Broadcom targets rival’s royalty model

Broadcom Corp. plans to use leverage from winning a ban on mobile phones with some Qualcomm Inc. chips to force its rival to end its royalty-based business model.

“The real core issue is that somebody is trying to hold on to an antiquated business model and doesn’t want to let go,” Broadcom Chief Executive Scott McGregor said.

McGregor compared the royalties to a “toll booth” and said they violated standard practices in the chip industry.

The U.S. International Trade Commission on June 7 banned some handset imports after finding Qualcomm’s new processors infringed a Broadcom patent for a battery-saving feature. Irvine-based Broadcom said it wanted to negotiate. Qualcomm, the world’s second-biggest maker of mobile-phone chips, said talks stalled because Broadcom insisted on ending the royalties.

Royalties generated $636 million of San Diego-based Qualcomm’s earnings before taxes, or about 67% of its profit for the quarter that ended in March. Qualcomm may generate even more royalties as the industry moves to a new generation of phones, analysts said.

“The royalty model, if it holds, will provide an extremely attractive growth rate for Qualcomm,” Stifel Nicolaus & Co. analyst Cody Acree said. “Investors buy Qualcomm because of its royalty model.”

Broadcom shares rose 1 cent to $30.47. Qualcomm rose 2 cents to $42.62.

“Broadcom is trying to use this proceeding to destroy our business,” Qualcomm General Counsel Lou Lupin said. “The ITC has unwittingly aided and abetted them.”

Qualcomm, which spent $1.5 billion on research last year, licenses its technology to over more than 100 companies, thus helping manufacturers to reduce their costs, Lupin said. Broadcom uses an older “vertical” model where in which it won’t let anyone else use its technology, he said.