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FTC: Qualcomm Has Unfair Monopoly In Smartphone Market

The Federal Trade Commission (FTC) accused Qualcomm of using the popularity of its baseband processors, which are used to manage connections to wireless networks, to weaken competitors and bully manufacturers into "onerous and anticompetitive supply and licensing terms." Qualcomm said the FTC's complaint is based on "a flawed legal theory, a lack of economic support, and significant misconceptions about the mobile technology industry."

There's no question that Qualcomm dominates the baseband processor market. ABI Research said in February 2016 that Qualcomm held roughly 65% of the LTE baseband market. Samsung, its closest competitor, represented just 12% of the market after it decided to create its own basebands for its smartphones. The runners-up, Huawei and MediaTek, managed to nab just 9% of the market each. None are even close to competing with Qualcomm.

Nor could one debate the costs of doing business in the smartphone market. One report, The Smartphone Royalty Stack: Surveying Royalty Demands for the Components Within Modern Smartphones, said the hypothetical manufacturer of a $400 smartphone might expect to spend $60 on royalty demands for LTE compatibility even though the baseband processor itself costs roughly $10. Qualcomm had the highest public royalty rate in the report.

So it's clear that Qualcomm is simultaneously ubiquitous and well-paid. The FTC alleged that at least part of the company's status results from it using essential patents to negotiate unfair terms from smartphone makers. The commission said that Qualcomm asks for elevated royalties and license terms for those patents, which equates to a tax on manufacturers that use competitive baseband processors, and effectively holds critical tech for ransom.

Here's the FTC on why this is a problem:

Increased costs imposed by this tax are passed on to consumers, the complaint alleges. [...] By excluding competitors, Qualcomm impedes innovation that would offer significant consumer benefits, including those that foster the increased interconnectivity of consumer products, vehicles, buildings, and other items commonly referred to as the Internet of Things.

The FTC accused Qualcomm of violating the FTC Act. It said that it's "seeking a court order to undo and prevent Qualcomm’s unfair methods of competition" and "has asked the court to order Qualcomm to cease its anticompetitive conduct and take actions to restore competitive conditions." Qualcomm, for its part, said that the commission doesn't understand the smartphone component market well enough to make this complaint.

This is what Qualcomm general counsel Dan Rosenberg said in a statement:

In our recent discussions with the FTC, it became apparent that it still lacked basic information about the industry and was instead relying on inaccurate information and presumptions. In fact, Qualcomm was still receiving requests for information from the agency that would be necessary to an informed view of the facts when it became apparent that the FTC was driving to file a complaint before the transition to the new Administration. We have grave concerns about the two Commissioners' decision to bring this case despite a lack of evidence supporting the allegations and theories in the complaint. We look forward to defending our business in federal court, where we are confident we will prevail on the merits.

The outcome of this complaint might have a meaningful effect on the smartphone market. Qualcomm's dominance could be threatened, and if competitors offer more favorable terms as they scramble to get a bigger share of the component market, phones might even get cheaper. Perhaps more interesting devices will be introduced: the authors of The Smartphone Royalty Stack said that the cost of patent royalties and other non-hardware expenses "may be undermining industry profitability — and, in turn, diminishing incentives to invest and compete." That's not good for consumers.

Or maybe the FTC will get its first loss right as it starts to transition from the Obama administration to the incoming administration. This case is likely to have broad implications for the smartphone market either way, given the importance of both the FTC and Qualcomm to the devices in our pockets.

  • mtcn77
    Mr. Trump bring back 'competitive' America, please.
    Reply
  • alextheblue
    the authors of The Smartphone Royalty Stack said that the cost of patent royalties and other non-hardware expenses "may be undermining industry profitability — and, in turn, diminishing incentives to invest and compete." That's not good for consumers.

    Reducing/eliminating patent royalties would absolutely reduce costs for consumers. That much is true. But patent royalties are actually a huge incentive to invest in technology. If you greatly reduce or eliminate royalties and possibly even force licensing, that would hurt the firms that are creating new technology and reduce the incentive to invest in new designs. At the same time, if the Chinese me-too chip firms can use these patents for free/cheap, they could further undercut the top chipmakers (more so than they already do), hurting industry-wide profitability in the long term as well.

