Apple, Broadcom, Caltech Judgment Showcases Ironic Apple Supply Chain Problem

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Caltech just won a $1B+ judgment from Broadcom and Apple, with Apple having to pay the lion’s share. While the discrepancy in the amounts both firms had to pay is likely because of the uneven benefits both enjoyed (Apple’s margins are much higher), it also showcases a recurring problem with Apple and intellectual property (IP) tied to their hardware logistics. What makes this problem ironic is that Tim Cook, Apple’s CEO, was the top logistics executive in Apple before taking over as CEO, so you’d expect this to be one area where Apple would do better, but with the Qualcomm settlement and this latest judgment it showcases what instead may be Apple’s biggest problem.

Let’s talk about the likely cause of what appears to be recurring bad behavior from Apple and its supply chain.

The Logistics CEO

Often when a CEO comes out of a function that wasn’t tied to what the company makes, you get problems resulting when someone moves from a position with little organizational power to one with lots of it. For instance, when you get a salesperson that moves up to CEO, you often have a company that over promises and underdelivers and becomes near terminally creative about sales outlook and the accuracy of financial reporting because they suddenly can manipulate things that they previously saw as obstacles.

For marketing, you’ll likely see an even bigger shift to over-promising, a big uptick in iss advertising, and a decreased decoupling of the message and the product. Steve Jobs showcased what could happen if the new CEO also has the power to drive employees to incredible levels of performance. Yes, Jobs over-promised, but he surprised a lot of competitors by still largely executing well against what was promised.

Tim Cook is one of two CEOs that I’ve watched come out of logistics, and he better showcased the problem. And that is that with the power of their company now behind them; they can use that power to drive pricing concessions to incredibly low levels resulting in putting those suppliers on life support. Apple is known for putting suppliers out of business and then acquiring the related technology for a song. But this pressure on Intel forced Intel to do some allegedly illegal things eventually forcing them out of the smartphone modem business and Apple’s pressure on Qualcomm—which included allegedly false anti-trust charges, fabricated evidence, and a level of animosity between the two firms (Qualcomm and Apple) that won’t easily go away.

This recent judgment likely resulted from the financial pressure on Broadcom being so severe that they couldn’t adequately research potential patent violations nor deal with the problem effectively—directly resulting in this latest judgment, which is likely to survive appeal, effectively eliminating both Broadcom’s profit on the related sales to Apple and Apple’s savings by using Broadcom in the first place.

Qualcomm’s Secret Benefit

One other thing occurs to me, and that is that Qualcomm, throughout their cases against Apple and the FTC, argued that their price partially resulted in a benefit that protected their licensees against successful IP infringement charges. This judgment just showcased that benefit because, had Apple been using Qualcomm and not Broadcom; the result would have likely been different because Qualcomm’s patent protections in smartphones lead the industry. This judgment may be a good showcase that you get what you pay for and that Apple’s excessive focus on cost appears to be penny wise but pound foolish, or more simply put, it is a suboptimal way to balance cost and revenue.

One additional issue is that Apple has now been successfully found to be infringing in several lawsuits, including this one and those against Qualcomm. These losses will form an evidentiary foundation making it far easier for other firms to successfully sue Apple for infringement because it appears infringement is part of Apple’s policy. While the Qualcomm case did show intent, the intent wasn’t demonstrated in the Broadcom case, but the damage to Apple’s image is likely cumulative regardless. Apple’s massive financial reserve makes for an attractive litigation target.

Wrapping Up: An Excessively Cost Focused Logistics Policy Is Suicidal

I mean this as well as metaphorically because Apple is also famous as the company that drove suicides in a supplier’s staff. When you push too hard on the partners in your supply chain, they start making tactical decisions that make their long-term viability less certain. They will abuse workers, cut back on research and development, cut quality control, cut support activities like patent reviews, and cut the quality of their raw materials. That is going to reflect adversely on the quality of the product that results, which will have an adverse impact on sales and customer loyalty and result in orthogonal problems like this Caltech litigation.

Your supply chain should be treated like family; you should maintain and assure trust and make sure that they are not taking advantage of you, and you aren’t taking advantage of them. Apple so far has weathered this abuse, but in this far more sensitive world, the firm’s behavior has the potential of turning it into a pariah if it isn’t more careful. If you take care of your suppliers, they’ll generally take care of you, if you abuse them, you’ll incur costs that you probably won’t anticipate and will regret. This Caltech judgment is a case in point.

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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.

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