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FTC case against Qualcomm does not stand up to reality




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Last Tuesday morning, I spent the day at the US Courthouse in San Jose, California, to hear that the FTC had closed its case against Qualcomm Shapiro, a professor of industrial economics at the University of California's Haas School of Business, Berkeley, formerly held an antitrust position in the Justice Department, produced a report on Qualcomm's market power (Monopoly) in CDMA and premium LTE modems: His analysis focused on the period between 2006 and 2016. He claimed that three Qualcomm policies allowed market power to demand "Super FRAND" fees (FRAND stands for fair, equitable and non-discriminatory) Super FRAND license means that Qualcomm has earned too much money, these policies are: "no-license no-chips" policy, incentive payments to phone OEMs ( Apple's 201

3 agreement) and the refusal to grant licenses required by the standard to SEPs to the competition from chip manufacturers.

The no-license no-chip policy should ensure that new OEM manufacturers of mobile phones acquire equivalent patent licenses before they receive chips for the construction of mobile phones. Without this policy, OEMs could build smartphones with Qualcomm chips. Then they simply refuse to pay Qualcomm for any additional IP addresses that apply to these phones. Qualcomm's only solution would be to sue OEMs for patent infringement, a costly process that can take years anyway. In the meantime, these OEMs could continue to sell and benefit from phones without paying the Qualcomm IP license. As you can imagine, OEMs of mobile phones sometimes hold the necessary licenses for as long as possible. There are sometimes delays when OEMs renegotiate expiring license agreements. Qualcomm says chips will continue to be sold to OEMs as long as they continue to negotiate in good faith, even if their licensing agreements expire. This seems to disprove the FTC's argument that Qualcomm is using chip supply as a lever to get higher royalties from OEMs. The only case the FTC was able to dig up was a delay in delivering new sample chips to LG, while LG had not yet signed up for the new WCDMA license.

In the case of the Apple 2013 contract, Apple received a large incentive payment (~ $ 640 million) when only Qualcomm modems were used. It has been proven that Intel (with the modem purchased from Infineon) had tried to reclaim the Apple business from the iPad (for data modems only). The FTC hypothesized that losing (part of) this incentive payment by Apple, which had broken exclusivity, was a hindrance to Intel. The iPad opportunity had too little volume to offset the loss of incentive payments. However, at that time, Intel modems were unable to replace Qualcomm modems in handsets because they lacked key features and performance and did not meet Apple's requirements. Then Apple sacrificed the Qualcomm payments in 2016 when it launched iPhone with Intel modems on the market. So this raises the question: how big is the agreement? It did not seem to prevent Intel from investing the capital needed to develop a product that met Apple's requirements, nor had Apple stopped using Intel modems when they were finally ready. The economic test for Shapiro was, Intel was able to buy the compulsory payment and still make a profit. But the design volume of the iPad was too low and the modem from Intel was inferior. Is this a real test for a monopoly?

While Professor Shapiro affirmed the case that Qualcomm's analysis had monopoly power from 2006 to 2016, he failed to show that quantifiable costs were incurred by consumers. There was no real competitive solution from other providers. Professor Shapiro's own report also showed that Qualcomm's share declined before 2016, as was the case for both CDMA and Premium LTE in 2017 and 2018. Qualcomm's market share was clearly not due to monopoly power but to the lack of suitable alternatives. So this raises another question: why did the FTC put Qualcomm on trial?

Marv Blecker (a former Qualcomm manager) was interviewed in a video submission, and he reported how the company refused "exhaustive" licenses to competitors, in particular, he recalled VIA and Samsung asking for licenses , Qualcomm's policy was not to grant exhaustive licenses to competitors (chipmakers), as royalties on all applicable patents have already been billed and paid by OEMs of mobile phones. The FTC's claim is hard to understand that the non-licensing of competing chipmakers was an entry barrier when they were already able to use Qualcomm's IP technology for free (because mobile phone OEMs paid the license fee). How could licensing royalty payments to Qualcomm for mobile SEPs help Intel or Mediatek cut costs and improve margins?

