The FTC case against Qualcomm does not stand up to the reality

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Last Tuesday morning, I spent the day at the US courthouse in San Jose, California, to hear the FTC's final record against Qualcomm. The day began with FTC's key expert witness, Professor Carl Shapiro. Shapiro is professor of economics of industrial organizations at the Haas School of Business at the University of California at Berkeley. Previously, he held an antitrust position in the Department of Justice. He produced a report on Qualcomm's market power (monopoly) in premium CDMA and LTE modems. His badysis focused on the period 2006-2016. & Nbsp; He claimed that three Qualcomm policies allowed him to claim "Super FRAND" royalties (FRAND means "fair, reasonable and non-discriminatory"). & Nbsp; The -FRAND license implies that Qualcomm has earned too much money. These policies include: a "no-license, no-chip" policy, incentive payments to telephone equipment manufacturers (including the 2013 Apple Agreement) and a refusal to license standard essential patents (SEPs) to manufacturers rival chips.

The "no license, no chip" policy was designed to ensure that new handset OEMs get the appropriate patent licenses before receiving chips to build phones. Without this policy, OEMs could build smartphones with Qualcomm chips and then refuse to pay Qualcomm for any additional IPs that apply to those phones. Qualcomm's only remedy would be to sue OEMs for patent infringement, which can take years in each case. & nbsp; In the meantime, these builders could continue to sell phones and make profits without paying Qualcomm's IP license. As you can imagine, phone OEMs sometimes block the payment of licenses as long as possible. Delays sometimes occur when OEMs renegotiate expired license agreements. However, Qualcomm claimed that it continued to sell chips to OEMs as long as they continued to bargain in good faith, even if their license agreement became void. & Nbsp; This would appear to refute the FTC's argument that Qualcomm uses chip sourcing as leverage to extract higher royalties from OEMs. The only case in which the FTC was able to find itself was a delay in providing new chip samples to LG when LG had not yet signed up for the new WCDMA license.

In the case of the Apple agreement reached in 2013, Apple was to receive a large incentive payment (approximately $ 640 million) if it used only Qualcomm modems. & Nbsp; Evidence was presented that Intel (using the modem purchased from Infineon) was trying to win back Apple. starting with iPad (data modems only). The FTC speculated that Apple's (partially) loss of this incentive payment for breach of exclusivity was a barrier to Intel's entry into the market. The iPad opportunity had too little volume to offset the loss of incentive payments. However, at the time, Intel modems were not able to replace Qualcomm modems in handsets because they lacked essential features and performance and did not meet Apple's requirements. But & nbsp; Apple then sacrificed Qualcomm payments in 2016 by launching iPhones equipped with Intel modems. This begs the question: what is the size of the barrier posed by the agreement? This did not seem to prevent Intel from investing the necessary capital to develop a product that meets Apple's requirements, or to discourage Apple from using Intel modems when they are ready. The economic test for Shapiro was: could Intel buy back the fine payment while making a profit? But the design volume of the iPad was too small and the Intel modem lower, so is this a true monopoly test?

While Professor Shapiro baderted that his badysis showed that Qualcomm had enjoyed monopolistic power from 2006 to 2016, it failed to demonstrate that it resulted in a quantifiable cost to consumers. Nor that there was a real competitive solution on the part of other suppliers. In addition, Professor Shapiro's own report indicated that Qualcomm's share had decreased before 2016 and that it had continued to do so in 2017 and 2018, both in CDMA and in Premium LTE. Clearly, Qualcomm's market share was not due to monopoly but to the lack of appropriate alternatives. & Nbsp; This raises another question: why did the FTC sue Qualcomm?

In video testimony, Marv Blecker (a former Qualcomm executive) was interviewed and told how the company had rejected the "exhaustive" licenses of its competitors, in particular, he recalled that VIA and Samsung had applied for licenses. Qualcomm's policy was not to provide exhaustive licenses to its competitors (chip makers) because the royalty for all applicable patents was already accounted for and paid for by the device manufacturers. It is difficult to understand the FTC's badertion that not licensing competing chip manufacturers was a barrier to entry, even though they could already use Qualcomm's IP technology for free (because that the device manufacturers have paid the fee). How could paying royalties to Qualcomm for cellular SEPs help Intel or Mediatek reduce costs and improve margins?

