Qualcomm’s fine from the European Commission announced this week could be the bullet in the head of the current administration at the company. It’s one thing to be beaten up by Apple which doesn’t want to pay its IPR dues and another for Broadcom to be pushing a heavy-handed foot in the door for an unwanted merger, but this move is entirely self-inflicted.
Intel, charged with much the same thing in the past by the Commission, was the stand out precedent which said loud and clear, that once dominant, you cannot offer discounts to retain a major client, on an exclusive basis. Qualcomm was undeniably dominant in Europe in baseband radios for smartphones during the past 5 years. Intel ended up gaining a temporary pardon for its transgression, with the Commission sent back to “gather more evidence” during its appeal.
Intel committed a similar act to prevent AMD gaining oxygen to keep it alive, and while we have argued many times that Qualcomm chips are just better, you just should not ever agree to pay an exclusivity discount to keep 100% of a client’s business. That is clearly aimed at monopolization and the move is self-inflicted, stupid and highly avoidable. Qualcomm of course says it is not guilty and it has not disobeyed any rules and so will appeal – we beg to differ.
The best thing that Qualcomm can do is pay the €997 million fine with good grace and try to forget it and move on. The fine represents 4.9% of Qualcomm’s turnover in 2017. Obviously Apple would have a vested interest to tell the European Commission about this, as it wants to bolster is ailing iPhone margin by slashing the IPR payments to Qualcomm, and that would have motivated it sufficiently to “be a model citizen” towards the Commission and provide it with all the evidence it wanted.
The fine is for abusing Qualcomm’s dominant position in LTE baseband chipsets, a move that will have driven a number of European owned chip firms into weakness, and perhaps Infineon’s fall to Intel, a move that let Intel back into the baseband market, was partly down to such shenanigans. Effectively Qualcomm offered volume discounts which went up considerably if Apple used no other chip vendor and this is illegal under EU antitrust rules.
Commissioner Margrethe Vestager, in charge of competition policy, said: “Qualcomm illegally shut out rivals from the market for LTE baseband chipsets for over five years, thereby cementing its market dominance. Qualcomm paid billions of US Dollars to a key customer, Apple, so that it would not buy from rivals.” These payments were not just reductions in price – they were made on the condition that Apple would exclusively use Qualcomm’s baseband chipsets in all its iPhones and iPads.
The truth is likely to include pressure from Apple which, for convenience and simplicity of design, had already agreed to use Qualcomm exclusively, to give it a bigger discount. An email exchange between the two is easy to doctor to make it appear that this was an open and shut anti-trust move by Qualcomm.
We’re not saying we know this to be the case, but Apple’s pursuit of a higher margin is legendary and savage, and it is likely that a deal was struck with two willing parties and subsequently Apple has decided that its ally of yesterday is today’s enemy and reported Qualcomm to the Commission.
The document was signed in 2011, and in 2013 the term of the agreement was extended to the end of 2016.
What has triggered this has been Apple subsequently using Intel chips and Qualcomm refusing a similar level of discounts. The Commission statement talks about Qualcomm paying Apple, but really this would have been delivered in the form of deeper discounts which had to be repaid if Apple broke the rules.
Qualcomm should have known that it could not and should not have any documents with this type of clause in it and its legal team should have vetoed it. Qualcomm management can now only hope that this is not a signal to investors to shrug, lose belief in the Qualcomm management team, and sell to Broadcom, as a result of yet another anti-trust fine – after years of similar battles with Korean and Chinese authorities.
This is of key interest to Faultline readers, because the overall outcome may be that Qualcomm gets acquired by Broadcom and that would likely see the end of Atheros inspired WiFi product lines, the move out of video by Qualcomm on TV and set top chips, in deferment to Broadcom product lines, but also a de-emphasis on set top markets, since it would now own a far more profitable market – LTE and 5G baseband.