In 2011, Apple began talks with Qualcomm about using the San Diego company’s chips in iPhones for the first time.
But there was a catch, said Qualcomm Chief Executive Steve Mollenkopf in testimony Friday in federal court in San Jose.
Apple proposed switching from Infineon Technologies — which had supplied iPhones since 2007 — to Qualcomm cellular modem chips for the next three years, “but they wanted us to pay them $1 billion to get that opportunity,” said Mollenkopf.
The U.S. Federal Trade Commission has accused Qualcomm of violating anti-monopoly laws – in part by entering into de facto exclusive supply deals with Apple that froze out Intel and other competitors.
Mollenkopf’s testimony before U.S. District Judge Lucy Koh attempted to give Qualcomm’s perspective on these supply deals that the FTC and Apple have called out as anti-competitive.
Mollenkopf said Qualcomm wanted to make sure that if it agreed to pay what Apple wanted, it would receive enough chip orders to make money.
But Apple refused to provide a volume guarantee. So the companies came to an agreement where Apple would receive the “incentive” payment, but only if it used Qualcomm cellular modem chips. If Apple added a second supplier, the incentive payment would be revoked.
“There was a lot of negotiations and essentially we got to an agreement,” said Mollenkopf. “It worked out for both parties.”
Testimony continued near the half-way point of the 10-day trial, with the FTC continuing to make its case that Qualcomm’s business practices violate anti-trust laws.
There is a lot at stake. The FTC’s case strikes at the heart of Qualcomm’s unusual business model of licensing its huge portfolio of cellular patents and selling smartphone chips as separate products.
The agency has called a steady stream of Qualcomm customers – ranging from Samsung to Lenovo to Motorola to Apple – that contend that Qualcomm threatened to cut off supply of its top-tier 4G and 3G CDMA chips during patent license negotiations.
Because they need the chips to launch high-end devices, smartphone makers don’t negotiate as hard as they otherwise would to reduce Qualcomm’s high patent licensing rates, according to the FTC.
Qualcomm collects patent royalties based on the wholesale price of smartphones – with rates running from 3.25 percent to 5 percent of the device costs up to a cap of $400.
Since the FTC is presenting its evidence, much of the testimony supports its allegations, including from tech heavyweights Intel and Apple.
Tony Blevins, Apple’s vice president of procurement, testified that the two companies entered into a second supply deal in 2013 where Apple would receive “rebates” if it bought all of its chips from Qualcomm.
Apple was free to add a second supplier, but it would no longer receive the rebates, said Blevins.
“They made it very unattractive for us to choose a different chipset supplier,” said Blevins. “I won’t mention any numbers but these rebates were very, very large.”
Mollenkopf said the 2013 agreement was similar to the 2011 deal.
Judge Koh questioned Qualcomm lawyers about whether the $1 billion figure was public information or confidential. Qualcomm’s outside lawyer Bob Van Nest said he believed the amount had not been sealed.
Blevins said the agreement led Apple to scrap plans to use Intel cellular modem chips in an iPad Mini tablet model that was launching in 2014.
On cross examination by Qualcomm lawyers, Blevins said Apple decided to add Intel as a second chip supplier for certain iPhones anyway in 2016 -- before its agreement with Qualcomm expired.
Apple sued Qualcomm over its business practices in January 2017. Apple ditched Qualcomm as a supplier for all new 2018 iPhones and now uses modem chips solely from Intel.
Blevins said Apple wanted to negotiate a chip supply deal with Qualcomm, but the relationship soured after it filed its lawsuit.
“At the time we made this challenge, they were no longer willing to sell us chips,” he said. “We were right back to no license, no chips.”
But Blevins conceded that Qualcomm continues to supply modem chips for older model iPhones today – despite the fierce legal battle.
Aicha Evans, Intel’s chief strategy officer, said supplying a chip to the iPad Mini in 2014 would have helped the company break into the market and pave the way for supplying iPhones. Not getting the deal was a significant setback, she said.
Asked if she respected Qualcomm, Evans said “As a technology company, yes. As a business model, no. They are excellent engineers. That does not give them the right to be the only ones (by) using unfair business practices.”
Mollenkopf said that he wasn’t aware of Qualcomm threatening to cut off chip supply during licensing negotiations, saying the company has never stopped shipping chips to any smartphone maker during a licensing dispute.
The trial continues next week. It is now scheduled to wrap up on Feb. 1
This story was updated at 6 p.m. on Saturday.