By Tripp Mickle and Asa Fitch
A meeting between Tim Cook and Steve Mollenkopf a year ago at
Apple Inc.'s headquarters started with a tense moment.
The feuding leaders of two smartphone industry titans -- Apple
and Qualcomm Inc. -- were there to discuss a long-simmering patent
dispute. Mr. Mollenkopf, who suspected Apple of supporting a
hostile takeover of his company, initially didn't speak, leaving
his general counsel to start talking, according to people familiar
with the meeting.
The awkwardness punctuated a distant relationship between the
chief executives that has turned their companies' conflict into one
of the ugliest corporate battles in history.
Apple has called Qualcomm a monopoly and said Mr. Mollenkopf has
lied about settlement talks between the companies. Qualcomm has
accused Apple of deceiving regulators around the world and stealing
software to help a rival chip maker.
For two years, the companies have bickered over the royalties
Apple pays to Qualcomm for its patents. Discord between the CEOs,
who bring different management styles and principles to the table,
has deepened the divide. They have dug into their positions as the
dispute has escalated.
The feud heads toward a showdown this coming week, when Apple's
patent lawsuit against Qualcomm is set to go to trial -- with both
CEOs expected to testify in a case where billions of dollars are at
stake. Unless a settlement is reached, opening arguments are
scheduled to begin Tuesday in a San Diego federal court.
Close relationships between CEOs have been critical to resolving
some big corporate feuds. Former Microsoft Corp. Chief Executive
Steve Ballmer spoke weekly with Sun Microsystems Inc. Chief
Executive Scott McNealy for more than six months before the
companies settled a two-year-old antitrust suit in 2004. Mr.
Mollenkopf's predecessor, Paul Jacobs, met often with Nokia Corp.
chief Olli-Pekka Kallasvuo in the midst of their wide-ranging
patent war before they struck a 15-year agreement in 2008.
"The CEO has the ability to make decisions and understand
tradeoffs that are difficult to delegate down to others," said John
Chambers, the CEO at Cisco Systems Inc. from 1995 to 2015, who once
resolved a trademark dispute with former Apple CEO Steve Jobs. "You
pick up the phone and make a phone call or ask for a meeting. It's
based upon trust."
Messrs. Cook and Mollenkopf are so entrenched in their competing
positions -- and have so little personal connection -- that Apple's
top executives have said they don't think it's possible to cut a
deal with Qualcomm while Mr. Mollenkopf is CEO, a person familiar
with their thinking said. "It's personal. I don't see anybody who
can bridge this gap," this person said.
The two men haven't made any headway in cultivating a
relationship, people familiar with the dispute said.
Apple and Qualcomm declined to make Messrs. Cook and Mollenkopf
available for interviews.
Mr. Mollenkopf, who was born in Baltimore, is a military buff
who interned for the Central Intelligence Agency before joining
Qualcomm. He has often made decisions after consulting individually
with his top lieutenants, but many have left over the years,
leaving him isolated and reliant on counsel from outside
advisers.
Mr. Cook, an Alabama native, is an operations whiz who works to
build consensus among Apple's top-dozen leaders, often asking them,
"What is the right thing to do?" The group-decision approach has
resulted in a team of enforcers who defend Mr. Cook's view that
Qualcomm's licensing practices -- taking a 5% share of most of the
sales price of an iPhone -- was just plain wrong, allowing the chip
maker to profit off Apple innovations in display and camera
technology.
Mr. Cook's conviction on that point and his frustration over Mr.
Mollenkopf's handling of the dispute have compelled him to testify
against Qualcomm, according to people familiar with his thinking --
a rarity in his time as CEO.
A jury could determine who is the real victim: Qualcomm, which
claims Apple is violating its patents by withholding royalties, or
Apple, which argues Qualcomm has been overcharging for those
patents for years. At stake is the future of Qualcomm's licensing
model and billions of dollars in royalties that Apple will pay or
keep.
The companies have spent millions of dollars on legal fees in
hopes of gaining an edge and forcing their opponent to settle.
