Apple vs. Qualcomm: Why Apple Is Trending Towards A Catastrophic End

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This week had several more wins for Qualcomm—one of them public and one of them very quiet. The public one had Qualcomm win a jury trial in San Diego where three patents were valued at $.50 each per phone which is critical because Apple had been arguing that the vast majority of Qualcomm’s patents were worthless, and that Apple should be able to license the hundreds of thousands of them for $1.50 per phone. If three patents are worth $.50 each what would the hundreds of thousands of patents Apple wanted access to be worth (I’ll bet the number is bigger than zero)? In a ruling that wasn’t widely covered, Apple is now on a path to being denied access to all of Qualcomm’s patents, even the ones that define mobile phone standards, which could in some extreme situations knock them out of the smartphone market altogether since, right now, you really can’t build a phone without using some of Qualcomm’s patents. Can you imagine what Apple’s valuation will drop to if they lose the ability to sell iPhones or had to recall all of them (granted this is unlikely but that is a huge change from impossible)?

So why is Apple, who seemed to be doing so well at the outset, doing so poorly now? The reason is, and I follow a lot of litigation, that much of what Apple is intending is covered by misdirection. And some agencies are figuring this out. Apple’s actual goal is to cripple Android (which suggests Google might set in) leaving them as the only truly viable smartphone vendor—particularly at the high end. If successful even market leaders Samsung and Huawei would have been badly hurt and Google would have been out of position to help.

Don’t get me wrong, this was a true bet the farm strategy, but they had to execute sharply. Each part of the plan was built on the prior part like a house of cards, and success was predicated on Qualcomm not realizing they were in a death match until it was too late. That house of cards seems to be crumbling.

Apple almost succeeded because their actions so badly eroded Qualcomm’s valuation it made them a hostile takeover target and Broadcom, who appeared to be acting on behalf of Apple, almost bought Qualcomm with the clear goal of shutting that company down and exclusively pushing the related technology to Apple while killing most of the non-Apple research and development (R&D) that maintains competition.

The irony here is while Apple was pointing at Qualcomm and getting agencies like the FTC to think Qualcomm was an illegal monopoly it was Apple that was highlighting in spades an abuse of extreme market power. It was fascinating that Spotify was the first to see this and they then began an anti-competitive legal action against Apple.

Let’s talk about why Apple is now failing.

The Long Con

Understanding how a confidence game is run is something most of us that have worked in compliance or audit have had to learn because these games are common and can be devastating. They start with a false story compellingly given and then a reliance on confirmation bias to keep people from seeing the truth. Even those of us trained to see these things can be fooled and–I’m embarrassed to say—I was fooled a few years back by a scam called Sanctuary Belize but, my training kicked in, and I got out before I lost hundreds of thousands of dollars (this scam is now on record as being one of the largest in history).

What Apple executed was a long con. They created a false story which surrounded the reality that Qualcomm uses a very different business model—one where they license their technology almost exclusively—and used that difference to argue the firm was behaving illegally. Apple used their massive resources and their own extreme power as one of the most well-funded companies in the world to travel the world convincing agencies at a global scale that Qualcomm was a bad actor, forcing Qualcomm to spend millions to defend even as Apple was unilaterally cutting payments to the firm while still using Qualcomm’s technology. While I can personally admire the balls this took, I actually think this was a result of Tim Cook not understanding the risk—and it certainly brings into question his ethics.

These efforts by Apple nearly put Qualcomm under, but also highlighted a level of power in Apple almost unheard of. This was “Fake News” at scale, provided at a level that even Russia would envy—and it almost worked. But with any con it has to be executed sharply, the longer the con—much like my Sanctuary Belize experience—the higher the probability that a chink in the false story will cause the target of the con, the “rube”, to realize they are being defrauded.

The break for Qualcomm happened when the Broadcom hostile merger failed and the President of the US named Qualcomm, not an illegal monopoly, but a “national treasure”. He didn’t name Apple a national treasure (though he did call Tim Cook “Tim Apple”).

This caused the hostile merger to fail and allowed Qualcomm the time to ramp up their own defense and fight back (part of the issue was that Qualcomm just didn’t seem to want to accept that Apple wanted to kill them).

Once that happened, agencies started to question Apple’s false story, realizing that Qualcomm wasn’t massively larger than Apple, as should be the case if what Apple was saying was true. It was Apple that was massively larger than Qualcomm. And it wasn’t Qualcomm using monopoly power to beat up their vastly larger customer, Apple’s moves to cut off Qualcomm’s air were instead massively uncompetitive.

Avoiding the Con

Now the problem for Apple when they lose will be, they will have done massive financial damage to Qualcomm’s investors and massive damage to their own—likely opening the firm to equally massive class action litigation. In addition, these hundreds of government agencies they have been misleading all over the world are likely to continue to flip in favor of Qualcomm and people really don’t like being publicly fooled like this—suggesting many will begin to turn on Apple vigorously. Depending on how fast this ramps up and how many countries go at once, the penalties, sanctions, class action law suits, and pissed politicians should set records given how broadly Apple attacked Qualcomm. At these massive scales even Apple’s billions in reserves may not be enough and the company will be hurt badly and might—though this isn’t likely at the moment—even fail.

Part of why this could be exceedingly catastrophic for the firm is that Apple’s executive staff never understood the downside risk and instead became convinced that their massive war chest and unbelievable power were unbeatable—even as companies like Google, Huawei, and Samsung were beating them in market. One of the lessons any con artist will tell you is always be aware of the reality and don’t fall for your own rhetoric. This is also why Sanctuary Belize failed. The executive staff began to believe their own false stories and that they had a money machine that would never run out until the FTC got wise and taught them different.

Agencies like the FTC may be understaffed and underfunded but when riled up they are anything but toothless and getting them personally invested can have extreme outcomes which, I think, we will see play out in both cases.

Wrapping Up

I’ve studied abuse of power over the decades and I’m not a fan. Whether it be abusing employees, partners, suppliers (something Apple is famous for), or any other group where there is a power imbalance, eventually there is a correction and—depending on the abuse and damage—that correction can often make the abuse that proceeded it look positively tepid. Individually, Apple’s growing number of losses are mice nuts and the firm can easily weather the storm, but they engaged globally, and collectively—particularly if you take into account the potential massive class action suits from Qualcomm and Apple investors who have and will have been damaged by Apple’s false stories (there are disclosure rules with public companies) this could drift into criminal complaints and collective liability in the trillions of dollars.

The lesson here is, there is no upside to confidence games. Everyone—even huge companies—eventually gets caught and, if you can’t run (and large companies generally can’t) the outcome can be dire. This year, I expect, we’ll see a backlash against Apple of biblical proportions that could have been avoided had Apple just focused on doing business and not using litigation and false stories to further a monopolistic agenda.

In short, I expect this to end really badly for Apple and Apple investors not to mention Tim Cook’s long-term career plans.

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About Author

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.

3 Comments

  1. The most insightful article yet on the war Apple decided to wage on THE company that helped them dominate the 4G cellphone market. As one of the early days engineering leads on the QC side it is interesting how Apple in the big picture as portrayed in this article is so similar to many of their working engineers: arrogant yet not so competent, horrible ethics, cheats, and deviousness.

    Former QCOM engineering VP

  2. It is nice to see at least one person putting the big picture together. Many peoples lives were already impacted due to layoffs caused by this aggression. As we have seen many times before, Apple couldn’t care less about the huddled masses living outside its walls as long as maximum power and money continue to flow in.

    Let’s hope regulators and politicians worldwide can see through to a just and fitting result to all of this.

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