Here's how much Apple was paying Qualcomm in royalties – The Motley Fool

It's been almost two years since Apple (NASDAQ: AAPL) and the Federal Trade Commission filed separate but concurrent legal complaints against Qualcomm (NASDAQ: QCOM). The FTC antitrust case is now on trial, with Jeff Williams, Apple's chief operating officer, testifying against the mobile chip giant over the controversial "no license, no chips" policy.

Many important facts – such as royalty per device – within Apple's original claim were drafted. Williams just shared some new details about the financial arrangement.

An "exorbitant" amount per device

CNET informs that Apple was paying Qualcomm $ 7.50 per device in royalties. Apple initially wanted to pay only $ 1.50 per device, which it considered a fair fee based on the value of the modems it bought from Qualcomm. But Qualcomm charges royalty fees based on the value of the entire device, not just that component.

Apple previously noted that it tried to negotiate a direct license with Qualcomm for nearly a decade, but Qualcomm declined to offer a license. Instead, Qualcomm licenses its intellectual property (IP) to hire manufacturers, who in turn are reimbursed by Apple. But these manufacturing partners do not trade and simply accept terms that Apple has described as "exorbitant." Before Apple instructed them to stop paying, contracted manufacturers paid Qualcomm 5% for each iPhone, which means $ 12 to $ 20 per device.

In exchange for exclusivity and other marketing concessions, Qualcomm used to grant discounts to Apple that effectively reduced its royalty burden. These discounts reduced the royalty per device to $ 7.50.

An Apple Head Gun

To get a sense of how much Apple was paying in royalties, here are how many iPhones the company was selling each year along with the estimated royalties. Note that Apple was paying these royalties even before Qualcomm became its exclusive modem vendor in 2011, and stopped paying the royalties (via reimbursements to contracted manufacturers) in 2017. In addition, hardware modem sales are separate .

Sources of data: SEC filings and author calculations.

As Apple's iPhone business grew, so did the royalties. For reference, the $ 1.08 billion in royalties paid by Apple in 2016 accounted for a significant portion of the total $ 7.9 billion licensing revenue that QUALCOMM reported that year.

Qualcomm unsuccessfully attempted to massively increase the royalty rate per device in 2013 when the contract was about to be renewed, hoping to add other $ 8 to $ 10 per device, according to the report. That would have more than doubled what Apple owed to Qualcomm in royalties annually. Instead, Apple accepted exclusivity as one of several provisions to keep the device fee at $ 7.50.

"We were looking at an increase of more than $ 1 billion per year in licensing so we had a gun in our head," Williams said.

Evan Niu, CFA owns Apple shares. Motley Fool owns stock and recommends Apple. Motley Fool is a shareholder of Qualcomm and has the following options: long-term calls of $ 150 for Apple and calls for $ 155 to Apple for $ 155. The Motley Fool has a policy of disclosure.