Qualcomm hit with €997m EC fine for illegal payments to Apple

Qualcomm came under even more pressure last week when the European Commission imposed a fine of €997m for “abusing its market dominance in LTE baseband chipsets”. Ironically, this was the result of a complaint brought by Apple, which is engaged in a vicious legal battle with Qualcomm over patent fees – but the EC’s issue is with Qualcomm giving Apple exclusive deals in order to keep its business.

This highlights just how serious the current legal stand-off is for Qualcomm, especially if it accelerates any moves by Apple to increase the number of modems it buys from Intel, or even to develop or acquire its own. In the past, the EC discovered, it has been ready to go to extreme lengths to keep the Apple business.

The Commission said that Qualcomm made significant payments to a key customer (Apple) on condition it would not buy from rivals, which is illegal under EU antitrust rules as it makes it difficult for other players to compete.

“Qualcomm illegally shut out rivals from the market for LTE baseband chipsets for over five years, thereby cementing its market dominance,” said competition commissioner Margrethe Vestager. “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. This meant that no rival could effectively challenge Qualcomm in this market, no matter how good their products were. Qualcomm’s behaviour denied consumers and other companies more choice and innovation.”

Vestager told a press conference that “Apple was seriously thinking of switching” from Qualcomm to Intel chips, but was unable to do so until its Qualcomm agreement expired in September 2016. “This meant that no rival could effectively challenge Qualcomm in this market, no matter how good their products were,” she went on. “We’re talking about one of the biggest and most important customers in this market.”

There are “no repercussions” for Apple for accepting the deal and no evidence of wrongdoing on the iPhone maker’s part, Vestager said.

Qualcomm said it strongly disagrees with the decision and the fine (which equates to 4.9% of its 2017 turnover) and will immediately appeal it to the General Court of the European Union. It added that the EC decision does not relate to Qualcomm’s licensing business (unlike some of the antitrust probes it has been subject to round the world) and has no impact on ongoing operations.

“We are confident this agreement did not violate EU competition rules or adversely affect market competition or European consumers,” said Don Rosenberg, EVP and general counsel of Qualcomm. “We have a strong case for judicial review and we will immediately commence that process.”

The licensing business has, indeed, been the primary source of regulatory grief for Qualcomm, and it seems that, if Broadcom succeeds in its $103bn hostile takeover bid, it plans to appease angry rivals and customers by changing the model for the hugely profitable, but troublesome, business unit. This was the story from Bloomberg sources, which said Broadcom would move to charging patent fees per chip unit, rather than as a percentage of the selling price of devices, which is Qualcomm’s system (it recently said  it would offer 5G licensing at an “effective running royalty rate of 3.25% of the selling price of branded multimode (3G/4G/5G) handsets”). If Broadcom made that change, it would certainly help bring Apple to peace talks, since the pricing structure lies at the heart of its disputes with its modem supplier.

Last week’s decision was the first time the EC has imposed a fine on Qualcomm, despite previous complaints and probes. In 2009, the Commission dropped a four-year investigation into patent licensing practices for 3G.

The latest development has a precedent in a 2009 EC finding that Intel violated its rules by offering rebates to computer makers, and payments to a retailer, in an attempt to squeeze out rival AMD.