Qualcomm to appeal $1.23B fine from EU over LTE chip dominance in the iPhone

Qualcomm’s longstanding dominance in LTE chipsets for smartphones, and specifically with Apple’s iPhone, is getting a major hit today.

The European Commission today announced that it would be fining the company €997 million, or $1.23 billion, for abusing its market position between 2011 and 2016, related to its relationship with Apple. The figure works out to 4.9 percent of Qualcomm’s revenues in 2017. (And the 4.9 percent take was worked out based on the five-plus year period of violation.)

“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, in a statement. “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 – and this in a sector with a huge demand and potential for innovative technologies. This is illegal under EU antitrust rules and why we have taken today’s decision.”

Qualcomm says it will appeal the case and that the decision “does not relate to Qualcomm’s licensing business 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, executive vice president and general counsel of Qualcomm, in a statement provided to TechCrunch. “We have a strong case for judicial review and we will immediately commence that process.”

Going forward, the big things to watch for are whether Qualcomm chooses to appeal this decision, and how it might affect the company’s current deal with Broadcom, which is trying to buy Qualcomm for $130 billion. Reportedly, partners like Microsoft and Google are against the deal.

Intel, which was one of the key losers in that arrangement, has been scrambling to catch up for years. Now, the iPhone is made using chipsets from both vendors, but all is not completely resolved.

There may be more than simple anticompetitive practices at issue here, since some tests appear to show that iPhones running on Intel’s chips are performing slower than their Qualcomm-based counterparts. This could prove to be grounds for an appeal down the line.

And to add a further twist to this story, there may be a case for Qualcomm to appeal its own fine based on another regulatory case involving — yes — that same Intel. The latter company last September had a vote in its favor in its (so far) nine-year-long battle to appeal its own $1 billion antitrust fine from the EU, when the European Courts of Justice said that the Commission needed to provide more proof in its case against the company.

“The Commission seems to have followed a ‘creative reading’ of the Intel ruling, remaining consistent with it while allowing some leeway on interpretation,” said Assimakis Komninos, a partner at global law firm White & Case, in a statement. “It will be interesting to see how the EU courts will react.”

Indeed, Qualcomm, which says that it “strongly disagrees with the decision,” said it will be making its appeal to the General Court of the European Union “immediately.”

We are reaching out to both companies for comment and will update this post as and if we get it.

The baseband chipsets at the center of this case are what enable smartphones to connect to cellular networks for voice and data services.

Qualcomm, as the EU points out, is the world’s biggest LTE supplier, making it a target for regulators looking into those who abuse their market dominance.

This is not the first time that Qualcomm has been under regulatory scrutiny. The company faced an $854 million fine in South Korea over anticompetitive practices, forcing vendors to pay royalties on its patents.

And vendor financing, which is the practice by which companies essentially pay customers to take on big orders of their equipment, is not a new thing — it was particularly strong in the late Nineties and early 00’s when telecoms networks were rapidly updating legacy infrastructure and building new mobile and digital networks.

Qualcomm itself had a strong game in it (as you can see in this excerpt from the book The Qualcomm Equation), and prior to this, Qualcomm was also fined in Korea to the tune of $208 million over its CDMA dominance back in 2009.

Qualcomm’s deal with Apple, in which it committed payments to Apple to secure exclusivity, started in 2011 and then were renewed in 2013. The investigation by the EU started in 2015 out of the Commission’s own examination of market information, including conditions in contracts between Qualcomm and its customers that appeared to harm competition.

“The agreement made clear that Qualcomm would cease these payments, if Apple commercially launched a device with a chipset supplied by a rival,” the EC notes in its statement. “Furthermore, for most of the time the agreement was in place, Apple would have had to return to Qualcomm a large part of the payments it had received in the past, if it decided to switch suppliers. This meant that Qualcomm’s rivals were denied the possibility to compete effectively for Apple’s significant business, no matter how good their products were. They were also denied business opportunities with other customers that could have followed from securing Apple as a customer.

“In fact, internal documents show that Apple gave serious consideration to switching part of its baseband chipset requirements to Intel. Qualcomm’s exclusivity condition was a material factor why Apple decided against doing so, until the agreement came to an end.

“Then, in September 2016, when the agreement was about to expire and the cost of switching under its terms was limited, Apple started to source part of its baseband chipset requirements from Intel. But until then, Qualcomm’s practices denied consumers and other companies the benefits of effective competition, namely more choice and innovation.”

We have confirmed that there were no formal complaints that led to the investigation, and that Apple, although one of the central players in this case, is not liable in this investigation.

There is an interesting op-ed here exploring why Apple might be moving away from Qualcomm, which isn’t directly relevant to the EU case, but underscores some of the challenges facing the company, should it prove accurate.

Qualcomm is down 10 cents on its opening price this morning.

We’ll update this post as we learn more.

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