When Broadcom first went public with its audacious plan to buy-out Qualcomm, Microsoft and Google were reportedly among the first tech titans to object to the deal in private, citing concerns about a potential loss of innovation. More recently, a trio of Chinese smartphone companies have gone public with reservations about the prospect of a takeover. But IP executives in China say that while any deal could potentially increase IP risks, it is too early to say whether it would be a net positive.
Last week, the Wall Street Journal reported that executives from Oppo, Vivo and Xiaomi are all worried about the potential deal. Two concerns are at the forefront: a potential increase in chip prices and curtailed investment in new R&D. Both sides in the hostile takeover attempt told the Journal that Chinese manufacturers supported their position.
The account also details how Broadcom CEO Hock Tan has been discussing the bid with Chinese customers, who he claims are “highly supportive”; and reducing the patent royalty burden seems to be a big part of the pitch. Tan has implied that a combined company would cut licence fees while charging more for chips. Analysts have predicted this course of action, with some even predicting that Tan would scrap licensing altogether, using patents only as leverage for chip pricing. “He thought we would support this idea because of immediate cost reduction, but that’s not how we see things,” a Chinese smartphone executive is quoted as saying.
If this sentiment is widespread in the Chinese electronics sector, it could pose an additional regulatory hurdle to any eventual deal. This blog has already pointed out that China’s Ministry of Commerce (MOFCOM), which reviews mergers, will almost certainly keep an eye on the IP implications of what would be the biggest-ever tie-up in a sector that’s considered critical to Chinese national interests. MOFCOM has sometimes taken a tougher line on licensing issues than Western counterparts in past mergers.
This week I discussed the deal with an IP executive in a major Chinese tech company, speaking in a personal capacity. He thinks it’s too early to say definitively whether the transaction would be good or bad for Chinese manufacturers from a purely IP or overall business perspective. Broadcom under Tan, however, may not necessarily be as anti-IP as it is cracked up to be, he observed.
In terms of IP risk, there is a complex web of relationships between suppliers and customers that may make it a different calculation for different Chinese companies. For existing Broadcom clients who may be protected by a covenant not to sue, it could be a positive on the patent risk front. The biggest danger, though, would be a deal that sees some or all of Qualcomm’s patent portfolio spun out from the operating company or even in the hands of a third party.
It sounds like Tan believes the prospect of lower patent royalties will be a powerful argument for Chinese device makers operating on thin margins. But any big change to Qualcomm’s model could re-introduce uncertainties that were to a large extent addressed in the company’s settlement with the NDRC, which paved the way for a whole lot of licences to be done. And it looks like the company is working hard to make sure that certainty extends to the next generation of technologies – a rate table for 5G recently published by IAM was marked as intended for Chinese customers.
In companies where decision-makers’ top concern is access to foreign markets, a rate cut that comes at the cost of added uncertainty may not be a welcome prospect. But we know that at least one major licensed OEM in China has stopped paying royalties to Qualcomm, suggesting that other firms are eager for authorities to re-visit whether Qualcomm’s rates are FRAND. You can bet that companies in that camp will use any potential deal to lean on regulators to have a second look.