The Hypocrisy of Apple vs. Qualcomm Litigation

We live in a world of Fake News and information manipulation. This is so bad that it often seems there are an impressive number of people that believe things that aren’t true. Some of the more interesting false beliefs from this week can be found here. I particularly like the one where three folks in entertainment are supposedly going to assassinate Trump, it is over the top wackadoodle.

One of the most nuts things in my area is the Apple/Qualcomm litigation because it is as if Apple is falsely accusing Qualcomm of doing what Apple is doing to their customers. Milking them for money. It reminds me of a story of a few years back where a husband screamed abuse because his wife’s face had hurt his hand.

This gain jumped out at me when I looked at Apple’s financials (I’m an ex-auditor and have a certificate in Management Accounting). Basically, Apple’s financials suggest their success simply comes form mining their existing customers for money.

Let me explain.

Apple’s 3Q 2018 Financials

Apple reported their financials, and everyone seemed to rave about their year over year double digit growth. What was fascinating is they all seemed to miss that—quarter over quarter—every region declined and every product but the iPad (go figure?) declined as well. You didn’t see this?

Look at the end of the this Business Wire report from Apple and the comparison between Q2 and Q3. iPhones are down a whopping 21 percent, iPads are up in units 27 percent but only up in revenue 15 percent—suggesting significant discounting (and margin erosion), Macs are down 9 percent, and the other stuff (Apple Watch, HomePod) are down 5 percent (and these products which came after the iPad should be going up in volume not down). The only clean positive number is services which are up a really modest 4 percent. And this is a trillion-dollar company? If iPhone declines continued at the same rate Apple iPhone sales would be zero in four more quarters. That won’t happen, but still you’d think investors would be a tad more concerned.

Now, if you look at this like a customer and look at these same product numbers but year over year, you’ll see that the iPhone and Mac volume numbers are relatively flat. iPhone sales were 41M and change both years, but revenue was up a whopping 20 percent, Macs declined 5 percent but revenue only 1 percent, and services were up a whopping 31 percent. They are charging you and me a ton more for almost the same stuff.

Underneath this is the litigation they have going on with Qualcomm, and the fact they aren’t paying their bills to Qualcomm at the moment. They are disputing how much Qualcomm is charging them even though Qualcomm has contracts that support these charges and their response is to simply not pay their bills. I’d make a lot more money if I didn’t pay my bills too, as I expect you would.

Apple vs. Qualcomm

At the heart of one of Apple’s arguments is that the method Qualcomm uses to charge for technology is so onerous that success is impossible thus the reason they aren’t paying their bills. Yet, not only are Qualcomm’s charges barely material to Apple, they are paid successfully by Apple’s smaller competitors (who often are charged much more as a percentage of revenue than Apple is as a function of volume). And, were what Apple is alleging true, then Qualcomm would be approaching a trillion dollar valuation–not Apple. Given this massive disparity in financial performance, revenue, profit, and valuation it looks like Apple is massively overcharging and not Qualcomm. The one huge difference is that Qualcomm is charging Apple, who once again isn’t paying their bills, and Apple is charging you.

This kind of suggests that Apple believes that anyone under a contract that believes they are being overcharged should be able to simply not pay their bill. What if every Apple customer decided to follow Apple’s lead and not pay their bill until Apple lowered the cost of their phone and service back to where it used to be for the original iPhone?

Now you’d be right to argue that if you didn’t pay what Apple wanted they wouldn’t sell you a phone, but Apple seems to argue that it would be unfair if Qualcomm did the same.

Wrapping Up: What Comes Around Goes Around

I was born and raised in California which means, given that state seems to have more attorneys than any other, I unfortunately have a lot of legal experience. Particularly when it comes to regulation in tech there has been a trend that suggests when a company uses regulation against another firm that this same dynamic will eventually apply to them. The most obvious recent example is Googles $5B fine from the EC which is years after Google got this same group to levy a multi-billion dollar fine against Microsoft for almost the same thing.

At the same time Apple is complaining Qualcomm is charging too much (something that doesn’t appear to be true) and not paying their bills in protest, Apple is apparently mining its customers for money and using their lock-in strategy to prevent people from changing over to the far more affordable Android platform. I expect that one of the regulatory bodies that is supposed to protect consumers will eventually step up and use Apple’s own arguments to force price concessions from the company. Until then Apple will likely remain one of the biggest examples of hypocrisy not in politics.

Now my final thought, how much will Apple’s margins and prices need to go up before customers say “enough”? We’ll see…

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Rob Enderle

President and Principal Analyst at Enderle Group

As President and Principal Analyst of the Enderle Group, Rob provides regional and global companies with guidance in how to create credible dialogue with the market, target customer needs, create new business opportunities, anticipate technology changes, select vendors and products, and practice zero dollar marketing. For over 20 years Rob has worked for and with companies like Microsoft, HP, IBM, Dell, Toshiba, Gateway, Sony, USAA, Texas Instruments, AMD, Intel, Credit Suisse First Boston, ROLM, and Siemens.

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