Later in the day, Qualcomm called its first two witnesses: the company's co-founder, Dr. Irwin Jacobs, and 4G Senior Vice President and 5G Engineering, Durga Malladi. Jacobs gave a detailed history of the company and its initial mission. He also mentioned the risks taken by Qualcomm to develop CDMA (Code Division Multiple Access) activity – a 2G digital technology that many believe would be too complex and too expensive to operate for consumer markets. The superiority of CDMA over frequency division multiple access (FDMA) and time division multiple access (TDMA) has led to its adoption by a number of telecommunication carriers, despite the limited number initially chip vendors (Qualcomm) CDMA modems. With CDMA, more subscribers could be supported with the same bandwidth. & Nbsp; With 3G, developments in CDMA technology have become the basis for all networks worldwide, as the widely deployed European standard, WCDMA (Wideband-CDMA), was built on CDMA technology.

Irwin's cross-examination focused on a specific case in which Qualcomm allegedly hid development chips at LG for a while while they were still negotiating a patent license for a new 3G WCDMA standard. The problem was finally solved and Qualcomm never hid commercial chips at LG. & Nbsp; This is also a digression for the FTC because this example is for WCDMA chips, which is beyond the scope of the FTC's arguments for premium CDMA and LTE modems.

Durga Malladi, SVP & amp; GM of 4G / 5G at Qualcomm, has 400 US patents in his name; and in his testimony, he emphasized the fact that the company is a leader not only in the market, but also in the field of standards, and that it evolves in the perspective of global end-to-end system solutions.

According to today 's testimony, I do not see that the FTC has a compelling case. As much as Qualcomm's market share dropped significantly when Mediatek entered the CDMA market and that Apple migrated to Intel modems. Whatever the advantage that Qualcomm had by being the first on the market with new technologies, it has been constantly mitigated over time by competitors such as Intel, MediaTek, Samsung and HiSilicon.

I will attend the next hearings because my schedule will allow me to see the progress of the case. And remember that the FTC has the burden of proving that Qualcomm has stifled competition and caused harm to consumers (through higher prices).

Kevin Krewell

Senior Analyst, TIRIAS Research

Twitter: @Krewell

The author and staff members of TIRIAS Research do not hold any interest in the mentioned companies. TIRIAS Research monitors and consults companies in the electronic ecosystem, from semiconductors to systems, sensors and the cloud.

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Last Tuesday morning, I spent the day at the US courthouse in San Jose, California, to hear the FTC's final record against Qualcomm. The day began with FTC's key expert witness, Professor Carl Shapiro. Shapiro is professor of economics of industrial organizations at the Haas School of Business at the University of California at Berkeley. Previously, he held an antitrust position in the Department of Justice. He wrote a report on the power of Qualcomm (monopoly) on premium CDMA and LTE modems. His badysis focuses on the period 2006-2016. He claimed that three Qualcomm policies gave him the power to claim "Super FRAND" royalties (FRAND means "fair, reasonable and non-discriminatory"). A super-FRAND license implies that Qualcomm has earned too much money. These policies include: a "no-license, no-chip" policy, incentive payments to telephone equipment manufacturers (including the 2013 Apple Agreement) and a refusal to license standard essential patents (SEPs) to manufacturers rival chips.

The "no license, no chip" policy was designed to ensure that new handset OEMs get the appropriate patent licenses before receiving chips to build phones. Without this policy, OEMs could build smartphones with Qualcomm chips and then refuse to pay Qualcomm for any additional IPs that apply to those phones. Qualcomm's only remedy would be to sue OEMs for patent infringement, which can take years in each case. In the meantime, these builders could continue to sell phones and make profits without paying Qualcomm's IP license. As you can imagine, phone OEMs sometimes block the payment of licenses as long as possible. Delays sometimes occur when OEMs renegotiate expired license agreements. However, Qualcomm baderted that it continued to sell chips to OEMs as long as they continued to bargain in good faith, even if their license agreement lapsed. This would appear to refute the FTC's argument that Qualcomm uses chip sourcing as leverage to extract higher royalties from OEMs. The only case in which the FTC was able to find itself was a delay in providing new chip samples to LG when LG had not yet signed up for the new WCDMA license.

