TECH

Arm vs Qualcomm: mutually assured destruction

The Arm vs. Qualcomm legal fight took a nasty turn last week, with Arm reportedly canceling Qualcomm's license to use Arm IP. This news has the makings of some scary headlines, but we think the immediate effects are likely minimal. That being said, it opens up more serious questions about what Arm aims to achieve here and how far they're willing to go to do so.

Does Arm's latest move – canceling a Qualcomm license – imply they're willing to take the very risky step of pushing this lawsuit all the way to a jury trial? At the most basic level, this lawsuit is essentially a contract dispute: Qualcomm pays one rate, and Arm thinks Qualcomm should pay a different, higher rate. But this cancellation clearly implies that Arm could cause deeper problems for Qualcomm, should they choose to.

Most outside observers view Arm's cancellation as a fairly common pre-trial maneuver – raising the stakes to gain negotiating leverage for the 11th-hour settlement agreement we're all expecting. We've seen this tactic deployed by litigants in legal disputes many times, including by and against Qualcomm. However, an outright cancellation seems heavy-handed, at least by the standards of our non-existent legal degree.

This brings up the question of why Arm took such a step. If the intent was to pressure Qualcomm, the move seems to have backfired. Qualcomm's stock essentially shrugged off the news, closing down 3% for the day, while Arm's dropped almost 7%. And this gets to the heart of the problem.

Qualcomm is one of Arm's biggest customers, and canceling their license falls squarely into the "cutting off your nose to spite your face" category. If we all woke up tomorrow and Qualcomm couldn't ship any chips, customers wouldn't switch to alternatives overnight. Instead, the market would face serious disruption. Apple, for instance, would have to stop making iPhones if Qualcomm couldn't ship them parts. This hurts Arm as much as it hurts Qualcomm. At best, Arm's threat seems hollow, and Qualcomm (and its lawyers) recognize this.

This brings up a more serious concern than any short-term impact from a canceled license. Arm also has plenty of smart lawyers who understand the fragile nature of this threat. What if they know this and don't care because they aren't looking to settle this lawsuit on the courthouse steps?

We worry this latest move signals that Arm wants to take this to trial. Could they see a victory in this lawsuit as providing a strong legal precedent to push through further changes to their business model and pricing? That would be a great outcome for them, but lawsuits are incredibly risky.

We have studied the industry closely for years. We have worked with both companies, negotiated these kinds of contracts many times, and read both Arm's complaint and Qualcomm's response repeatedly. And we're still not clear on who is in the right.

But somehow, a jury of regular people will be able to decipher this in a predictable fashion? Our concern goes further: even if Arm wins this lawsuit, what kind of message are they sending to the rest of their customers?

To be clear, we're not taking sides. We don't have all the facts (and we're certainly looking forward to the discovery materials), and as we've said, we have no idea who has the stronger case. Our concern is simply that this lawsuit risks harming both companies at a time when both should have more higher priorities.

mundophone