcome of the lawsuit.

Apple isn't the only company wary of Qualcomm.

Huawei started developing its own mobile phone chips a long time ago. After its establishment in 2004, Huawei HiSilicon chips were applied to industry chips and did not enter the smartphone market at first. Five years later, Huawei launched the K3 processor to test smartphones, but with little success. It was not until 2013 when Huawei released its first quad-core mobile phone, the D1, that HiSilicon chips gradually became well-known.

The HiSilicon K3V2 used in the D1 was known as the world's smallest quad-core A9 architecture processor at the time, and its performance was comparable to mainstream processors at the time (such as Samsung Exynos 4412). Although this processor had a series of problems such as heating and GPU compatibility, it represented a technical breakthrough in mobile phone chips for domestic mobile phone manufacturers at the time.

In 2009, when Huawei launched the K3 processor, Samsung launched a processor called "Hummingbird" in order to create the most powerful Android phone. At that time, it had an extremely advanced 45nm process, a frequency of up to 1.2GHz, a 3D gaming performance that was 200% higher than that of its competitors, and could even hard-decode 1080P videos.

At the same time, the Galaxy S equipped with this processor also created a sales myth, establishing Samsung's leading position in the Android device camp.

After entering the 4G era, the explosion of mid- and low-end smartphones has become the biggest obstacle to manufacturers' profit growth. As a result, a small number of mobile phone manufacturers have begun to focus on the research and development of their own processors, hoping to keep the initiative in their own hands.

Samsung abandoned Qualcomm processors in its flagship Galaxy S6 released in 2015 and adopted its own Exynos to cope with the pressure of declining market share and increasing profit margins.

The same is true for Huawei, whose flagship models (Mate 7, P8, P9, etc.) since 2014 have all been equipped with self-developed processors. This indirectly proves the importance of Chinese chips and also stimulates the determination of other domestic mobile phone manufacturers to develop their own chips.

Xiaomi is one of them.

When Lei Jun brought the first self-developed Pinecone Surge S1 processor to the stage of the press conference, it meant that the number of mobile phone manufacturers in the world that can independently develop processors has increased to four, namely Apple, Samsung, Huawei and Xiaomi.

As early as 2014, it was reported that Xiaomi would develop its own processors. The reason for this decision was that Xiaomi sold 61.12 million mobile phones throughout the year, achieving Lei Jun's previous expectation (60 million units). At that time, Xiaomi was on a fast track of growth. However, neither the flagship model nor the Redmi series could bring Xiaomi huge and sustained profits and revenue.

In an interview, Lei Jun made it clear that "the significance of chip manufacturing is not just about the chip itself. This is related to the second half of the mobile phone industry. When entering the knockout stage, we must focus on core technology."

In other words, the intention behind Xiaomi's self-research is nothing more than to enhance its voice in the supply chain and reduce product costs.

However, an industry insider told Jiemian News that from 2014 to 2016, the shipment of Xiaomi mobile phone series began to decline gradually, while Huawei began to recover gradually during the same period, and Kirin chips played an indispensable role in this. It is worth mentioning that at the end of 2014, Xiaomi was banned from selling in India due to a patent case. This series of impacts forced Xiaomi to speed up the layout of self-developed chips.

Subsequently, Xiaomi's Pinecone Technology officially acquired the SDR1860 platform technology developed and held by Leadcore Technology for 103 million yuan. Half a year later, the "crystal" of Xiaomi and Leadcore was born.

The Redmi 2A, which is equipped with the Leadcore LC1860C processor and is priced at 499 yuan, sold more than 5 million units within three months of its launch. After that, Xiaomi's "independent" processor development using Leadcore's core technology was accelerated.

Qualcomm can be said to be a company that "counts money while lying down."

Its main business is divided into three parts: QCT, QTL and QSI. Relying on the patents accumulated by Qualcomm over the years, the QTL business line (technology licensing department, mainly responsible for licensing the technology patents accumulated and acquired by Qualcomm over the years) contributed 30%, 29% and 31% of its business revenue in fiscal years 2013, 2014 and 2015 respectively, equivalent to about 8 billion US dollars per year. Qualcomm also invests a lot of money in research and development every year.

However, Qualcomm's charging method is rather special. In addition to charging chip manufacturers for selling chips, it also takes a certain percentage of the sales price of the mobile phone. The percentage is not transparent, but the industry says it is generally around 4% of the price of the whole phone.

It can be said that Qualcomm has made a fortune using its original patent licensing model, and then used the revenue to invest in the research and development of more advanced chips to continue to dominate the market.

Moreover, in order to consolidate its patent advantage, Qualcomm adopted a "patent re-licensing" policy when signing agreements with Chinese companies. Specifically, before using Qualcomm chips, mobile phone manufacturers must sign a patent licensing agreement with Qualcomm, re-licensing their own patents to Qualcomm for free, and stipulate that they cannot use these patents to sue other Qualcomm customers.

