Facing a potentially devastating federal court ruling in its antitrust case, Qualcomm and its allies are ratcheting up political pressure for a settlement with the Federal Trade Commission (FTC) before the judge announces a decision in the case. But why? A look at Qualcomm’s financial history in the last year exposes a company desperate to save its stock price and fend off acquisitions, all while putting the future of the internet of things (IoT) economy at risk thanks to its illegal, anticompetitive practices.
Qualcomm’s executives bet the company, their careers, and billions of shareholder dollars on the ability to continue the anticompetitive tactics European, South Korean, and Taiwanese regulators already found illegal. They rejected multiple acquisition offers from Broadcom, including a $121 billion deal which would pay shareholders $82 dollars a share – $60 of which was in cash. Qualcomm’s executives asked shareholders to leave that cash on the table and roll the dice again. A year later, shareholders have lost half their money, and are looking for any way to collect.
Investors have plenty of reasons to be furious at this all-or-nothing gamble. According to Motley Fool, new revelations show that Qualcomm refused to sell modem chips to Apple for its newest phones. Moreover, Qualcomm’s most lucrative business—smartphone sales—has plateaued. Facing a ticking timebomb of shareholders wanting their cash, Qualcomm has no choice but to export the same abusive and anticompetitive practices to new industries.
Qualcomm’s “Evolved” Business Model
Since a number of Qualcomm’s primary lines of business collapsed in the late 1990s (e.g., mobile phones and telecom equipment), the company has increasingly depended on squeezing as much profit out of its patent portfolio as possible. Patent licensing went from a mere 32% of the company’s profits in 1999 to 82% by 2016.
There is no dispute that outside the standards context Qualcomm has the right to exclude competitors from using its proprietary patents and even to arbitrarily demand any licensing fee it wants for them. The crux of the FTC’s case, however, is about a special type of patents that Qualcomm offered for inclusion in global standards like LTE, 5G, and WiFi. For these standard-essential patents (SEPs), Qualcomm voluntarily committed to licensing these patents under fair, reasonable, and non-discriminatory (FRAND) terms including giving up its right to exclude potential licensees or charge monopoly prices for its intellectual property in exchange for the instant market created by these collaborative standards.
Qualcomm chose simply to ignore those legal commitments and treat the patents it voluntarily committed to consensus standards as proprietary patents that it can weaponize to choke off competitors to its chipset business and demand hyper-inflated monopoly prices from its customers. Regulators around the world have found these tactics to be inherently anticompetitive.
While the specific behavior the FTC and other regulators investigated took place in the smartphone market, Qualcomm’s SEP abuse is not limited to it. Indeed, Qualcomm must look elsewhere for the growth it needs and shareholders demand – every industry analyst has found a dramatic slowdown in the smartphone market and most predict continued flat growth into the future. At the same time, Qualcomm continues to sell off divisions like Qualcomm Health that could deliver groundbreaking new products and real growth in favor of focusing solely on its illegally intertwined patent licensing and chip manufacturing businesses, doubling down on its at-all-costs patent monetization strategy.
Qualcomm Could Hold the Entire IoT Economy Hostage
In the digital world, today’s open standards (like Wi-Fi and LTE) and future ones (the technical interoperability protocols developed that will, combined, represent 5G) effectively are the foundation for competition. Not only do standards enable new entrants to build devices and software that can work with existing networks and services, but they dramatically lower switching costs for customers. 5G will be critically important because it is poised to become the connective tissue that binds our connected world of smart cars, smart cities, precision farming equipment, and other innovative IoT deployments.
If Qualcomm is allowed to continue abusing the FRAND commitments it made on intellectual property it voluntarily contributed to key technical standards, it will irreparably damage competition in the markets for any product that connects to the internet, from consumer tech to aerospace to healthcare.
If there was any doubt about Qualcomm’s intentions to expand its illegal behavior into new markets, one only needs to look at Qualcomm’s lobbying in Europe. The company conspired with allies to secretly push the European Commission to endorse a radical anti-FRAND concept they devised called “use-based pricing.” The entire premise behind use-based pricing is to permit SEP holders to arbitrarily charge different prices based on type of product and the price of the devices in which the standardized technology was being used. In practice, this would allow Qualcomm to charge a company making a low-end smartphone $5 and aerospace company $1,000,000 for the exact same patent license.
Qualcomm’s lobbying for use-based pricing also directly contradicts their claim that they merely want to be paid fairly for the value of their innovations and continued research and development (R&D). Under FRAND commitments the value of an SEP should be determined based on its merit alone not others’ contributions to the standard or the downstream innovations of those who use the standard. The goal of Qualcomm’s use-based pricing model, however, is to allow the company to also take a cut of the value created by the innovators that use these standards.
Any Outcome that Allows Qualcomm to Export its Illegal Behavior to New Markets Would Be Devastating
Qualcomm’s executives are desperate to save their jobs as shareholders fume over the $121 billion offer they rejected, and time is running out to turn the ship around. Qualcomm’s history, and its current desperate situation, mean that FTC cannot take any promises Qualcomm makes at face value, and must ensure any remedies they reach are iron clad and not limited to a few companies or even the broader smartphone industry. Any company willing to argue that the refusal to license patents to competitors is perfectly legal under its FRAND commitments clearly has no qualms about breaking its contracts and legal commitments. With shareholders demanding results immediately, Qualcomm’s executives will be looking for any loophole or gray area they can exploit as long as possible.
Perhaps most importantly, the FTC must ensure any outcome of this case protects competition beyond the smartphone industry. Any court decision or settlement in this case should be comprehensive (i.e., fully address each charge the FTC has made in its enforcement action), enforceable, and as transparent as possible in order to provide small business innovators with maximum clarity.
As we move toward a 5G connected world, Qualcomm’s practices represent a clear and present danger to the entire economy. We must protect these standards which form the foundation for competition in the connected economy, and that means holding Qualcomm to their FRAND commitments across the board in a way that leaves no room for the gamesmanship it is famous for in this context. Anything less will only serve to encourage Qualcomm to export its anticompetitive behavior to every corner of the economy.