Is Apple Using a Technicality to Avoid 3G License Fees?

Ryan Whitwam

You may not be aware, but Qualcomm holds a number of patents on modern 3G cellular technology. Any company making a 3G cell phone has to pay patent royalties to Qualcomm. Analyst Sanford Bernstein pointed out in a report this week that Apple appears to be taking advantage of a licensing loophole to avoid paying all those fees for the iPhone. The loophole is estimated to save Apple $290 million in fiscal 2009 alone.

Licensees must pay 5% of the wholesale price of a 3G device to the patent owner. Qualcomm’s website lists over 145 companies that have licensed their 3G technology. The list includes all major makers of 3G handsets. The one notable exception? Apple. One surprise on the list is Foxconn, the Taiwanese manufacturer of the iPhone.

The Bernstein report says that Qualcomm is being paid royalties not on the price Apple charges (average $590), but on the unit price Apple pays Foxconn, a mere $244. So instead of making $23.60 per iPhone, Qualcomm is only seeing $9.70. Apple is able to get away with this because the entire manufacturing process is done externally. Qualcomm seems fine with the arrangement. After all, $9.70 per iPhone is pretty good considering how they fly off the shelves.

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