Qualcomm has thus established its own ecosystem and made small manufacturers willingly pay for the unreasonable high "Qualcomm tax". This is because it reduces the risk of small and medium-sized manufacturers lacking patents being sued by their peers. Companies including Xiaomi, OPPO, and Coolpad have become extremely slow in overseas markets due to the lack of patents, but have achieved rapid growth in China.

Due to the impact of Qualcomm's "patent anti-licensing", domestic manufacturers with 1,247 patents can hardly make a profit from it. According to incomplete statistics, if the "Qualcomm tax" is abolished, Qualcomm's patent licensing fees in the Chinese market will be reduced by at least 200 to 300 million US dollars each year.

But while Qualcomm was making huge profits, dissatisfaction among downstream mobile phone manufacturers was also accumulating. At the call of many downstream manufacturers, China's National Development and Reform Commission paid attention to Qualcomm's patent issues and launched an investigation.

In February 2015, the National Development and Reform Commission issued a huge fine of RMB 6.088 billion to Qualcomm. It also proposed rectification measures for Qualcomm, two of the more important changes being: 1. For mobile phones sold in China, a patent licensing fee of 65% of the net wholesale price of the whole device will be charged; 2. Chinese mobile phone manufacturers will not be forced to reverse license their patents for free.

In this way, the ecosystem built by Qualcomm based on patents was partially disintegrated. Some domestic manufacturers also began to refuse to pay patent fees to Qualcomm, such as Meizu.

However, the powerful Qualcomm filed a lawsuit against Meizu after the communication failed. On June 23, 2016, Qualcomm claimed 520 million yuan for Meizu's infringement of Qualcomm's 3G and 4G patents. Qualcomm said that it had negotiated with Meizu before and hoped to sign a patent licensing agreement based on the correction plan submitted by Qualcomm to the National Development and Reform Commission of China in 2015. However, after many negotiations, the two sides failed to reach a consensus and Meizu refused to pay patent fees to Qualcomm.

The feud between the two families has a long history.

As early as when Meizu launched its mobile phone business, Huang Zhang expressed his dissatisfaction with Qualcomm in the Meizu forum, saying that CDMA required high patent fees and Meizu would not develop CDMA phones. Meizu subsequently developed a number of mobile phones, but did not develop CDMA phones until 2015.

After Alibaba invested in Meizu, the latter made a qualitative leap in the mobile phone market, with sales reaching 20 million in the first year of cooperation. Qualcomm realized that "the time to close the net has come."

Why is Meizu reluctant to pay patent fees to Qualcomm? Many industry insiders told Jiemian News that their answers were consistent: "It's too expensive, so expensive that it's unimaginable." In fact, the patent issues between Qualcomm and Chinese mobile phone manufacturers are not unique to Meizu. Most mobile phone manufacturers are unwilling to pay patent fees.

However, during the hot sales period of smartphones, Qualcomm's patent fees were extremely high because manufacturers sold a lot of them, but as long as they got the processor early, the patent fees were still affordable. However, in 2015, the overall sales volume of the Chinese smartphone market began to slow down or even decline. Qualcomm chose to continue to charge high patent fees, which seriously affected the profits of manufacturers.

A mobile phone industry insider told Jiemian News: "Qualcomm doesn't just sell processors, but a complete solution. If your mobile phone uses Qualcomm's CPU, you must also use Qualcomm's baseband, power management, signal amplification, wireless module and other complete solutions. The chip procurement cost is quite high. If you do not use Qualcomm's CPU, in addition to reducing CPU costs, you will have more choices for various other chip suppliers, and you can consider performance and price factors comprehensively, so the overall mobile phone manufacturing cost will be much lower."

Behind the quarrel with Meizu, Qualcomm is gradually losing its deterrent power over domestic mobile phone manufacturers. Also in 2015, the high-end Snapdragon 810 had serious overheating, and the performance of mid- and low-end processors was weaker than that of its competitor MTK, which sounded the alarm for Qualcomm.

After the release of the Pengpai S1 chip, Xiaomi became the fourth smartphone company to have its own chip. Although there is still a long way to go in terms of performance, the Pinecone processor has greatly enhanced Xiaomi's brand effect.

In the past two years, Huawei has also seized market share with its Kirin processor-based phones, and has even challenged Apple and Samsung. The importance of processors is self-evident.

At this point, the world's top three mobile phone manufacturers, Apple, Samsung, and Huawei, all have their own chips, and newcomer Xiaomi is following closely.

An industry insider told Interface News that once mobile phone companies become strong enough, they will develop their own processors with the mentality of "no matter how poor they are," for at least four reasons.

The first is to control costs. As a major component in a mobile phone, the price of the processor accounts for a large proportion of the total cost. If we can independently develop the processor, we can naturally reduce costs.

