Last Wednesday, smartphone chip manufacturer Qualcomm published its Q3 financial report announcing a 44% fall in profit. Chief Executive of Qualcomm Steve Mollenkopf said in a conference call agreements with two major Chinese customers (smartphone makers) are taking longer than anticipated to conclude.
According to the report President of Qualcomm Derek Aberle also said that some Chinese companies were “improperly” withholding patent royalties due to a change in the way they report sales. Close to half of Qualcomm’s revenue for 2014 was derived from Qualcomm’s highly profitable patent licensing business in China.
What’s behind Qualcomm’s extravagant profits
Qualcomm is famous in the world for the practice of patent accumulation. Basically, if you buy a 64GB iPhone 6 Plus for RMB 5288 (USD 800) in China, deducting the 1600 RMB local tax paid to the Chinese government, you have to pay RMB 300 tax to Qualcomm because the iPhone uses Qualcomm patents.
This not only applies to Apple, Android smartphone makers are faced with several patent licensing fees from the likes of Qualcomm, Microsoft, Ericsson and other large tech companies. For example, Android phone makers pay Microsoft between USD 10-15 in licensing fees for use of its patents. Despite this, Microsoft has nothing to do with the Android system and only happens to hold some patents in the Linux kernel.
Android phone makers pay Qualcomm 5% of a phone’s wholesale price. For Xiaomi, Meizu, ZTE and Huawei, profits from affordable smartphones are quite low, but they still are either forced to pay relatively high licensing fees to Qualcomm or face a potential bar on the use of Qualcomm CPUs.
Since 2013, the status of Chinese smartphones has changed.
MediaTek’s triumph in China
MediaTek was the first local company to renegotiate terms with Qualcomm. Following the conclusion of a prior agreement with Qualcomm, MediaTek has now negotiated a new agreement that no longer requires them to reports specific sales numbers to Qualcomm regardless of the number WCDMA Chips it produces. As a consequence of the new agreement MediaTek is now winning the market in the low end, high performance sector, meeting the needs of Xiaomi and other Chinese makers.
According to Antutu Benchmark, the famous smartphone benchmarking app, MediaTek now has 29.35% of the market for Android smartphones, only marginally surpassed by Qualcomm’s lead at 30.62%.
Though Qualcomm is still the No.1 chipmaker across devices in the market, it is increasingly being threatened by the likes of MediaTek and Samsung. The Samsung Exynos-7420, MediaTek MT6795 and MT6752 chips ranked first, second, and third with Qualcomm chips coming in at fourth and fifth place on Antutu’s chip representation chart.
The downfall of Qualcomm
So what explains the phenomenon of manufacturers moving away from Qualcomm? There are several reasons:
1. Chips which only use ARM architecture need to pay less total licensing fees.
Where Qualcomm charges about 5% of wholesale price, ARM charges only 1-2%. Samsung Exynos, MediaTek’s MT series and Huawei’s Kirin and Rockchip, are all based on ARM architecture, which allow them to avoid Qualcomm licensing fees.
2. Qualcomm is losing the 64-bit war.
The 64-bit Apple A7 CPU first introduced in the iPhone 5s, was a masterpiece at the time and a head-on blow to Qualcomm. Basking in the glow of its 32-bit empire, Qualcomm was left defenceless when MediaTek first introduced its 64-bit MT6752 CPU. Though Qualcomm released its 64-bit Snapdragon 610 processor and the Snapdragon 615 early in 2014, the performance of these two has been found to be quite unsatisfactory.
3. Qualcomm has lost the high-end too.
After Apple introduced the A7, Qualcomm’s high-end Snapdragon 801 was found to be hugely deficient. The processor has been accused of emitting too much heat despite its powerful credentials. According to Phone Arena, the 801 can hit temperatures as high as 107.6 Fahrenheit. The 801’s 64-bit successor, the Snapdragon 808, inherited the 801’s heat problem which has only been solved with the 810 this year.
4. Qualcomm faces an even greater problem
In addition to Qualcomm being fined by the Chinese government for violation of antitrust laws, China’s antitrust regulator, the Nation Reform and Development Commission has set new licensing fees for Chinese smartphone makers. Because of the change in fee structure, Qualcomm has lost almost all of its partnerships with Chinese smartphone makers.
Chinese producers now do not need to pay comparatively more expensive licensing fees and there is much more choice in the market. MediaTek and Kirin chips are as good as Qualcomms. Specs for the upcoming Kirin 950 CPU are slated to be much better than Qualcomm’s next flagship Snapdragon 820. (http://bbs.c114.net/thread-840282-1-1.html)
Though Qualcomm of course still has opportunities in plenty of other countries, emerging markets however are flocked with Chinese smartphone brands. Xiaomi in India and Southeast Asia, Huawei in Europe and Africa. The high-end market is now split between Samsung and MediaTek.
Qualcomm’s chip business is steadily losing sway. Even if the Snapdragon 820 is a big hit, and it’s 4xx and 6xx win back some of the middle and low-end market, if Qualcomm continues its past greedy, arrogant, and selfish behaviors, Qualcomm may just end up killing itself.
(The story only reflects the author’s view.)