The Federal Trade Commission has reason to believe that Qualcomm abused its position in the broadband chip manufacturing business to obtain an advantage illegally. The chip maker is said to have forced smartphone makers to agree to anti-competitive business arrangements that prevented them from using modems from Qualcomm’s competitors.
Apple is one of the high-profile Qualcomm partners that was allegedly forced to enter into an exclusive agreement for modem chips, which prevented Apple from using any other chips for several years. Only last year, Apple added a second LTE provider to its iPhone supply — that’s Intel, one of Qualcomm’s main rivals, and a company that has been vying for Apple’s business for years.
In its complaint, the FTC explains that Qualcomm doesn’t only make the modem chips it sells to phone makers, but it also holds many patents critical for these components. Some of these patents were declared essential to industry standards that enable cellular connectivity.
Qualcomm should license those patents on “fair, reasonable, and non-discriminatory, or ‘FRAND,’ terms,” but the chipmaker failed to do so.
“According to the complaint, by threatening to disrupt cell phone manufacturers’ supply of baseband processors, Qualcomm obtains elevated royalties and other license terms for its standard-essential patents that manufacturers would otherwise reject,” the FTC wrote. “These royalties amount to a tax on the manufacturers’ use of baseband processors manufactured by Qualcomm’s competitors, a tax that excludes these competitors and harms competition. Increased costs imposed by this tax are passed on to consumers, the complaint alleges.”
Qualcomm reportedly practices a “no license, no chip” policy. That means smartphone makers who chose modems from other companies have to pay higher royalties.
“According to the Commission’s complaint, this is an anticompetitive tax on the use of rivals’ processors. ‘No license, no chips’ is a condition that other suppliers of semiconductor devices do not impose,” the commission said. “The risk of losing access to Qualcomm baseband processors is too great for a cell phone manufacturer to bear because it would preclude the manufacturer from selling phones for use on important cellular networks.”
Apple is one of Qualcomm’s most important customers, the complaint explained, which is why the company forced an exclusivity deal. “Qualcomm precluded Apple from sourcing baseband processors from Qualcomm’s competitors from 2011 to 2016,” the complaint notes. “Qualcomm recognized that any competitor that won Apple’s business would become stronger, and used exclusivity to prevent Apple from working with and improving the effectiveness of Qualcomm’s competitors.”
Apple’s deal with Qualcomm included “substantial incentive payments.”
“In all, Qualcomm’s 2011 and 2013 agreements with Apple provided for billions of dollars in conditional rebates from Qualcomm to Apple,” the complaint says. The conditions included “not using a competitive wireless technology backed by Intel, agreeing not to sue Qualcomm over royalties, and using Qualcomm chips in forthcoming iPhones and iPads,” according to Business Insider.
Qualcomm, meanwhile, denied the antitrust accusations. The company said, “the complaint is based on a flawed legal theory, a lack of economic support and significant misconceptions about the mobile technology industry.”
“Qualcomm has never withheld or threatened to withhold chip supply in order to obtain agreement to unfair or unreasonable licensing terms. The FTC’s allegation to the contrary — the central thesis of the complaint — is wrong.”
This isn’t the first antitrust fight for Qualcomm. The company was fined almost $2 billion in Asia — $975 million in China (2015) and $853 million in South Korea ($853).