Secondly, we have the right to speak and independently develop processors, so the product route planning is basically controllable. The production chain can prepare for this in advance, greatly reducing the uncertainty brought to the product by various external factors.

The third is to have your own characteristics. For example, when talking about Apple and Samsung, we think of the A series chips and Exynos series processors. Competition among companies requires differentiation.

Finally, it is about gaining profit margins. If mobile phone manufacturers want to make profits by making chips, they have to go through a difficult period. After waiting for maturity, they will reap the rewards.

However, although Huawei and Xiaomi have launched their own processors, this is still a luxury for other domestic mobile phone manufacturers. An industry analyst told Jiemian News that the research and development of processors not only requires a large amount of comprehensive cost investment, but also requires consistent confidence in the project, which is unimaginable for most mobile phone manufacturers.

Moreover, in the current environment, Qualcomm chips still have considerable technical advantages. When it comes to choosing flagship phones, whether it is Xiaomi, OnePlus, Sony, or Samsung, everyone is still competing fiercely with Qualcomm.

In recent years, MediaTek has been "surviving in the cracks" of Qualcomm. This Taiwanese company shifted its product strategy to thousand-yuan smartphones, thus earning it the title of "Father of Cheap Phones."

Brands such as vivo, TCL, Gionee, Meizu, and Meizu Blue have successively released models equipped with MediaTek processors. However, due to the lack of investment in in-depth polishing, these phones have not left a deep impression in the consumer market in terms of performance and experience.

Qualcomm's third quarter 2017 financial report shows that the company achieved revenue of $5.37 billion in the third quarter, up 7% from the previous quarter and down 11% from the previous year. The third quarter revenue was adversely affected by the lawsuit with Apple. Qualcomm predicts that the company's patent licensing department's revenue in the fourth quarter will drop to $1 billion, down about 47% from the previous year.

Qualcomm released its financial report for the fourth quarter of 2017 today. The report showed that Qualcomm's revenue this quarter was US$5.9 billion, a decrease of 5% from US$6.2 billion in the same period last year; net profit was US$200 million, a year-on-year decrease of 89%.

As the smartphone market is gradually approaching its ceiling, Qualcomm, as one of the biggest winners in the smartphone market, has apparently begun to be affected by the sluggish market growth.

According to Gartner's smartphone research report, the global mobile phone market shipped 1.5 billion units in 2016, a decline of 1.6%. This is very similar to the PC market a few years ago. As mobile phones become more and more powerful, the lifespan of smartphones will gradually increase. The smartphone market has gradually matured and is close to saturation.

However, Qualcomm doesn't seem worried.

Paul E. Jacobs, executive chairman of Qualcomm's board of directors, said that in the next five years, another 8 billion smartphones will be sold and there will be more than one trillion connected devices. His reason is that in the future, mobile phones can achieve innovation by integrating more functions, and in the era of the Internet of Everything, Qualcomm will have a larger market space.

Some industry analysts said that Qualcomm is currently troubled by the following two main issues.

First, the growth of Qualcomm's revenue and net income will continue to be volatile for some time to come as litigation and the smartphone market develop. On the other hand, there are signs that the uncertainty of Qualcomm's acquisition of NXP Semiconductors (On October 27, 2016, Qualcomm acquired all of NXP's issued shares at a price of US$110 per share, with a total value of approximately US$47 billion, all paid in cash) is increasing, and the results are unpredictable, let alone the development of new markets.

Any of the above external factors will have a great impact on Qualcomm's business and revenue. Qualcomm lost nearly 20% of its revenue in the first quarter of 2017 due to the impact of the lawsuit, which is a very obvious example.

In other words, facing these two major difficulties at the same time, Qualcomm needs to launch more, newer and more advanced products in the future to prove itself, convince consumers and stimulate the market.

However, as mentioned above, the pursuit of MediaTek and the pressure of Intel are not fatal to Qualcomm. The "collective rebellion" of the mobile phone giants is the real culprit. In the fields of Internet of Things and artificial intelligence, competitors are also eyeing them.

MediaTek Vice General Manager You Renjie once told a reporter from Interface News that MediaTek currently has 80% of the smart speaker market share and will "overtake" in the Internet of Things market in the future; Apple, Huawei, and Samsung are also deepening their research in the field of artificial intelligence processors. Following the A11 and Kirin 970, Samsung also plans to equip its own smartphones with artificial intelligence chips within the next three years.

Qualcomm, which was founded in 1985 and has just turned 30, has dominated the entire smartphone chip market. Since 2017, the "rebellion" of giants and the entanglement in patent fees are gradually making the company lose its direction.

This company, which is still able to "count money while lying down", is now standing at a crossroads. How will it coordinate its relationship with its customers? Will it continue to command everyone from a high position, or change its strategy and achieve win-win cooperation?

Note: This article is reproduced with the author's permission and does not represent the position of Leifeng.com