Later that day, Qualcomm called his first two witnesses: Company founder Dr. Ing. Irwin Jacobs and the Senior Vice President of 4G and 5G Engineering Durga Malladi. Jacobs gave a detailed history of the company and its original mission. He also talked about the risks Qualcomm has taken to set up the Code Division Multiple Access (CDMA) business – a 2G digital technology that many believe would be too complex and expensive for hypermarkets. The dominance of CDMA over Frequency Division Multiple Access (FDMA) and Time Division Multiple Access (TDMA), despite the initially limited number of chip manufacturers (Qualcomm) of CDMA modems, led to the adoption by a number of carriers. CDMA could support more subscribers in the same bandwidth. With 3G, CDMA developments became the basis for all networks around the world, as the widely used European standard WCDMA (wideband CDMA) was based on CDMA.

Qualcomm boss Irwin Jacobs faces the patents of Qualcomm's headquarters on April 11, 2001 in San Diego, California, USA. Photographer: Denis Poroy. Bloomberg News. BLOOMBERG NEWS

Irwin's Cross Check focused on a specific case in which Qualcomm had allegedly withheld LG's development chips for a while while still negotiating a patent license for a new 3G WCDMA standard. The problem was finally resolved, and Qualcomm did not withhold LG any commercial chips. This was also a digression to the FTC, as the example concerned WCDMA chips, which is outside the scope of the FTC with CDMA and premium LTE modems.

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

According to today's testimony, you do not see that the FTC has a compelling case. Especially since the market share of Qualcomm fell significantly when Mediatek entered the CDMA market and Apple switched to Intel modems. Whatever advantage Qualcomm had when it first came onto the market with new technologies, over time it has been repeatedly mitigated by competitors such as Intel, MediaTek, Samsung and HiSilicon. And remember, the burden of proof lies with the FTC that Qualcomm hindered competition and harmed consumers (through higher prices).

Kevin Krewell

Principal Analyst, TIRIAS Research

The author and collaborators of TIRIAS Research do not own any of the listed companies. TIRIAS Research tracks and advises companies across the electronics ecosystem from semiconductors to systems and sensors to the cloud.

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On the last Tuesday morning, I spent the day at the US Court House in San Jose, California to hear the FTC's closing on Qualcomm's trial The day began with important FTC expert witness Professor Carl Shapiro, Shapiro is a professor of industrial economics at the University of California Haas School of Business, Berkeley, and previously held an antitrust position in the Department of Justice, producing a report on Qualcomm's monopoly on CDMA and premium LTE modems, the focused on the period between 2006 and 2016, claiming three Qualcomm policies allowed market power to demand "Super FRAND" balances (FRAND stalls) fair, reasonable and non-discriminatory.) A Super FRAND License implied that Qualcomm had earned too much money, which was "no-license-no-chips" policy, incen payments to telephone OEMs (especially Apple 2013 agreement) and the refusal to license standard patents (SEPs) to rival chipmakers.

The no-license no-chip policy should ensure that new handset OEMs acquire a corresponding patent prior to obtaining chips to build phones. Without this policy, OEMs could build smartphones with Qualcomm chips. Then they simply refuse to pay Qualcomm for any additional IP addresses that apply to these phones. Qualcomm's only solution would be to sue OEMs for patent infringement, a costly process that can take years anyway. In the meantime, these OEMs could continue to sell and benefit from phones without paying the Qualcomm IP license. As you can imagine, OEMs of mobile phones sometimes hold the necessary licenses for as long as possible. There are sometimes delays when OEMs renegotiate expiring license agreements. Qualcomm says chips will continue to be sold to OEMs as long as they continue to negotiate in good faith, even if their licensing agreements expire. This seems to disprove the FTC's argument that Qualcomm is using chip supply as a lever to get higher royalties from OEMs. The only case the FTC was able to dig up was a delay in delivering new sample chips to LG, while LG had not yet signed up for the new WCDMA license.

