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Qualcomm signs landmark deal with Xiaomi

US firm now has patent licensing pacts with four of China’s top five OEMs, but many smaller ones remain

Qualcomm’s licensing issues in China have dominated its results and industry perceptions all year, so it will come as a big relief for the US company to have signed a patents pact with Xiaomi, the rapidly growing Chinese handset maker.

In fact, since Qualcomm settled with the Chinese competition authority, following an investigation into its business practices, it has succeeded in concluding new licensing deals with several tier one device makers, such as Huawei, TCL and ZTE (though Lenovo is still outstanding). Previously, Qualcomm had said that many Chinese companies were deferring patent renewals until they knew the outcome of the antitrust probe.

But Xiaomi is symbolically, as well as financially, important. Unlike Huawei and others, it makes only devices, so its patent relationships with Qualcomm are uncomplicated. And its agreement will send a signal to the wider base of suppliers. It is perhaps the best representative of the new breed of smartphone makers which are emerging from China and taking the market by storm, helping to shift the balance of revenues eastwards, and into the highly functional but affordable bracket.

That shift is causing Qualcomm other problems of course – lower average selling prices for complex devices hit its chip revenues as well as its patent fees; and many of the new OEMs are customers of MediaTek or Spreadtrum, while loyal Qualcomm clients like BlackBerry are in decline. However, if peace breaks out on the licensing front, that will surely ease the path for the chip side of the business – Xiaomi recently announced that its Mi 4c Android handset – which offers a 5-inch Full HD screen with sunlight display and a 13-megapixel camera for US$200 – runs on a Qualcomm Snapdragon 808 processor.

Closer ties to such a high growth vendor will boost confidence in Qualcomm, which is undergoing a strategic review sparked by activist investors and could face significant restructuring or even break-up in 2016. Its share price leapt by the largest amount in four years on the Xiaomi news, reaching $53.44 at one point during Wednesday. Up to the end of Tuesday, Qualcomm stock had fallen in value by 34% this year.

The US giant says it has now completed new licensing agreements with four of the top five Chinese phone suppliers and according to Sanford Bernstein analysts, it is in negotiations with Lenovo, whose situation may be complicated by legacy agreements forged with Motorola, which Lenovo acquired from Google.

There are also many deals to be concluded with smaller players in China’s fragmented device space. Announcing fiscal fourth quarter results last month, Aberle and CEO Steve Mollenkopf said there were many such agreements still to negotiate, including “fewer than a handful” with Chinese OEMs which “in a negotiating tactic have stopped reporting sales and paying royalties”. They admitted they do not expect all these firms to agree terms during 2016. “In the end we will get these agreements concluded, but we are taking a cautious approach because the timing remains uncertain,” Aberle told analysts.

Mollenkopf was more upbeat, saying: “You should read this as just a delay in signing up people, not a change to the overall capability of us to go after that market.” And he stressed that the weakness in the licensing business, which accounts for 60% of operating income, was offset by “higher demand for chipsets than we had thought”.

Qualcomm came to an expensive but essential agreement with the Chinese government over antitrust allegations earlier this year, taking a $975m fine and agreeing to charge lower royalty rates on single-technology modems, and to calculate the fees based on 65% of the device’s sale price.

This may set a precedent for renegotiation in other markets, but at least it should have restarted the flow of royalty payments from Chinese companies for its patents, and even with lower fees, this market is essential. “Qualcomm is committed to the success of its partners in China as they continue to grow their businesses,” the firm’s president and IPR chief, Derek Aberle, said in a statement.

Under the terms of the agreement, Qualcomm said it has granted Xiaomi a royalty-bearing patent licence to develop, manufacture and sell 3G (W-CDMA and CDMA2000) and 4G devices. These include the tri-mode products which are so important to China Mobile, supporting its own TDD flavors of 3G and 4G (LTE-TDD, TD-SCDMA and GSM). The royalties are “consistent with the terms of the rectification plan submitted by Qualcomm to China’s National Reform and Development Commission” after the antitrust settlement.

“Xiaomi prides itself on embracing and leading smartphone innovation through its popular line of Mi devices,” said Lei Jun, CEO of the five-year old handset maker. “A licence from Qualcomm will play an important role in helping us bring the newest and most innovative products to our growing customer base.”

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