If you remember the last time there was a pubic spat between these two companies, most pundits took one of two positions. We wrote, “What SemiAccurate does care about is why this is happening, essentially what drove Apple to get their panties in a bunch enough to start a hot war now? This is where the two reasons being bandied about in the press come in. One says that since Apple has a second supplier for LTE modems, Intel for the iPhone 7, they are emboldened to try and gain leverage over Qualcomm. The other camp contends that this is simply a spat over royalties, Apple’s margin are obviously in dire need of a boost. Lets take a look at these scenarios before we state the reason SemiAccurate feels led to shells being lobbed between Cupertino and San Diego.” (Author’s note: This article never went up for a variety of reasons but the sentiment remains unchanged)
Our conclusion was that both sides were wrong, effectively Intel’s execution on the modem front was and still is so woeful that they aren’t a second source. This new spat only reinforces our opinion that we were right about the underlying reasoning from Apple. That said a new court filing yesterday sheds a lot of light on the current crossfire. Let’s look at the lay of the land starting with a Reuters piece about Apple supposedly designing out Qualcomm modems in the next iPhone.
That died down until a not-so-coincidental ‘leak’ to the Wall Street Journal about Qualcomm being designed out of Apple for a reason. The story reads as if Apple is the victim, they had no choice but to get rid of the miscreants. The story goes on to imply that Qualcomm was withholding critical software from Apple to hurt Apple, so there was no choice but to go to Intel and Mediatek.
The problem with this is if you stop and do the barest minimum logical parsing, something no news outlet seems to have done, this story doesn’t stand up. This is why we used the single quotes around the word leak above, it isn’t a leak, it is a one sided plant to kick Qualcomm in the sensitive bits, and the timing of the day before Qualcomm earnings isn’t coincidental.
Lets go back to the logic or lack thereof. Apple is one of Qualcomm’s biggest clients and unquestionably the one with the highest SKU mix. Apple is also probably Qualcomm’s most lucrative client. For years the two made each other a lot of money. The software that Apple alleges Qualcomm withheld is “critical” to using Qualcomm chips in Apple phones. If Qualcomm is in a spat with Apple, withholding this software quite possibly means Apple can’t use Qualcomm modems in the next gen iPhone.
The part that doesn’t make sense is that if Qualcomm withheld this software, they are preemptively shutting out about 20% of their market. According to the articles on the subject, Qualcomm did this, a day before their earnings, to hurt themselves and make themselves look stupid. Can you think of a better reason that a company would cut out that much of their revenue base, feng shui isn’t it either. If you stop and think about it, it makes no sense as given to the WSJ.
The very next day however there was a court filing from Qualcomm pointing a finger at Apple. It is ugly and linked below for subscribers. It says in no uncertain terms that Qualcomm did actually withhold some software from Apple, but allegedly did it for a very solid reason. That software doesn’t seem to actually be necessary to make a product with Qualcomm radios, the filing points out that Apple is one of the few, if only, company that has access to the software, and dozens if not hundreds of OEMs successfully make quite functional Qualcomm phones without it.
So what is this filing about? It seems Apple was granted access to this code under a 2010 agreement called the Master Software Agreement (MSA). This granting comes with a host of conditions not uncommon to such revealing of corporate crown jewels between companies. These include things like restricting access to specific secure computers, not allowing engineers with access to the code to work on competing products for a period of time, and maintaining a list of accesses with who used the code and why. There are also more prosaic things like audit rights for Qualcomm and the obvious non-disclosure agreements.
When SemiAccurate first read the filing our mind was kind of blown. No not because of Apple’s handling of IP, we have heard several horror stories about that from many vendors not related to Qualcomm, but of the sheer stupidity alleged in the document. While this kind of thing probably happens all the time in the corporate world, rarely does a company get publicly allegedly caught with their pants down.
What are we talking about? How about this gem from the court filing, “9. The restrictions in the MSA are designed to maintain the confidentiality of Qualcomm’s source code and related proprietary information. Upon information and belief, Apple has violated the confidentiality and restricted use provisions of the MSA. For example, in July Apple requested that Qualcomm provide details about how Qualcomm’s implementation of a particular interprocessor communication was designed to meet a certain wireless carrier’s requirements. Qualcomm’s proprietary implementation of this communication protocol is not dictated by any standard and it contains Qualcomm’s highly confidential trade secrets. Apple, however, included in the “CC’d Persons” distribution list for this request an engineer from Intel (a competitive vendor) and an Apple engineer working with that competitive vendor.” Not very bright but possibly a simple case of fat fingering when addressing an email.
That explanation sounds good until you read the next bit, “In a separate incident, Qualcomm received correspondence indicating that rather than preventing information regarding Qualcomm’s proprietary implementations from being shared with Apple engineers working with competitive vendors, Apple appears to have merely redacted the code name that Apple uses for Qualcomm on that correspondence.” This appears to be a bit more toward the Oscar Wilde quote, “To lose one parent may be regarded as a misfortune; to lose both looks like carelessness.”