Since Apple sued Qualcomm in January 2017 over what the iPhone
maker considered to be unfair licensing practices, Qualcomm has
shed more than 25% of its market value, now around $68.9 billion.
The hobbled company fended off a hostile takeover by rival Broadcom
Inc. last year, and then faced the ire of shareholders who voted
against the board at the annual meeting in a show of displeasure
after the company rebuffed Broadcom.
Apple has faced bans on the sale of some iPhones in China and
Germany after courts there found it infringed on Qualcomm patents.
Its most recent iPhones now exclusively feature modem chips from
Intel Corp., a company that has lagged Qualcomm in wireless
features. This year's iPhones won't have Qualcomm's new 5G chips,
potentially putting Apple a year behind rivals like Samsung
Electronics Co. in offering speedier wireless devices.
Dow Jones & Co., publisher of The Wall Street Journal, has a
commercial agreement to supply news through Apple services.
Members of both sides say the lines of communication remain
open, though largely unused, and a settlement could be reached. The
companies are awaiting a ruling from a federal judge in an
antitrust case brought by the Federal Trade Commission against
Qualcomm that could weaken or strengthen the chip maker's
position.
Apple once needed Qualcomm, which had pioneered an efficient
system for transmitting phone calls and data. Before it could
launch the iPhone in 2007, Apple had to license Qualcomm's patents
in phone technology. Qualcomm was licensing those patents to other
cellphone manufacturers for a royalty of 5% on the price of each
handset, a fee that could equal $12 to $20 per device.
Qualcomm's terms baffled Mr. Cook, then chief operating officer.
He knew the first iPhone would carry a high price tag -- predicated
partly on Apple's brand cachet -- and didn't think Qualcomm should
get such a big share of that, people familiar with the negotiations
said. His team had proposed paying $1.50, according to court
transcripts.
Mr. Jobs, however, felt that companies should be fairly
compensated for their innovations. He had a business relationship
with Mr. Jacobs, Qualcomm's CEO at the time, speaking often. They
helped forge an agreement for Apple to pay Qualcomm a lower royalty
rate of $7.50 for each phone, according to people familiar with the
negotiations.
In 2011, Apple extended that agreement and deepened its
relationship with Qualcomm by making it the exclusive provider of
modem chips for iPhones.
As part of the terms, Qualcomm would pay $1 billion to Apple in
what Mr. Mollenkopf called incentive payments, with a stipulation:
Apple would have to pay back that money if the iPhone maker added
another chip supplier. The one-time payment was later updated to be
annual.
Both companies raked in sales. By the end of 2012 -- five years
after its launch -- Apple had sold more than 250 million iPhones
and generated more than $150 billion in sales. Qualcomm had
collected more than $23 billion in royalties from all its partners
and almost $42 billion in chip and other product sales over the
same period.
Mr. Cook, who succeeded Mr. Jobs as CEO in 2011, found it
egregious that Apple paid Qualcomm more than every other iPhone
licensee combined, people familiar with the negotiations said.
Making matters worse, he and his top operations lieutenant, Jeff
Williams, who has a longstanding relationship with Mr. Mollenkopf,
felt trapped into using Qualcomm as an exclusive modem
provider.
"We had a gun to our head," Mr. Williams said of the deal during
recent court testimony.
Mr. Mollenkopf saw it differently. Apple had made overtures
about the exclusivity deal, he said in court testimony. Messrs.
Cook and Williams promised a surge in chip sales and an advantage
over competitors by having Qualcomm chips inside millions of
iPhones, and had requested $1 billion for the privilege, he
said.
Apple confronted Qualcomm publicly over its licensing practices
in 2016. During a hearing in a case brought against Qualcomm by the
South Korean Fair Trade Commission, an Apple representative gave a
presentation on the company's "Views on Qualcomm's Abuse of
Dominance" and said Apple had yet to add another modem chip
supplier because of "Qualcomm's exclusionary conduct," according to
court filings.
