It’s the Apple-Nokia conflict all over again, but this time it’s between Apple and one of its key chip suppliers, Qualcomm. The row appears to be over how much of a premium Qualcomm is charging for its modem chips in past and future models of iPhone.
If you’ve been following this thread, you’ll remember that Apple is suing Qualcomm over unfair premiums on its wireless mobile modem prices. It is now confirmed that Qualcomm will continue to supply the chips to Apple, but Qualcomm CEO Steve Mollenkopf has confirmed what we suspected all along – that the lawsuits (now lodged in U.S. and Chinese courts) – are being used as a ploy by Apple to get better pricing:
“Apple’s complaint contains a lot of assertions, but in the end, this is a commercial dispute over the price of intellectual property. They want to pay less for the fair value that Qualcomm has established in the marketplace for our technology, even though Apple has generated billions in profits from using that technology.”
“At the end of the day, they essentially want to pay less for the technology they’re using. It’s pretty simple,” added Qualcomm president Derek Aberle, who was formerly the head of Qualcomm’s licensing unit.
Apple doesn’t need the billion dollars or the billion yuan that it is suing Qualcomm for, but there is now enough evidence to suggest that they’re doing this to help maintain their own high margins on the iPhone.
It is a well-known fact that Apple takes about 90% of the entire smartphone market’s profits. We saw this in the last quarter. That means their margins are obviously higher than anyone else’s. Could it be that Apple is trying to make up for lost device sales by showing higher profitability?
On the one hand, Apple’s board of directors is visibly ticked off by declining device sales. On the other hand, it’s not really Apple’s fault that iPhone sales are on the decline. There’s more competition in the market now, the demand for smartphones isn’t as strong as before and at the current price points, iPhones just aren’t practical for emerging markets like China and India.
Just yesterday we saw Apple present its plans to government officials for setting up manufacturing units in India. That’s also part of their plans to bring down their operating costs.
When you look at all these apparently disparate things going on around Apple, a pattern begins to emerge. They’ve been putting pressure on all their suppliers to reduce pricing, they’re taking a harsher route with Qualcomm, they’re possibly dropping Intel’s modem chipsets in favor of Qualcomm’s, and they’re exploring cheaper manufacturing in India.
That pattern points back to the fact that Apple either needs to show higher sales for iPhones in 2017, or higher profitability to offset any further decline in device sales.
The real problem is that their services ecosystem isn’t fully built out yet. Both Apple Pay and Apple Music – their strongest earners in that segment at this point – are still fledgling units when compared to devices. Why Apple didn’t start focusing on them earlier is anyone’s guess, but the company has now realized that this is imperative to their future.
As for the case against Qualcomm, we noted before that neither company is going to take this to a point where they break off their relationship altogether. And I’m going to re-state that fact. This is merely a lover’s quarrel that will end in a kiss-and-make-up scene when it’s time for those chips to be supplied. It is too important to both their businesses to allow this matter to escalate beyond a point of no return.
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