Qualcomm denies Korea royalty claims

Claims that leading mobile phone chip developer Qualcomm will no longer collect royalties from major phone makers in Korea are untrue, the company told vnunet.com yesterday. 

Confidential documents allegedly seen by a local newspaper were "out of date ", and supporting statements by a government official were apparently the result of confusion, according to a Qualcomm spokeswoman.

In fact, it appears that the royalties received by Qualcomm in Korea could actually increase in August, because it will no longer need to pay 20 per cent of them to a government research institute.

Analysis by vnunet.com suggests that the extra revenue earned by Qualcomm in this case could exceed $90m per year, based on extrapolation from older data. Qualcomm has not confirmed this figure.

The Korea Times claimed yesterday that Korean mobile phone vendors' royalty obligations to Qualcomm will partially expire in August. The paper cited a confidential 15-year licensing agreement between Samsung and Qualcomm dating from 1993. 

"The version of the Samsung-Qualcomm licence agreement that the Korea Times claims to have seen is outdated and has been amended and extended several times with each manufacturer," Christine Trimble, Qualcomm's senior director of corporate communications, told vnunet.com in an email.

"While Qualcomm cannot disclose confidential details of its licence agreements, the royalty obligations that Korean manufacturers have with Qualcomm will continue beyond such dates (for both domestic Korean sales and exports), and there is no date on which a licence under all of Qualcomm's patents becomes royalty free."

Korea is a key market for Qualcomm, which developed much of the technology used in mobile phone chips, due to the presence of major mobile phone manufacturers Samsung and LG Electronics. 

According to local research data quoted by the paper, Qualcomm earned revenues of $467m from royalties in Korea last year. Qualcomm's own financial filings list about $2.1bn, or 37 per cent, of its total $5.6bn revenue as being earned in South Korea in fiscal 2005.

The apparent confusion over the royalty payments stems from an agreement signed between Qualcomm and Korea's government-sponsored Electronics and Telecommunications Research Institute (ETRI) in the early 1990s.

Under this joint development agreement, ETRI and Qualcomm cooperated in the development of CDMA mobile phone technology and shared the royalties paid by local phone makers.

This agreement, along with others, signed by Qualcomm during this period appear to have a lifetime of 13 to 15 years, and are therefore now expiring.

An ETRI director supported the newspaper's claims. He told the Korea Times that a percentage of Qualcomm's Korean royalty fees which was being paid to his institute would cease this August, indicating an end to payments by local mobile phone makers.

Qualcomm, however, claims that it is only this royalty sharing agreement with ETRI which is ending, not royalty payments from local phone makers.

This suggests that the company may actually begin earning more from Korean royalties in August, not less, although Qualcomm did not explicitly confirm this. The extra revenue would most likely range from $35m to more than $90m per year.

"Qualcomm has previously disclosed to its investors that its sharing obligations to ETRI under the joint development agreement do expire this fiscal year," said Trimble.
"However, the expiration of such sharing obligations under the agreement with ETRI do not in any way affect the royalty obligations of Korean manufacturers.

"It is unfortunate that an ETRI director has apparently confused the terms of the joint development agreement with ETRI with the terms of our separate licence agreements with Korean manufacturers."

Qualcomm has not commented on the details of the agreement. However, according to Korean media reports, ETRI's share of Qualcomm's Korean royalties is 20 per cent.

Furthermore, the reports say, in a dispute between the two sides in the late 1990s, international arbitrators found that Qualcomm had paid only 11 per cent, rather than the full 20 per cent agreed.

Qualcomm announced in 2000 that it would pay ETRI $86m to cover this shortfall over the previous eight years of the agreement. The company expected that the additional annual payment to ETRI in future would be in the order of $16m.

The data on additional royalty sharing payments and estimated payments released by Qualcomm, together with the details of the joint development agreement reported in the Korean press, suggest that the company was earning approximately $177m from these royalties per year in Korea in 2000 and 2001.

This number agrees with data on Qualcomm's Korean royalties released by ETRI's affiliate, the Market Intelligence Center (MIC). According to the most recent royalty data from the MIC, in 2005 Qualcomm earned $467m from Korean royalties.

It is not clear whether all of this revenue was covered under the joint development agreement, which relates to basic CDMA technology.

If it is, however, then the extra income for Qualcomm from August, when payments to the ETRI end, will be more than $93m annually, assuming its Korean royalty revenue continues to increase as it has in recent years.

Yesterday's reports are at least the second time that Korean media has claimed that Qualcomm royalty payments will cease. The company also denied similar claims last year.

The local media reports come against a background of discontent worldwide at the company's dominance through an extensive patent portfolio of key mobile phone technologies.

Competitors and phone makers are involved in a series of legal actions with Qualcomm, involving claims and counterclaims of anti-competitive behaviour and alleged patent infringement.

Governments have also become involved. In Korea, Qualcomm's offices were visited by anti-trust officials in April, and in China, the government has delayed the introduction of 3G mobile phones, despite huge demand, while it attempts to develop its own technology which it hopes will have reduced royalty obligations.