In the case of the Apple agreement reached in 2013, Apple was to receive a large incentive payment (approximately $ 640 million) if it used only Qualcomm modems. It has been proven that Intel (using the modem purchased from Infineon) had attempted to reclaim Apple, starting with iPad (for data modems only). The FTC speculated that Apple's (partially) loss of this incentive payment for breach of exclusivity was a barrier to Intel's entry into the market. The iPad opportunity had too little volume to offset the loss of incentive payments. However, at the time, Intel modems were not able to replace Qualcomm modems in handsets because they lacked essential features and performance and did not meet Apple's requirements. But in 2016, Apple sacrificed Qualcomm payments by launching iPhones equipped with Intel modems. This begs the question: what is the size of the barrier posed by the agreement? This did not seem to prevent Intel from investing the necessary capital to develop a product that meets Apple's requirements, or to discourage Apple from using Intel modems when they are ready. The economic test for Shapiro was: could Intel buy back the fine payment while making a profit? But the design volume of the iPad was too small and the Intel modem lower, so is this a true monopoly test?

While Professor Shapiro baderted that his badysis showed that Qualcomm had enjoyed monopolistic power from 2006 to 2016, it failed to demonstrate that it resulted in a quantifiable cost to consumers. Nor that there was a real competitive solution on the part of other suppliers. In addition, Professor Shapiro's own report indicated that Qualcomm's share had decreased before 2016 and that it had continued to do so in 2017 and 2018, both in CDMA and in Premium LTE. Clearly, Qualcomm's market share was not due to monopoly power, but to the lack of appropriate alternatives. This begs another question: why did the FTC sue Qualcomm in court?

In video testimony, Marv Blecker (a former Qualcomm executive) was interviewed and told how the company had rejected the "exhaustive" licenses of its competitors, in particular, he recalled that VIA and Samsung had applied for licenses. Qualcomm's policy was not to provide exhaustive licenses to its competitors (chip makers) because the royalty for all applicable patents was already accounted for and paid for by the device manufacturers. It is difficult to understand the FTC's badertion that not licensing competing chip manufacturers was a barrier to entry, even though they could already use Qualcomm's IP technology for free (because that the device manufacturers have paid the fee). How could paying royalties to Qualcomm for cellular SEPs help Intel or Mediatek reduce costs and improve margins?

Later in the day, Qualcomm called its first two witnesses: the company's co-founder, Dr. Irwin Jacobs, and 4G Senior Vice President and 5G Engineering, Durga Malladi. Jacobs gave a detailed history of the company and its initial mission. He also mentioned the risks taken by Qualcomm to develop CDMA (Code Division Multiple Access) activity – a 2G digital technology that many believe would be too complex and too expensive to operate for consumer markets. The superiority of CDMA over frequency division multiple access (FDMA) and time division multiple access (TDMA) has led to its adoption by a number of telecommunication carriers, despite the limited number initially chip vendors (Qualcomm) CDMA modems. With CDMA, more subscribers could be supported in the same bandwidth. With 3G, developments in CDMA technology have become the basis for all networks worldwide, as the widely deployed European standard, WCDMA (Wideband-CDMA), was built on CDMA technology.

Irwin's cross-examination focused on a specific case in which Qualcomm allegedly hid development chips at LG for a while while they were still negotiating a patent license for a new 3G WCDMA standard. The problem was finally resolved and Qualcomm never retained LG's commercial chips. It was also a digression for the FTC because the example was about WCDMA chips, which does not appear in the FTC's case concerning CDMA and LTE premium modems.

Durga Malladi, Executive Vice President and General Manager of 4G / 5G at Qualcomm, has 400 US patents in his name; and in his testimony, he emphasized the fact that the company is a leader not only in the market, but also in the field of standards, and that it evolves in the perspective of global end-to-end system solutions.

According to today 's testimony, I do not see that the FTC has a compelling case. As much as Qualcomm's market share dropped significantly when Mediatek entered the CDMA market and that Apple migrated to Intel modems. Whatever the advantage that Qualcomm had by being the first on the market with new technologies, it has been constantly mitigated over time by competitors such as Intel, MediaTek, Samsung and HiSilicon.

I will attend the next hearings because my schedule will allow me to see the progress of the case. And remember that the FTC has the burden of proving that Qualcomm has stifled competition and caused harm to consumers (through higher prices).

Kevin Krewell

Senior Analyst, TIRIAS Research

Twitter: @Krewell

The author and staff members of TIRIAS Research do not hold any interest in the mentioned companies. TIRIAS Research monitors and consults companies in the electronic ecosystem, from semiconductors to systems, sensors and the cloud.