Qualcomm hopes to avoid Nokia conflict

Paul Jacobs, Qualcomm chief executive, says he hopes “Armageddon” can be avoided in a week’s time, when an all-out patent war could break out between the number two chipmaker for mobile phones and Nokia, the number one handset maker.

A long-standing cross-licensing agreement between the two companies is due to expire on April 9 and failure to reach agreement on terms could lead to both taking legal action to block the sale of handsets that contain their intellectual property.

“The two teams are pretty polarised. I’m hopeful that we can avoid Armageddon and a massive escalation but it’s hard to know,” he said in a Financial Times interview.

Nokia is objecting to renewing the agreement on the same terms, where Qualcomm is understood to be earning royalties of 4.5 per cent of the cost of handsets containing its chips.

Qualcomm is behind the CDMA (Code Division Multiple Access) wireless standard that rivalled GSM (Global System for Mobile) in second-generation phones and has become more influential in third-generation (3G) ones. Qualcomm also uses Nokia patent in some of its chips.

Rick Simonson, Nokia’s chief financial officer, says Qualcomm’s patents play less of a role in the W-CDMA 3G standard and therefore its royalties should be lower.

“You don’t want everybody to have 4.5 per cent royalty rates so that when you add it up the device has an unbearable tax on it,” he said.

Qualcomm counters that the royalties are justified by the hundreds of millions of dollars it has spent on research and development that has enabled handset manufacturers to produce sophisticated and cost-effective phones.

Nokia does have a unilateral option to extend the agreement until December, but that would mean continuing to pay the existing royalty rate.

“There’s various degrees of disagreement over how the mechanics of that might work,” Mr Jacobs said.

Richard Windsor, Nomura telecoms equipment analyst, said recently Nokia, with 40 per cent of the W-CDMA market, would soon be paying Qualcomm more than $1bn a year at current royalty rates.

“For Qualcomm, the stakes are even higher as the industry will use the outcome as a yardstick for all future negotiations. We think that Qualcomm is fighting for its survival as losing to Nokia will punch a massive hole in its business model,” he said.