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EU Fines Qualcomm A Billion Euro Over Exclusive Deals With Customers

The European Union concluded its antitrust investigation into Qualcomm with a €997 million ($1.23 billion) fine for the company, which is 4.9% of Qualcomm’s revenue in 2017. The EU’s investigation found  that Qualcomm was doing exclusive deals with customers and preventing them from buying from anyone else, which is illegal under EU antitrust laws.

Commissioner Margrethe Vestager, who is 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.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 And Apple Deal

The investigation seems to relate mainly to the deal between Qualcomm and Apple made back in 2011, which said that Qualcomm would commit to making significant payments to Apple if Apple wouldn’t purchase LTE modems from anyone else.

The deal also said that Qualcomm would stop the payments, and Apple would also have to return some of the money already paid by Qualcomm, if Apple wanted to switch LTE modem providers. The EC said in its statement that this meant that other providers wouldn’t be able to fairly compete against Qualcomm for Apple’s business, even if their products were better.

Apple only started considering another provider when the terms of the deal were approaching the end in 2016, so the consequences for switching were limited. Apple started using Intel LTE models in some of its iPhones back in 2016. Intel has also said recently that this type of deal between Qualcomm and its customers is what has prevented it for years from making a dent in the LTE modem market.

Ironically enough, this is the type of deal Intel has also been caught doing with Dell and other manufacturers many years ago, which was one of the reasons why the European Commission fined Intel over a billion euro back in 2009.

In the last two years we’ve also seen Samsung and MediaTek more aggressively develop their own LTE modem technology, as Qualcomm was starting to be sued by multiple governments over antitrust violations. The South Korean government has already fined Qualcomm $854 million, and the Chinese government also fined it another billion dollars. Qualcomm is currently under investigation by the FTC in the United States, too, and it’s also involved in a billion dollar lawsuit that Apple started against it.

Qualcomm Failed To Disprove EC’s Antitrust Conclusions

The EC took many factors under consideration when coming up with its decision to fine Qualcomm. These included the following:

the extent of Qualcomm's dominant position;the significant amounts paid by Qualcomm in exchange for exclusivity;a broad range of contemporaneous evidence (including Apple's internal documents) that Qualcomm's payments reduced Apple's incentives to switch to rivals;the importance of Apple as a customer in the market for LTE baseband chipset suppliers: Apple accounts for a significant share of LTE chipset demand (on average one third). Apple is also a leading smartphone and tablet manufacturer, which can influence other customers' and manufacturers' procurement and design choices. By making sure that rivals had no chance to compete for any of Apple's important business, Qualcomm's conduct had an effect on the LTE baseband chipset market as a whole; andthat Qualcomm did not demonstrate that the exclusivity condition created any efficiencies, which could have justified Qualcomm's practices.

Additionally, the EC rejected a “price-cost” test from Qualcomm, because it failed to support Qualcomm’s claim that the deal hurt competition or had other anti-competitive effects. The EC said that the deals Qualcomm made with its customers not only hurt competition, but they also deprived EU citizens of genuine choice and innovation.

Qualcomm’s Response

Qualcomm said that it does not agree with EC’s decision and it will appeal it at the General Court of the European Union. It also added that the decision has no impact on the company’s 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. “We have a strong case for judicial review and we will immediately commence that process.

  • Yuka
    I wonder how much of the outrageous current smartphone prices are due to Qualcomm's shenanigans.

    Cheers!
    Reply
  • gangrel
    Not that much.

    http://www.businessinsider.com/iphone-x-teardown-parts-cost-ihs-markit-2017-11

    Estimates the parts cost breakdown. The modem is less than 3% of the cost. And also figure, in a completely free and competitive market, the price wouldn't be *that* much less. Even if we say half...that's only dropping $10 off the total parts bill.

    The *big* cost factor is the screen. Next up, the case. Together, they're almost half.
    Reply
  • derekullo
    1.23 billion from the European Union
    854 million from South Korea
    1 billion from China
    1 billion from Apple (Maybe/Probably)

    4.08 billion total

    http://investor.qualcomm.com/results.cfm

    Revenue in 2011 was 14.96 billion
    Revenue in 2012 was 19.12 billion
    Revenue in 2013 was 24.87 billion
    Revenue in 2014 was 26.49 billion
    Revenue in 2015 was 25.3 billion
    Revenue in 2016 was 23.6 billion
    Revenue in 2017 was 22.3 billion

    or 156.64 billion in 7 year revenue.

    Judging from their total revenue, a $4.08 billion fine pales in comparison to the money made in a 7 year monopoly.

    In fact, when you do the calculations they appear to be only getting fined on average 2.6% a year

    4.08 billion / 156.64 billion = 0.026


    Does the math look correct, the fine seems abnormally low?
    Reply
  • mrmez
    $3 billion in fines, and it doesn't effect them
    #Ballin!!!

