Qualcomm signs three Chinese licensing deals

Hopes rise that the floodgates are about to open, boosting patents revenues from the huge but fragmented market

After a difficult year, dominated by challenges in China, Qualcomm is going into 2016 with some signs of hope. It has announced patent licensing deals with three Chinese companies, hinting at a flood of such agreements and the unblocking of a significant bottleneck in the chip giant’s revenues.

For much of last year, Qualcomm was suffering from the after-effects of a Chinese antitrust probe of its licensing practices. Many patent users in the country had withheld their payments, or refused to sign or renew deals, until the outcome of the investigation was known. Although Qualcomm came to a settlement with the Chinese authorities in February, it complained that it was still proving difficult to bring all the vendors into line.

A major breakthrough came in December with the announcement of a patents pact with Xiaomi, and in fact, Qualcomm has now succeeded in concluding new licensing deals with several tier one device makers, such as Huawei, TCL and ZTE (though Lenovo is still outstanding). The latest deals are with smaller fry than that, but provide additional confidence that the stream of patent revenues is starting to flow again – even if the fees are at a lower rate than Qualcomm could charge before the settlement .

The three new signatories are Tianyu (Beijing Tianyu Communication Equipment Company), which owns K-Touch, China’s tenth largest smartphone brand; consumer electronics and home appliances giant Haier; and QiKu (QiKu Internet Network Scientific), a joint venture between online security firm Qihu and device maker Coolpad. All three deals cover 3G and 4G patents (W-CDMA, CDMA2000 and LTE, including trimode GSM/TD-SCDMA and TD-LTE, essential for China Mobile). Qualcomm said the royalties, which were not specified, are “consistent with the terms of the rectification plan submitted by Qualcomm to China’s National Reform and Development Commission”.

Eric Reifschneider, general manager of Qualcomm Technology Licensing, said in a statement: “Qualcomm is pleased to support the growth of Chinese companies such as Tianyu as part of our long term collaboration with China’s mobile industry. This new agreement enables Tianyu to develop, manufacture and sell 3G and 4G devices, greatly enhancing their competitive position in the wireless landscape.”

Cao Teng, general manager of Qingdao Haier Telecom, said: “Haier values and respects Qualcomm’s intellectual property, which was created as a result of its extensive research and development efforts. The licensing agreement with Qualcomm supports our vision by helping us to deliver products embedded with leading 3G and 4G connectivity to provide the same convenient and personalized connected experience that consumers have come to expect from a smartphone.”

QiKu is a new licensee for Qualcomm, as it is introducing its first smartphones. “We are pleased to sign QiKu as a new licensee and to support their entry into China with 3G/4G smartphones,” said Reifschneider. “As a new brand, QiKu is poised to deliver on what consumers want: variety, performance and dependability.”

There should be many more such announcements, given the fragmentation of the Chinese market, though the most important negotiations will be with Lenovo – though that situation may be complicated by legacy agreements forged with Motorola, which Lenovo acquired from Google.

Announcing fiscal fourth quarter results in November, Qualcomm’s president Derek Aberle and CEO Steve Mollenkopf said there were many 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 did 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.

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