How Can Higher Royalty Rates Add To Our Price Estimate For Qualcomm?

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We currently forecast that Qualcomm‘s (NYSE:QCOM) royalty rates for mobile devices will decline from an estimated 3.0% in 2015 to 2.0% by the end of the Trefis forecast period. Our primary reason for believing that Qualcomm might have to lower its royalty rate going ahead is the rising number of lawsuits against the company globally for basing its royalty fee on the price of the final product. Another reason for the expected decline in royalty rate is Qualcomm’s weaker patent position in 5G technology as compared to 4G.

In February 2015, Qualcomm agreed to pay China’s National Development and Reforms Commission (NDRC) $975 million in fines for alleged monopolistic practices in the region. As a part of the settlement with NDRC, Qualcomm has agreed to ease its royalty rate regimen for Chinese vendors. The company is facing similar actions in South Korea as well. If Qualcomm were to lose its case in South Korea, it faces the risk of lowering its royalty rate as it might have to base its royalty fee on the average selling price of a chipset itself, rather than the ASP of the device it powers.

However, the existing disputes can take years to settle and the company might continue to enjoy higher royalty rates until then. Furthermore, the expanding 3G and 4G penetration in emerging markets can counter the negative impact of declining royalty rates for Qualcomm to some extent. There could be an approximate 10% upside to our price estimate if Qualcomm is able to retain its current royalty rates over our forecast period.

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