Apple is Holding Companies and Innovation Hostage

Apple recently became the first U.S. company to have a market capitalization of over $800 billion. Not only does the company alone comprise four percent of the entire S&P 500 index, it also holds more than 90 percent of the global smartphone profits according to Strategy Analytics. Needless to say, when Apple knocks on the door, tech companies jump at the opportunity to work together. However, what more and more companies and analysts are coming to realize is that a partnership with Apple can bring as much heartache as profit.

According to the company’s website, Apple relies on over 200 companies to create its cadre of electronics. These vendors provide components and technology that are crucial to Apple products, including semiconductor chips, metal casings, chip processors and graphics technology.

Many of these companies are likely now achieving higher profits than ever imagined. The reality though is that assets on one balance sheet are viewed as liabilities on another. Due to slowing iPhone sales, Apple is seeking to increase margins by raising prices for consumers and lower costs by squeezing suppliers.

Apple recently announced it would no longer use Imagination Technology’s graphics and would instead develop similar technology in house. Soon after, Imagination’s stock plummeted by 72 percent and faced further hardship when Apple announced its plan to cut its royalty payments to Imagination by up to two-thirds in the coming months. (Apple is also reportedly considering parting ways with suppliers Dialog and Synaptics, and subsequently, their stocks plunged 36 percent and 12 percent respectively.)

Not surprisingly, Imagination issued a press release stating, “Apple’s notification has led Imagination to discuss with Apple potential alternative commercial arrangements for the current license and royalty agreement.” In other words, after suffering devastating losses, Imagination has little choice but to return to the negotiating table.

If they don’t, it seems Apple has a backup plan. Bloomberg reports that Apple has hired several employees from Imagination and Dialog. While hiring employees from suppliers is not illegal, it is plain to see that patent infringement and intellectual property violations could easily, or intentionally, occur. Imagination seems particularly concerned that this might soon be the case. The company’s press release noted, “Apple has not presented any evidence to substantiate its assertion that it will no longer require Imagination’s technology, without violating Imagination’s patents, intellectual property and confidential information. This evidence has been requested by Imagination but Apple has declined to provide it.”

Imagination, Dialog and any other companies that run afoul of Apple should be ready for a long, drawn-out process, because Apple does not back down from a fight. To be convinced, one must only look at the company’s assault on Qualcomm.

Apple’s iPhones rely heavily on Qualcomm’s patented technology and modem chips. At the beginning of this year, Apple sued Qualcomm over the royalties it charges to use Qualcomm technology, which ensures iPhones have the capabilities that customers expect. Qualcomm filed a countersuit against Apple and released a statement noting that Apple is “attempting to use its enormous market power to coerce unfair and unreasonable license terms from Qualcomm.”

Not only that, but Bloomberg reported that this suit coincides with “regulatory investigations and fines on three continents, including a lawsuit announced last week by the U.S. Federal Trade Commission.” It would be a large coincidence that these governments started independent inquiries into the same company for the same reasons. Some analysts subtly point the finger at Apple for these inquiries. “‘It feels like another coordinated attack on Qualcomm,’ said Mike Walkley, an analyst at Canaccord Genuity. The mobile phone business is ‘a mature industry, they’ve got to get their margins higher.’”

Finally, if global lawsuits and inquiries weren’t enough pressure to apply to a business partner, Apple’s next salvo was to direct its contract manufacturers to withhold all payments to Qualcomm until the suit is settled. This means, while Apple is still selling and earning profits from products enabled by Qualcomm’s technology, it is no longer paying for the right to use it.

These companies are examples of potential victims of Apple’s singular focus on profit. However, what’s at stake is much larger than Apple’s bottom line. While Apple is breaking market cap records, it is systematically devaluing innovation and technology. If these bullying tactics are not kept in check, Apple’s own partners will lack the resources needed to invest in new developments and better ideas. Further, the precedent will be established that the largest technology company in the world can take and use intellectual property owned by others, whether legally allowed or not, ultimately stifling innovation and creativity.