Qualcomm, Broadcom: The Spoils of War

Mobile-phone chipmakers Qualcomm and Broadcom are burying the hatchet. The two companies waged an epic, four-year dispute that included antitrust and patent infringement allegations. It came to an end Apr. 26, when Qualcomm said it reached an agreement to pay Broadcom $891 million to settle six outstanding cases, five filed in California and one at the International Trade Commission.

Broadcom has also agreed to withdraw complaints against Qualcomm (QCOM) at the European Commission and Korea Fair Trade Commission. The settlement gives both companies certain undisclosed rights to each other's patents.

As part of the settlement, Qualcomm will pay Broadcom (BRCM) over the next four years, with the first installment due at the end of June. San Diego-based Qualcomm incurred $748 million of the total charge against earnings during the fiscal second quarter, which ended in March. As a result, the company reported a loss of $289 million, compared with a $766 million profit a year earlier, according to financial results released Apr. 27.

"It's Behind Them Now"

For Qualcomm, the settlement removes long-standing concern over the company's legal status vis-à-vis a competitor in the market for cell-phone chips; the resolution will also save millions of dollars a year in legal fees. "It's done, it's behind them now," says Mark McKechnie, an analyst at American Technology Research. "They can save on the legal expenses."

For its part, Broadcom is likely to emerge a more formidable competitor and could boost its share of the wireless-chip market by several percentage points, analysts say. The settlement will give Broadcom some rights to Qualcomm's patents related to chips for so-called CDMA wireless networks, which are used by the likes of Verizon Wireless and Sprint (S) as well as by carriers in Korea, China, and India. As Chinese carriers broaden their networks, sales of some types of CDMA chips to carriers in that country are expected to grow at double-digit rates for years, according to consulting firm Forward Concepts.

In the U.S., Broadcom could use Qualcomm expertise to win more business from carriers and eventually become a major vendor as the carriers migrate to more advanced networks in the coming years. "If you are going to play with Verizon and Sprint in the future, you've got to play in CDMA today," says Will Strauss, president of Forward Concepts. Today, Qualcomm makes about 90% of CDMA chips shipped.

As a result, in the next several years, Broadcom may be able to increase its current 2% market share in cell-phone chips to more than 10%, Strauss says. "They are spending a lot on R&D, but they are confined to a single-digit percentage of the market," he says. "This will certainly get them into the double-digit percentage of this growing market in the next couple of years."

A More Level Playing Field

The settlement likely puts Broadcom on a more even price footing with Qualcomm. In some cases, Qualcomm has given a discount to customers that purchase chips and pay royalties on those chips. "Before, there were a few instances where the price of Qualcomm chips was deducted from the royalty base," says Qualcomm spokeswoman Christine Trimble. Now, handset vendors using Broadcom chips will pay Qualcomm the same royalties as those using Qualcomm chips. "It's a leveling of the playing field," McKechnie says. "It gives Broadcom a chance to compete at the chip level."

Recent court victories for Broadcom made it apparent that Qualcomm may have had a hard time winning the legal dispute through the court system. Last year, a court in Santa Ana, Calif., found Qualcomm in contempt of an injunction that barred it from importing chips that infringe on Broadcom patents. Further legal setbacks might have forced Qualcomm to cease shipments of certain chips and placed limits on the importation of handsets that use its chips. "The possibility of disruption was there," says Don Rosenberg, Qualcomm's general counsel, who replaced Lou Lupin in 2007 amid setbacks in the cases brought by Broadcom.

In hopes of settling, Rosenberg began talking with Broadcom's new general counsel, Arthur Chong, hired last year. "It's always helpful to have fresh eyes look at things," Rosenberg says. "We made contact with one another. One thing led to another."

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