In the case of the Apple 2013 contract, Apple received a large incentive payment (~ $ 640 million) when only Qualcomm modems were used. It has been proven that Intel (with the modem purchased from Infineon) had tried to reclaim the Apple business from the iPad (for data modems only). The FTC hypothesized that losing (part of) this incentive payment by Apple, which had broken exclusivity, was a hindrance to Intel. The iPad opportunity had too little volume to offset the loss of incentive payments. However, at that time, Intel modems were unable to replace Qualcomm modems in handsets because they lacked key features and performance and did not meet Apple's requirements. Then Apple sacrificed the Qualcomm payments in 2016 when it launched iPhone with Intel modems on the market. So this raises the question: how big is the agreement? It did not seem to prevent Intel from investing the capital needed to develop a product that met Apple's requirements, nor had Apple stopped using Intel modems when they were finally ready. The economic test for Shapiro was, Intel was able to buy the compulsory payment and still make a profit. But the design volume of the iPad was too low and the modem from Intel was inferior. Is this a real test for a monopoly?

While Professor Shapiro affirmed the case that Qualcomm's analysis had monopoly power from 2006 to 2016, he failed to show that quantifiable costs were incurred by consumers. There was no real competitive solution from other providers. Professor Shapiro's own report also showed that Qualcomm's share declined before 2016, as was the case for both CDMA and Premium LTE in 2017 and 2018. Qualcomm's market share was clearly not due to monopoly power but to the lack of suitable alternatives. This raises another question: why did the FTC put Qualcomm on trial?

Marv Blecker (a former Qualcomm manager) was interviewed in a video submission, and he described how the company refused "exhaustive" licenses to competitors, notably recalling VIA and Samsung asking for licenses. Qualcomm's policy was not to grant exhaustive licenses to competitors (chipmakers), as royalties on all applicable patents have already been billed and paid by OEMs of mobile phones. The FTC's claim is hard to understand that the non-licensing of competing chipmakers was an entry barrier when they were already able to use Qualcomm's IP technology for free (because mobile phone OEMs paid the license fee). How could licensing royalty payments to Qualcomm for mobile SEPs help Intel or Mediatek cut costs and improve margins?

Later that day, Qualcomm called his first two witnesses: Company founder Dr. Ing. Irwin Jacobs and the Senior Vice President of 4G and 5G Engineering Durga Malladi. Jacobs gave a detailed history of the company and its original mission. He also talked about the risks Qualcomm has taken to set up the Code Division Multiple Access (CDMA) business – a 2G digital technology that many believe would be too complex and expensive for hypermarkets. The dominance of CDMA over Frequency Division Multiple Access (FDMA) and Time Division Multiple Access (TDMA), despite the initially limited number of chip manufacturers (Qualcomm) of CDMA modems, led to the adoption by a number of carriers. CDMA could support more subscribers in the same bandwidth. With 3G, CDMA developments became the basis for all networks around the world, as the widely used European standard WCDMA (wideband CDMA) was based on CDMA.

Qualcomm boss Irwin Jacobs stands in front of the patent wall of Qualcomm's headquarters on April 11, 2001 in San Diego, California, USA. Photographer: Denis Poroy. Bloomberg News. BLOOMBERG NEWS

Irwin's Cross Check focused on a specific case in which Qualcomm had allegedly withheld LG's development chips for a while while still negotiating a patent license for a new 3G WCDMA standard. The problem was finally resolved, and Qualcomm did not withhold LG any commercial chips. This was also a digression to the FTC, as the example concerned WCDMA chips, which is outside the scope of the FTC with CDMA and premium LTE modems.

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

According to today's testimony, you do not see that the FTC has a compelling case. Especially since the market share of Qualcomm fell significantly when Mediatek entered the CDMA market and Apple switched to Intel modems. Whatever advantage Qualcomm had when it first came onto the market with new technologies, over time it has been repeatedly mitigated by competitors such as Intel, MediaTek, Samsung and HiSilicon. And remember, the burden of proof lies with the FTC that Qualcomm hindered competition and harmed consumers (through higher prices).

Kevin Krewell

Principal Analyst, TIRIAS Research

The author and collaborators of TIRIAS Research do not own any of the listed companies. TIRIAS Research tracks and advises companies across the electronic ecosystem, from semiconductors to systems and sensors to the cloud.


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