The Six Five team discusses Apple extends Qualcomm licensing.

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Transcript:

Patrick Moorhead: On the earnings call, it was announced that Apple is going to extend the patent license agreement for an additional two years, which I think this is very interesting. And this might be quicker than the earnings discussion, but this is important for a couple of reasons. So a decent amount of the company’s profit comes from their licensing business.

Now, it becomes a much smaller percentage of that over time. And quite frankly, it used to be 50/50. And if we look at first quarter results, QCT, which are the actual chips, was 8.4 billion. And QTL was 1.5. Now, where the QTL, the licensing business kicks in is that it has a EBT margin of 74%, which is a lot better than the 30% margin for QCT, and it’s a higher margin business. Everybody’s licensing business is that. But this is important. If you recall, and Dan, you and I wrote and talked about this in multiple interviews. A few years back, Apple decided to stop paying Qualcomm for its IP that went into modems. And also, there were UI things that, yes, Qualcomm has UI patents that Apple, quite frankly, were stealing. The stock tanked, a bunch of layoffs, a bunch of restructuring. They actually had to get out of businesses like the server CPU business. Apple was working with worldwide regulators to get them to sue Qualcomm. In the end, Qualcomm ended up winning on the Apple front.

Daniel Newman: Everything.

Patrick Moorhead: And on the regulator front. And Apple had to crawl back to Qualcomm, and not only pay for license, but also buy modems. And Qualcomm didn’t have to change any licensing structure of their business at all. And Dan, I look back at this and I just think it’s such a shame that you can have a company spending hundreds and billions of dollars over multiple decades to create this intellectual property, and then a company decides we’re not going to pay, right? It’s not that we’re going to just reduce the amount and then sue you and then go from there, but cut it all off. But then again, we’ve got a very recent case here that Apple lost, which was Masimo, where they stole their IP for Pulse Ox in their Apple watches. And so it looks like Apple’s track record on these is not very good. And I’m just wondering, Dan, does it even matter? Do investors, will anybody ever care that Qualcomm basically steals intellectual property and doesn’t pay?

Daniel Newman: Apple, you mean, steals.

Patrick Moorhead: Apple, I mean. Yeah.

Daniel Newman: No. Just to be clear, Qualcomm builds the IP. So look, this is a tribute to, what did I read, the badassness of Qualcomm’s technology. I mean, we are very bullish, positive on Qualcomm for a good reason. We actually understand the complexity of the technology that they make. And if there hasn’t been a better validation than the fact that Apple, whether it’s Infineon from Intel, or the purchase, whether it’s been the legal and lawsuits that they’ve tried to pursue, or the fact that despite absolutely holding a gun to Qualcomm’s head, that it has had to crawl back and pay not only for chip set agreement, the modem agreement, but also for patent agreement. Because it simply cannot build this iPhone product without help from Qualcomm, direct and indirect, through the portfolio and through the direct access to the modems. If you want to make a call or actually any sort of outward communications from your iPhone, you can be sure that there’s some Qualcomm technology enabling that to happen.

So it’s a really interesting thing, Pat, does anybody care? I really don’t know. I mean, look, Tiger Woods proved to be maybe not the best guy on the planet, but people still love watching him hit the golf ball. I feel like Apple’s like, everyone knows that they’re kind of a bully and mean, but they still like their stuff. And by the way, Tiger wasn’t a bully. He had his own thing. But my point is, people seem to quickly come around even after they get really angry and triggered by something, they seem to come back around, but oh, it’s my phone. I mean, Pat, they apparently implement or use slave labor of some type to build their phones, right? Isn’t there some speculation to that, the Uyghurs and everything? Am I allowed to talk about that on the podcast or is this going to get blocked now?

Patrick Moorhead: No, no, no, no. I think it’s very appropriate. Heck, I had even forgotten about-

Daniel Newman: What I’m saying is like, are you mad they stole IP from another big corporation? People don’t even care that they potentially use slaves to build these things. It was like the Daniel Tosh joke, I don’t care. Just keep slapping my iPhones together. We need more stuff. I mean, we need our stuff. So I don’t know. It seems like we’re kind of ethics and convenience come together. When it’s convenient, we care about ethics. But when it’s like, I need an iPhone, I don’t care.

Patrick Moorhead: I mean, Dan, it’s very related to-

Daniel Newman: Well, I have an iPhone, so I’m certainly hypocritical.

Patrick Moorhead: I mean, AirPods are the best, and their watch are the best. So I think their phones are middling. And the only reason I have an iPhone, I have a Samsung phone too, is because the green bubble, maybe. My family.

Daniel Newman: Green machine. Aren’t they going to have to undo that though? They’re going to have to start letting, what is it?

Patrick Moorhead: Well, there’s RCS. That doesn’t solve the whole green bubble, but it gets really, really close to solving that. Yeah, I think they should. So I don’t know. Do ethics matter? I don’t know. I mean, it’s amazing what comes out of Apple’s mouth and then the way that they act are so completely different. It amazes me.