Regulators claim “no license, no chips” policy hurts competitors.
Intel’s efforts to crack the market for baseband processors could get a boost from the U.S. government. This week the Federal Trade Commission filed a lawsuit in San Jose, California, seeking a permanent injunction against market leader Qualcomm “to undo and prevent its unfair methods of competition.”
Qualcomm has almost two-thirds of the global market for LTE baseband processors, the chips which control a mobile device’s modem. The FTC is not challenging Qualcomm’s market position, but regulators are worried that since so many mobile phone makers use Qualcomm’s chips, the company has an unfair advantage in the other part of its business: patent licensing.
Licensing patented technology is the most profitable part of Qualcomm’s business, and some of its technologies are “standards essential,” meaning mobile devices cannot meet industry standards without them. Qualcomm is required by law to license its patents at “fair and reasonable terms,” but that is obviously open to interpretation and in the end the terms are those that both companies accept. The FTC claims companies are accepting unusually high license fees because Qualcomm threatens to disrupt their supply of baseband processors if they don’t capitulate.
“Qualcomm maintains a ‘no license, no chips’ policy under which it will supply its baseband processors only on the condition that cellphone manufacturers agree to Qualcomm’s preferred license terms,” the FTC said in a press release. “The risk of losing access to Qualcomm baseband processors is too great for a cellphone manufacturer to bear because it would preclude the manufacturer from selling phones for use on important cellular networks.”
Qualcomm’s response
“Qualcomm has never withheld or threatened to withhold chip supply in order to obtain agreement to unfair or unreasonable licensing terms,” the company said in a statement. “The FTC’s allegation to the contrary – the central thesis of the complaint – is wrong.”
Qualcomm said the FTC complaint was based on “a flawed legal theory, a lack of economic support and significant misconceptions about the mobile technology industry.” The company also said Congress asked the FTC to refrain from this so-called “midnight litigation.”
“The FTC accelerated the investigation of Qualcomm and directed the filing of the complaint just days before the change of the administration though only three of five FTC commissioners are in place,” the company said.
The FTC specifically calls out Qualcomm for elbowing potential competitors out of the market. The complaint does not name names, but in the past Qualcomm has been accused of restricting access to its standards essential patents when dealing with rival modem makers including Intel, Samsung and MediaTek.
Last month, South Korean regulators brought similar charges against Qualcomm and slapped the company with an $850 million fine. Qualcomm plans to challenge the ruling in court.
Private deal with Apple?
The FTC complaint also says Qualcomm cut a deal with Apple, offering reduced patent royalties in exchange for Apple’s commitment to use only Qualcomm’s baseband processors. IPhones have used Qualcomm modems until last year, when the iPhone 7 models designed for the AT&T Mobility and T-Mobile US networks shipped with Intel modems.
“Qualcomm precluded Apple from sourcing baseband processors from Qualcomm’s competitors from 2011 to 2016,” said the FTC. “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.”
Analyst Linley Gwennap of The Linley Group believes Apple is frustrated with Qualcomm and thinks the company is likely to have joined forces with Intel in pushing the FTC to seek this injunction.
“It appears to be driven by Intel (4% market share) and Apple in an attempt to gain leverage over Qualcomm through the courts rather than in the marketplace,” Gwennap said. He said that Qualcomm engages in “vigourous competition” with Samsung, Huawei, MediaTek and Spreadtrum, and that the company’s share of the baseband processor market has been under pressure for two years.
Legal challenges to Qualcomm’s dominant market position may take months or even years to make their way through the courts. Intel, Samsung and Qualcomm’s other competitors may continue to trail the San Diego, California-based company in the market for LTE modems, but the market for “5G” modems could be a different story. Qualcomm and Intel have already announced 5G modems. Qualcomm’s modem supports the frequency bands in which U.S. carriers are testing 5G, while Intel’s supports those bands as well as the bands used by Chinese carriers.
Qualcomm shares, which were up more than 30% last year, slipped about 5% Tuesday on news of the FTC complaint, but started climbing again on Wednesday.
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