Apple fires back at supplier Imagination in contract dispute

On a conference call with investors this week, Imagination CEO Andrew Heath said the company was informed by Apple at the end of March "that they were certain" that products to be released in 2018 or early 2019 will no longer use Imagination’s intellectual property.

By: Bloomberg | Published:July 7, 2017 7:48 pm
Apple, Imagination Technologies, iPhone, Apple Imagination deal, Apple business By 2016, Apple said it told Imagination it was further diminishing the relationship by initiating a clause in its contact that allows Apple to pay a lower royalty rate for using a smaller amount of intellectual property. (Source: Bloomberg)

When the iPhone supplier Imagination Technologies Group Plc announced in April that Apple Inc. would no longer be using its graphics technology, investors in the small UK. company were shocked. The graphics provider’s stock collapsed more than 60 per cent. But while investors were caught off guard by the move, Apple said Imagination had known for nearly two years that it was winding down the relationship.

Apple first informed Imagination in late 2015 that it would no longer be buying the UK company’s latest technology, Apple said in a statement to Bloomberg. It continued using its older systems.

By 2016, Apple said it told Imagination it was further diminishing the relationship by initiating a clause in its contact that allows Apple to pay a lower royalty rate for using a smaller amount of intellectual property. By February of this year, Apple said it told Imagination it was ending the relationship altogether and would no longer be making any royalty payments as early as 2018.

Apple’s statement clashes with Imagination’s time line of events. On a conference call with investors this week, Imagination CEO Andrew Heath said the company was informed by Apple at the end of March “that they were certain” that products to be released in 2018 or early 2019 will no longer use Imagination’s intellectual property.

Apple said Imagination had known for longer that the relationship was ending.

“We began working with Imagination in 2007 and stopped accepting new IP from them in 2015,” Apple said. “After lengthy discussions we advised them on February 9 that we expected to wind down our licensing agreement since we need unique and differentiating IP for our products. We valued our past relationship and wanted to give them as much notice as possible to adapt their future plans.”

Imagination’s shares fell as much as 8 per cent in London trading. The company said it disclosed the change of its relationship with Apple on April 3 “when it had sufficient clarity on Apple’s position.” Imagination said it struck a multi-year licensing agreement with Apple in February 2014 that carried confidentiality clauses preventing it from commenting.

“Imagination has commercial discussions all the time with all of its customers, including Apple,” Imagination said.

The timing of Imagination’s disclosure about losing Apple’s business will “almost certainly” be reviewed by government regulators, said Tim Aron, a barrister who specializes in financial law and previously worked for the UK’s Financial Conduct Authority. “The overriding obligation is inform the public as soon as possible in the event it holds information that may be relevant to the share price,” Aron said.

Apple’s accusations escalate a dispute with a supplier that has relied on its business for about 50 per cent of its revenue. The two companies have worked together since the first iPhone was released in 2007, but now Apple is developing new graphics technology by itself. The chips have primarily been used for displaying graphics in games and other apps, but are now increasingly powering new artificial intelligence and augmented reality features.

Imagination has questioned whether Apple can develop new graphics technology without using its intellectual property. Heath said on the investor call that “we don’t accept Apple’s position” that it can build its own system. He called Apple’s decision to stop making royalty payments “unsubstantiated.”

Responding to the allegations, Apple said it’s been using less and less of Imagination’s technology in recent years and that the supplier would have no way of knowing how its future products are designed. “We’re disappointed in their response, which has been inaccurate and misleading,” Apple said.

Apple’s decision to drop Imagination is devastating to Imagination’s business and an example of the power the Cupertino, California-based company has over suppliers who depend on its business. Imagination’s shares are down 41 per cent since March 31, the last business day before it revealed the dispute with Apple. Oliver Knott, an analyst at N+1 Singer Ltd., said Imagination will struggle to stay in business as an independent company without Apple as a customer.

Imagination recently announced it’s attempting to sell the company. Apple, which owns a stake in Imagination, isn’t likely to make an offer, according to a person familiar with the matter.

Imagination isn’t the only supplier Apple is battling. The iPhone maker is entangled in an escalating legal dispute with Qualcomm Inc., the world’s largest maker of mobile chips. Apple is refusing to pay Qualcomm royalties and filed an antitrust lawsuit. Qualcomm has sued Apple for patent violations and is attempting to get a US trade body to block the importation of some iPhones.

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