    I don't think the parts price includes licensing fees???
    A big gripe from Apple was that QC charged fees based on the sale price of the device.
    So, for example, regardless of every iPhone X having the same QC modem, they pay more for a modem in a 256Gb phone than one in a 64Gb phone.

    Kinda like paying more for a movie rental because you have a bigger TV and can enjoy it more. It's BS.
    Reply
  • jasonkaler
    I want to own a company where a 1 billion dollar fine "has no impact on the company’s ongoing operations"
    Reply
  • MASOUTH
    "Does the math look correct, the fine seems abnormally low?"

    At a glance, the math looks correct. No, the amount doesn't seem abnormally low by the normal standards applied in these cases. Yes, it does seem low by "common" sense.
    Reply
  • bigpinkdragon286
    20632494 said:
    $3 billion in fines, and it doesn't effect them
    #Ballin!!!

    I don't think the parts price includes licensing fees???
    A big gripe from Apple was that QC charged fees based on the sale price of the device.
    So, for example, regardless of every iPhone X having the same QC modem, they pay more for a modem in a 256Gb phone than one in a 64Gb phone.

    Kinda like paying more for a movie rental because you have a bigger TV and can enjoy it more. It's BS.
    I'm not disagreeing with your post, just pointing out the irony of Apple's complaint here. If Apple doesn't think you should be able to charge more for the same product, based on some final sales price, in this case a modem, or based on the usage, why does Apple charge such an added premium for the very same flash memory chips, just because they used a few more of them?

    Payment for a good based on a percentage of a final sale is not unheard of in business. An easy example is how movie studios get a percentage of ticket sales. The higher the ticket prices, or the higher the percentages in the contracts, the more money goes to the studios.

    If Apple didn't like the terms of the contract, they shouldn't have entered into it. This sounds more like childish bickering because they changed their minds about something and now want a free pass for terms they obligated themselves to as a company. This isn't to say Qualcomm's behavior is good, but it would seem Apple is trying to say they're innocent and should get a pass, because Qualcomm victimized them, and I'm not buying it.
    Reply
  • varase
    Not that much.

    http://www.businessinsider.com/iphone-x-teardown-parts-...

    Estimates the parts cost breakdown. The modem is less than 3% of the cost. And also figure, in a completely free and competitive market, the price wouldn't be *that* much less. Even if we say half...that's only dropping $10 off the total parts bill.

    The *big* cost factor is the screen. Next up, the case. Together, they're almost half.
    Actually, the cost of a Qualcomm modem is about $18 - but the real cost is that Qualcomm then demands 5% of the total cost of the handset to license its IP (regardless of whose chip you buy).

    This means that for the base iPhone X, the total cost is $67.95, but if you get the 256GB model your cost goes up to $75.45 (despite the fact that Qualcomm had nothing to do with that NVMe memory).

    This is Qualcomm's idea of FRAND (Fair, Reasonable, and Non-Discriminatory) licensing for being part of the cellular communications standards.

    Really, if I were on a standards body I would consider Qualcomm's participation as a poison pill to be avoided at all costs.
    Reply
  • varase
    20635022 said:
    I'm not disagreeing with your post, just pointing out the irony of Apple's complaint here. If Apple doesn't think you should be able to charge more for the same product, based on some final sales price, in this case a modem, or based on the usage, why does Apple charge such an added premium for the very same flash memory chips, just because they used a few more of them?

    Payment for a good based on a percentage of a final sale is not unheard of in business. An easy example is how movie studios get a percentage of ticket sales. The higher the ticket prices, or the higher the percentages in the contracts, the more money goes to the studios.

    If Apple didn't like the terms of the contract, they shouldn't have entered into it. This sounds more like childish bickering because they changed their minds about something and now want a free pass for terms they obligated themselves to as a company. This isn't to say Qualcomm's behavior is good, but it would seem Apple is trying to say they're innocent and should get a pass, because Qualcomm victimized them, and I'm not buying it.
    You don't get it, do you?

    The majority of that cost is just for using cellular telephone standards ... and every handset maker is on the hook to Qualcomm for using their IP.

    Qualcomm agreed to license their technology on FRAND terms to be part of the standard, but they're extorting every handset maker. Any "discounts" they're offering for using their chips is sort of like the Godfather offering you lower protection fees for putting in his cigarette machines.

    As for movie studios getting a percentage of the gate - the product produced by the studio is of the essence of the business. For something like an iPhone, cellular communications probably accounts for less than 10% of it's usage - modern smartphones are more like computers with the ability to use several communications facilities - wifi, bluetooth, and cellular - than they are actual wireless telephones.

    Imagine where networking would be if you had to pay $75 for an ethernet NIC (or before it a modem). The Internet would've died on the vine.
    Reply