Mr. Mollenkopf and other Qualcomm executives were livid,
according to people familiar with the events. They knew that behind
the scenes, Apple was producing iPhone 7 devices in China with
modem chips from rival Intel. Those devices would be revealed
within weeks of the testimony.
At Mr. Mollenkopf's direction, according to people familiar with
the events, Qualcomm began withholding the roughly $1 billion in
royalty rebates and incentives it paid Apple on the grounds that
the iPhone maker had violated its contract by misleading
regulators.
"That was a nuclear move," said a person familiar with the
events.
Apple retaliated by cutting off billions in royalties to
Qualcomm and filing its lawsuit against the chip supplier in
January 2017.
The lawsuit landed as the smartphone's salad days were ending.
Handset shipments declined for the first time in 2017, pressuring
both Apple's and Qualcomm's businesses.
Echoing a similar legal strategy Qualcomm had used with Nokia in
the mid-2000s, Mr. Mollenkopf endorsed suing Apple over patent
infringement in the U.S., China and Germany. Qualcomm began
withholding software code that Apple needed to test modem chips for
future iPhones because of its suspicion Apple shared some software
with rival Intel, something Intel and Apple have denied.
Around October 2017 Apple began designing iPhones and iPads that
jettisoned Qualcomm components.
Shortly after, Broadcom made its unsolicited takeover offer of
$105 billion for Qualcomm. The timing of the offer stirred
suspicion inside Qualcomm that Apple was supportive of the bid,
according to people familiar with the events.
After the takeover failed, Mr. Mollenkopf held hope that Apple
would come to the table to negotiate a settlement, according to
people familiar with the events. Mr. Cook was due to be deposed in
summer 2018, and Qualcomm executives thought the Apple chief would
settle to avoid speaking about his secretive company's business
practices.
Mr. Cook, however, was committed to fundamentally changing
Qualcomm's business model and sat down for his deposition last
summer without issue, according to a person familiar with his
thinking.
In the face of Apple's resistance, Qualcomm escalated a
public-relations effort to bring it to the table. The company
worked with Definers Public Affairs, an opposition research firm
based in Washington, D.C., according to people familiar with the
firm's work. The New York Times reported in November that the firm
maintained a relationship with news-aggregation website NTK
Network, which ran one article calling Apple Silicon Valley's
biggest bully and another saying Apple needed to "make nice with
Qualcomm, or offer slower, inferior products to consumers."
Meanwhile, Mr. Mollenkopf doubled down on assertions the parties
were close to a settlement. He told CNBC during an appearance that
they were on the "doorstep" of a resolution. Weeks later, Qualcomm
scored legal victories in China and Germany.
In January, an agitated Mr. Cook stated the companies weren't in
negotiations. During a CNBC appearance with Jim Cramer, he
described Qualcomm's licensing practices as illegal and said they
hadn't held talks since September. He also castigated the chip
maker for paying Definers to write fake news. "This is stuff that
should be beneath companies," Mr. Cook said.
Mr. Mollenkopf continues to believe Apple will negotiate a
settlement just as Nokia did, people familiar with the events
said.
Mr. Cook has shown no indication he is willing to bend. Apple
has pushed ahead with an effort to develop its own modem chip,
which would further reduce its dependency on Qualcomm.
For Mr. Mollenkopf, the prospect of cutting a deal that lowers
its licensing fees is risky. Qualcomm has a clause in its contracts
with other manufacturers that would require it to extend them the
same terms, potentially crushing its lucrative licensing
business.
Not cutting a deal quickly has left Apple without access to
Qualcomm's market-leading 5G chips, putting the iPhone a step
behind its Android-based competitors in the race for the next big
advance in wireless.
"Both sides have their hammers out," one person said. "There has
to be something that happens to make one side put their hammer
away."
Write to Tripp Mickle at Tripp.Mickle@wsj.com and Asa Fitch at
asa.fitch@wsj.com
(END) Dow Jones Newswires
April 13, 2019 00:14 ET (04:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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