‘Brace for a long and ugly battle’ — Wall Street reacts to the escalating fight between Apple and Qualcomm

Apple and Qualcomm are in a bitter legal battle.

Qualcomm makes chips that go into the iPhone and also licenses patents to Apple, but Apple would like to change their business arrangement. Earlier this year, Apple sued Qualcomm for allegedly overcharging, timed alongside the FTC announcing it was investigating Qualcomm for anti-competitive practices. That lawsuit is ongoing.

Qualcomm is firing back. The latest development: In a separate suit, Qualcomm is alleging that Apple is violating a handful of patents that affect things like device charging or data transfer.

Qualcomm is even asking courts to ban certain iPhone models from being sold in the United States.

This battle is complex, but here’s what you need to know.

Qualcomm filed its suit with the the International Trade Commission, a fast-moving judicial body. It also filed the suit in federal court.

“The good news is that the ITC is typically a much more quickly moving jurisdiction than district courts, so this case could be decided sooner than was originally expected. The press release indicated that the case is expected to be tried next year,” Raymond James analyst Tavis McCourt wrote on Friday.

Still, a decision isn’t expected until late 2018 or even early 2019.

ITC process

“Qualcomm said that it expects the ITC to start its investigation in August. We note that in the Cisco-Arista ITC case of, which was filed in Dec 2014, it took nearly 18 months before the ITC could issue a cease and detest order. We suspect that Qualcomm-Apple ITC investigation could take similar amount of time to process,” JPMorgan analyst Tom Hall wrote in a note to clients.

“We do not see many immediate implications as Qualcomm expects the case to be tried next year,” Macquarie analyst Srini Pajjuri wrote.

President Trump could get involved.

Tim Cook Donald Trump

“We note that the official litigation process includes an ITC hearing, leading to an ITC Initial determination and then a final determination, followed by a presidential review. We note that any exclusion orders come into effect after the presidential review,” Credit Suisse analyst Kulbinder Garcha wrote on Friday.

“We also note that when Samsung got an ITC ruling against Apple in 2013, it was vetoed by President Obama,” RBC analyst Amit Daryanani wrote.

The patents Qualcomm alleges Apple violates were all issued in the last four years and aren’t the “industry standard” patents that were part of previous lawsuits.

“Qualcomm claims that these patents (all issued in the last four years) are not required for any industry standard, and play key roles in extending battery life and high-speed performance,” Credit Suisse analyst Kulbinder Garcha wrote on Friday.

Qualcomm doesn’t want Apple to stop selling iPhones with Qualcomm chips. It only wants to stop Apple from selling iPhones with Intel modems, which could be as many as 17% of Apple’s total iPhone volume.

“Qualcomm is requesting the ITC to issue a Limited Exclusion Order (LEO) to bar importation of the iPhone and other products that infringe on Qualcomm’s patents. Qualcomm is seeking this LEO against iPhones that do not use baseband processors from the company,” Hall wrote.

“We note that Apple ships ~31% of iPhones into the US. Of these shipments in to the US, we believe that ~55% do not use Qualcomm’s baseband. Overall, we believe that ~17% of total iPhone volume is exposed to the ITC complaint filed by Qualcomm,” he continued.

Apple would probably pay up if there was a real chance of certain iPhones being barred from the United States.

“While this Qualcomm complaint creates some risk for a potential injunction for Apple products longer-term (unlikely before 18 months), we believe Apple would quickly start paying Qualcomm licensing fees through its ODM partners should an injunction occur,” Cannacord analyst T. Michael Walkley wrote in a note for clients on Friday.

“Even if Qualcomm receives an injunction, we believe Apple would just resume paying ODMs for Qualcomm licensing fees and then continue to battle Qualcomm in courts as Apple works to lower its royalty payments to Qualcomm.”

This lawsuit is likely to be used as a bargaining chip on the way to a settlement.

“The increasingly intense legal battle is likely to be long drawn given multiple patents, govt agencies and geographies involved. Ultimately we expect parties to reach a settlement for agreeable economics, though timing and terms are uncertain,” RBC analyst Amit Daryanani wrote.

“Posturing like this is not uncommon even during late stages of a negotiation process. Apple vs Ericsson dispute saw its share of bitter arguments right until the eventual settlement,” Pajjuri wrote.

“Our understanding is this is a completely different case … so a victory or loss in this case would likely have little bearing on the lawsuits around [industry standard patents] filed by Apple, but this case could certainly be used as leverage to draw Apple to the bargaining table,” McCourt wrote.

Ultimately, Apple investors shouldn’t worry about this lawsuit.

“While Qualcomm’s actions mark an escalation in feud with Apple, we don’t think there is a cause for alarm for investors. Near term impact on Apple should be negligible,” Daryanani wrote.

“We do not believe the Qualcomm ITC complaint creates risk to our 2018 Apple estimates,” Walkley wrote.

Qualcomm investors may want to pay attention.

“We expect [Qualcomm] stock to remain range-bound until a settlement is reached, and maintain Neutral,” Pajjuri wrote, giving the stock a $US55 price target.

“We believe this overhang will continue to persist. We rate Qualcomm Market-Perform,” Bernstein analyst Stacy Rasgon wrote.

“While resolution does not appear imminent, we believe these legal battles will continue to be an overhang and expect potential share price volatility around court decisions,” Wells Fargo analyst Maynard Um wrote.