iPhone 8: Apple’s Legal Battle With Qualcomm May Hurt Sales

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The United States accounts for nearly 40% of Apple’s total revenue. It is the largest market for the Cupertino company. As Apple gears up to unveil its 10th anniversary iPhone 8, Qualcomm is seeking the iPhone import ban in the US. If Qualcomm succeeds, the ban would significantly hurt the iPhone 8 sales. The two companies are locked in a legal battle that is taking an ugly turn.

Can Qualcomm get the ITC to ban iPhone 8 in the US?

According to Bloomberg, the US chipmaker is planning to seek a complete ban on the import of iPhones. Apple’s products are assembled by contract manufacturers such as Foxconn in Asia. The iPhones account for about 50% of Apple’s total revenue. An unnamed source told Bloomberg that Qualcomm was preparing to ask the US International Trade Commission (ITC) to block the iPhones from entering the United States.

The ban will be imposed if the ITC sides with Qualcomm. The ITC, a quasi-judiciary agency, processes cases more quickly than federal courts, where the cases could drag on for years. It all began when the FTC accused Qualcomm of indulging into anti-competitive patent licensing practices in January. Shortly after, Apple sued the chipmaker, accusing it of charging exorbitantly high royalties for “technologies they have nothing to do with.”

Qualcomm countersued Apple in April, accusing the iPhone maker of making false statements and breaching licensing agreements. Qualcomm claimed Apple could never have built the iPhone franchise without using Qualcomm’s “fundamental cellular technologies.” Things got worse last month when Apple stopped paying licensing fees and confirmed that it would not make payments until a court figured out the exact amount owed.

Apple CEO Tim Cook reiterated during the company’s latest quarterly earnings call that Apple would not pay until the court decides what amount is owed because of Qualcomm’s refusal to license patents under the Fair, Reasonable, and Non-discriminatory (FRAND) terms. Cook clarified that Qualcomm hadn’t offered any fair terms, which is required under the laws governing the patent licensing.

Why are Apple and Qualcomm fighting?

Qualcomm is a leading chip maker. For a long time, Apple had been sourcing LTE modems exclusively from Qualcomm for its iPhones. With the iPhone 7, the Cupertino company began sourcing modems from both Qualcomm and Intel to diversify its supply chain. That’s just one part of Qualcomm’s business model.

An even more lucrative and Qualcomm’s most profitable business is patent licensing. The company owns several patents related to wireless technologies. It has patented the technologies covering the fundamentals of how voice and data are transmitted between networks and devices. So, smartphone companies will have to pay Qualcomm royalties even if they do not use Qualcomm’s modems. It charges royalties as a percentage of the price of the device rather than a fixed fee. Apple argues that Qualcomm contributes little to the iPhone’s brand value and appeal, so it shouldn’t charge royalties as a percentage of the phone’s price.

Qualcomm cannot afford to change the way it charges royalties to Apple. Stifel Nicolaus analyst Kevin Cassidy says if it lets Apple get away with this, other companies may also demand similar treatment. The attempt to get the iPhones banned in the US is part of the chipmaker’s plan to improve its negotiating position. Qualcomm has already slashed its revenue outlook for the current quarter by $500 million due to the legal dispute with Apple. If the ITC sides with Qualcomm, it would be a major setback for Apple.

iPhone 8: A major design overhaul

The iPhone 8 is rumored to have the biggest design overhaul since the original iPhone. It is said to feature a 5.8-inch edge-to-edge OLED display, moving away from the LCD panels. OLED screens are better, more energy efficient, and more advanced than LCD panels that Apple has been using for years.

At the bottom of the display will be a function area similar to the Touch Bar on MacBook Pro. The function area would offer dynamic buttons such as accept/decline buttons for calls, sharing options in Safari browser, and editing tools in the Photos app. The fingerprint sensor is rumored to be integrated into the OLED display, though some reports claim it could be relocated to the rear panel. The iPhone 8 is also expected to come with 3D facial recognition and iris scanner for security.

The phone will reportedly have vertical dual cameras on the back for augmented reality applications. JPMorgan recently said in a research note that the iPhone 8 would use Broadcom’s chip for wireless charging, though the research firm did not clarify whether it would rely on Qi or PMA wireless charging standard. Broadcom offers chips supporting both standards.

Apple CEO Tim Cook said during the earnings call that consistent leaks and rumors related to the iPhone 8 were hurting the iPhone 7 sales. Potential buyers are holding off purchases in anticipation of a major upgrade this September, which is negatively affecting the iPhone 7 sales. The company sold 50.8 million iPhones during the latest quarter, falling short of the Wall Street projections of 52.27 million units.

Will Apple unveil iPhone 8 at WWDC?

Until now, there have been numerous leaks and rumors pointing to a delay in iPhone 8 launch. Supply chain reports have blamed technical difficulties with new technologies such as 3D sensing module and in-display fingerprint sensor for the delay. While some claim that its release will be pushed back to October or November, more recent reports claim that the device won’t arrive until early 2018.

That’s why the rumor mill was surprised when JPMorgan analyst Rod Hall told investors that the iPhone 8, along with the iterative upgrades iPhone 7S and 7S Plus, will be previewed at the WWDC event next month. It goes against all the leaks we have seen about the 10th anniversary iPhone. Hall believes the new iPhones will be previewed at the WWDC, and will hit the store shelves in September.

A June announcement could help the iPhone 8 steal some potential buyers from Samsung’s flagship Galaxy S8. But it seems unlikely given the manufacturing issues facing Apple. The last iPhone Apple unveiled at WWDC was the iPhone 4 in 2010. Since then, all the flagship iPhones have been announced in September. The tech giant has shown a preference for the fall release, which helps it boost the holiday quarter sales.

WWDC is only about a month away. If JPMorgan is right, we will get to see the 10th anniversary iPhone sooner than expected.

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