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What a Qualcomm takeover would mean for Apple and its bitter legal dispute

Qualcomm Broadcom takeover

Earlier today, news landed that chip giant Broadcom has made a $103 billion offer for Qualcomm, its rival in the mobile chipmaking industry. The deal would have huge implications for the semiconductor business, and by extension the smartphone industry. But the news is particularly significant for Apple, which uses Qualcomm as a key supplier for iPhones, whilst also engaging in heavy legal warfare with Qualcomm.

Qualcomm and Apple have long been embroiled in a dispute over patents, or more specifically how much Qualcomm charges for the use of its intellectual property. Apple first sued Qualcomm early this year, and the two companies have gone back and forth in three different courts for much of 2017, with no resolution on the horizon.

At stake is how much Apple has to pay for the use of Qualcomm’s patents in the iPhone. Currently, Apple has to pay a percentage of every phone’s selling price to Qualcomm for the use of its cellular data patents. No-one contests that Qualcomm owns the intellectual property; the disagreement is how much Qualcomm earns per device.

According to analysts, a Broadcom takeover of Qualcomm would have a huge effect on the legal battle. Right now, what matters to Qualcomm is playing hardball against Apple to get the most dollars per device for its patents. But if Broadcom takes over, it just needs to make enough money per phone to get a positive return on its investment.

“While Qualcomm is pursuing the dispute in the courts in an effort to maximize the value of its IP, an acquirer wouldn’t need to maximize value — an acquirer would only need to settle for a rate that would provide a positive ROI,” analyst Christ Caso said in a note seen by CNBC. That would be good news for Apple: it could re-negotiate a deal with Qualcomm, lock up modem supply for its next few rounds of iPhones, and increase the ever-important margins on its handsets.

An agreement would be easier to come to, as Broadcom is already an Apple parts supplier, and it wouldn’t want to jeopardize a good relationship with a negotiation over royalties. The exact percentage that Qualcomm charges in royalties is of the utmost importance to a standalone Qualcomm, as it’s a key component of its profits. That’s why the recent lawsuits have seen its share price plummet. But for a merged Broadcom-Qualcomm, the exact amount of the royalty would be less important than a good working relationship with Apple.

So in the short term, the Broadcom offer seems like good news. But down the line, that might not be the case. Apple is reportedly interested in making its own modems — the component that it currently buys from Qualcomm — which would require cooperation and manufacturing partnership with other semiconductor companies. If Broadcom does take over Qualcomm, the resulting company will have a dominant position in the semiconductor fabrication industry, which could make it much harder for Apple to design and produce its own modems — meaning it would still have to rely on Qualcomm for parts.