But it goes on, “As another example, an Apple engineer working on a competitive vendor’s product asked an Apple engineer working on Qualcomm’s product to request assistance from Qualcomm relating to a downlink decoding summary for carrier aggregation.” Unfortunately Oscar Wilde’s pithy quotes only went up to two, this is at least three and Oscar stopped with the quotes many years ago. Also do note that Intel’s modems were and still are significantly behind Qualcomm’s capabilities here. In the iPhone 7 generation, Apple had to hobble Qualcomm modems to the capabilities of the Intel ones, things like this are the reason. It unquestionably hurts Apple and their customers to have an inferior radio solution.
This looks kind of bad for Apple, but remember two things, these are only Qualcomm’s allegations and this is the reason why audit clauses are built in to such contracts. If Apple kept the required list of accesses, it should be cleared up in short order, right? Luckily the next section of the filing has information on the subject.
“10. The MSA provides Qualcomm the right to, at least once per year and in Qualcomm’s sole discretion, audit Apple to ensure Apple’s compliance with its obligations under the MSA. On February 28, 2017, Qualcomm requested an audit under the MSA. To date, despite Qualcomm’s repeated requests, Apple has refused to permit Qualcomm to audit Apple’s compliance with the provisions of the MSA. Qualcomm seeks specific performance of Apple’s obligations under the MSA to provide sufficient information to Qualcomm to confirm that Apple has at all times complied with its obligations related to Qualcomm’s software. Qualcomm also seeks compensation for Apple’s breach of the MSA and its failure to adhere to the use restrictions placed on the Qualcomm code by the MSA.” Allegedly speaking, Doh! This is starting to look allegedly ugly.
But wait there’s more! “22.On February 28, 2017 Qualcomm requested an audit pursuant to the MSA, stating that it would commence the audit beginning on March 20, 2017. Apple responded, claiming that three weeks’ notice was not “reasonable,” and refusing to let the audit proceed on that date. Apple also admitted that it had not maintained the list of Authorized Engineers who had accessed the software, the purpose for such access and any actions taken as a result of such access, which Apple was required to maintain under MSA § 3.3(d).
23.In subsequent correspondence, Apple provided some information requested by Qualcomm, such as what Apple claimed to be a list of Authorized Engineers pursuant to MSA § 3.3(d) and certain transactional records from Apple repositories hosting certain Qualcomm software. The information provided by Apple was incomplete and insufficient for Qualcomm to audit Apple’s compliance or lack thereof with its obligations under the MSA, including but not limited to the requirement that certain software “shall only be stored, viewed, and used by Authorized Engineers on Restricted Computers in Authorized Locations[.]” MSA 3.3(a). Apple has failed to provide additional information in response to Qualcomm’s follow-up requests for information that would allow Qualcomm to meaningfully exercise its audit rights.
24.In other respects, Apple flatly refused to permit Qualcomm to proceed with the audit. For example, Qualcomm requested to inspect “Restricted Computers, Approved Machines, and Authorized Locations.” Apple refused to permit this inspection, stating that doing so would be “unworkable.” Similarly, Qualcomm sought to audit Apple’s compliance with the MSA with respect to “additional debug messages and log packets” added by Apple pursuant to MSA § 3.3(b), but Apple has refused to permit that inspection.” This has now surpassed anything Oscar Wilde could come up with, but it isn’t over yet.
See? “25.Subsequent to Apple’s refusal to permit audit and inspection under the MSA,
8 Qualcomm became aware of a posting regarding Intel Corp. layoffs that appears to have been posted by a former modem design engineer, and which contains several statements of concern that on August 14, 2017 Qualcomm specifically requested Apple investigate. The post references a CNBC article reporting on the ITC action filed by Qualcomm against Apple and goes on to say: “We were told to ignore intellectual property rights when designing the modem. There was even a conspiracy to copy Qualcomm’s technology by hints from Apple about the ‘reference device’.”This statement appears to be made by an Intel engineer working on the Apple (Intel branded)modem.
26.Qualcomm requested in writing that Apple investigate whether and to what extent any engineers working on the Intel branded modem for use in the Apple iPhone were provided Qualcomm intellectual property and/or confidential information in any form. Qualcomm also requested that Apple investigate whether and to what extent Qualcomm’s modem hardware or software was ever referred to by Apple as the “reference device”, or other similar descriptions in the context of modem design.
27.On August 24, 2017, Apple responded to Qualcomm’s request by refusing to conduct any investigation. Apple specifically responded as follows: “Apple does not plan to conduct an investigation .””
When your head stops spinning over this filing, go back to the ‘leak’ in the Wall Street Journal. It alleges Qualcomm withheld critical software from Apple so Apple couldn’t possibly make the next gen iPhones with Qualcomm radios. The story effectively says it wasn’t Apple allegedly mis-handling Qualcomm’s crown jewels, it was Qualcomm shooting themselves in the foot so they could lose 20% of their revenue, give or take. Ignore that it makes no sense, that was the story that the WSJ repeated. Any guess where the ‘leak’ came from?
More interesting is the timing. Yes it was the day before Qualcomm earnings but it was also the day before the court filing. Given the complexities of this kind of litigation, think Apple had a copy, or at least a heads up a day or two before Qualcomm actually filed?S|A
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