Verizon cuts deal with Broadcom
Stepping out of a raging dispute between two Southern California chip makers, Verizon Wireless said Thursday it would pay licensing fees to Broadcom Corp. to avoid a ban on importing new mobile phones.
Irvine-based Broadcom will receive $6 per handset -- up to $200 million over the life of the agreement, the companies said -- so that Verizon can continue selling phones laden with the latest technology.
The deal was announced just before Broadcom released second-quarter results that included a 68% drop in net income and a 4.6% fall in revenue, both roughly in line with what analysts expected.
The agreement puts more pressure on San Diego-based Qualcomm Inc. to settle a series of patent violations alleged by Broadcom.
Most pressing was the International Trade Commission ban on imports of handsets with Qualcomm chips that the commission found infringed Broadcom patents.
Verizon Wireless, which bases its network on Qualcomm technology, had joined Qualcomm in asking President Bush to invalidate the commission’s order. But as part of the agreement with Broadcom, Verizon withdrew its challenge.
“You can be a friend and an ally only so long,” said Roger Entner, senior vice president for communications at IAG Research in New York. “If the friend is stubborn and does not see what is going on, you are going to have to move on.”
Broadcom shares rose 5%, or $1.63, to $33.99. Qualcomm shares fell 4%, or $1.75, to $43.35. Verizon shares gained 29 cents to $42.26.
Lowell C. McAdam, chief executive of Verizon Wireless, said a business settlement was “the most effective way to resolve these kinds of intellectual property issues.”
Broadcom Chief Executive Scott A. McGregor said the deal validated his company’s patents and opened the door to further work with Verizon, which both companies said they would pursue.
“Verizon needed this settlement,” said analyst Rob Enderle of Enderle Group in San Jose.
Enderle said Verizon probably saw, as others have, that Bush wasn’t going to overturn the trade commission order.
Analyst Blair Levin of Stifel, Nicolaus & Co. said that Qualcomm, with Verizon at its side, had a good shot at overturning the ban. But the agreement with Verizon “will reduce the likelihood significantly,” he said.
Enderle pointed out that the licensing fees, which would amount to no more than $40 million a quarter, probably would not last long because Verizon would eventually find a way to get around them. Details of the agreement weren’t disclosed.
Qualcomm said it would continue to “work with its partners” to appeal the order.
In its financial report, Broadcom said quarterly net income fell to $34.3 million, or 6 cents a share, from $106.1 million, or 18 cents a share, a year earlier. Revenue dropped to $897.9 million from $941.1 million.
It attributed the weaker results to an increase in research spending for mobile phone chips and weaker cable modem sales. The company makes communications semiconductors for computers, TV set-top boxes and wireless devices.
“Broadcom has been struggling for a while and remains under pressure,” Enderle said. “The number of competitors and the relative dominance of some, like Cisco Systems, makes it difficult for smaller guys to maintain profit margins.”