    Don't get me wrong, that's a somewhat separate issue from patent abuse. They need to be fair about their licensing, and there is a middle ground between "free everything, get rid of patents" and "nobody can use my patents unless I say so, and even then I rob them blind". Qualcomm has been abusive, but at the same time we need to tread carefully to avoid setting a bad legal precedent.
    Reply
  • SockPuppet
    The good ol' American dream. Start a business and make a life for yourself. Unless your business gets TOO successful. Then we'll fine you billions of dollars because your competition isn't as good as you are.
    Reply
  • mtcn77
    It is so ironic that the other companies that 'failed' to launch a contemporary baseband solution are NOT acknowledged anywhere on the litigation. You would think they as the benefactors of such a suggestion need be mentioned as to what Qualcomm was capable of that they weren't? Has '2w' tdp processors possible before Qualcomm?
    Reply
  • falchard
    Qualcomm should be quite confident in winning this court case. They have an army of lawyers and are dealing with flimsy claims. Patent licensing has been moving the industry forward in a massive way. Do you think Microsoft is sharing its patent portfolio out of good will? Of course not, they are bankrolling on every smart phone sold even though they represent a minuscule portion of the market.
    Reply
  • mtcn77
    Qualcomm leaders are free to dump uncompetUSion, too much triglycerides have harmed their core intellectual capacity beyond repair.
    Reply
  • kenjitamura
    I hate a lot about the patent industry but from just 10 seconds of googling it looks like the main argument cited that "$60 of every $400 phone goes to LTE patents" shouldn't really be a consideration for a suit lodged against Qualcomm.

    While Qualcomm has the highest share of royalties from LTE patents the pool has dozens of companies that get shares and many of them are competing smart phone manufacturers which kind of defeats the monopoly argument if the competition is recouping some of the money for themselves in the process.
    Reply
  • gggplaya
    The patents are a little high, but I think they have a right to charge it. They have the best innovation, and the asian companies simply copy most of it with little to no innovation.

    Considering Trump is a pro-american crony capitalist, he'll probably side with Qualcomm since it's an american powerhouse. He'll just make them bring manufacturing back to the U.S. then take credit for it on twitter.

    I'm not taking sides, i'm just saying it like it is.
    Reply
  • shrapnel_indie
    Or maybe the FTC will get its first loss right as it starts to transition from the Obama administration to the incoming administration.

    Is THIS another cheap political jab?

    19178818 said:
    Reducing/eliminating patent royalties would absolutely reduce costs for consumers. That much is true. But patent royalties are actually a huge incentive to invest in technology. If you greatly reduce or eliminate royalties and possibly even force licensing, that would hurt the firms that are creating new technology and reduce the incentive to invest in new designs. At the same time, if the Chinese me-too chip firms can use these patents for free/cheap, they could further undercut the top chipmakers (more so than they already do), hurting industry-wide profitability in the long term as well.

    Don't get me wrong, that's a somewhat separate issue from patent abuse. They need to be fair about their licensing, and there is a middle ground between "free everything, get rid of patents" and "nobody can use my patents unless I say so, and even then I rob them blind". Qualcomm has been abusive, but at the same time we need to tread carefully to avoid setting a bad legal precedent.

    Patent trolls definitely need to be crushed out of ownership and business. Unfortunately, with all the "updates" to the patent (and coyright) system, updates that can easily give a perpetual ownership, It defeats the very intention of the system as designed by our founding fathers. (Invent, collect royalties to recoup invention costs and some profit, allow the market to freely use it after a period of set time, not own and cash in on it for perpetually forever.) You're right though, there should be a middle-ground and unfortunately through legal manipulation of lawmakers, that middle ground is shrinking along with the original intent of the patent (and copyright) system.


    19179063 said:
    The good ol' American dream. Start a business and make a life for yourself. Unless your business gets TOO successful. Then we'll fine you billions of dollars because your competition isn't as good as you are.

    What you describe is a pervasive attitude that is invading all life activities. (The other team played harder, practiced harder, etc. We can't reward them for their drive to be the best, so everyone gets the same reward: Fostering the why try when I get the exact same reward attitude that is growing.)

    There shouldn't be a TOO successful penalty unless it can be proven that it was because of extortion tactics, physical threat tactics, or other underhanded and"legal" means (i.e. threats of lawsuits on those who can't afford to defend,) Unfortunately the Patent and Copyright systems are BOTH full of such tactics... and patent and copyright trolls cash in on it. (I'm not trying to say Qualcomm is a patent abuser, that has yet to be proven that they are even remotely so.) However, if you are "too successful" you better be prepared to always show it was from real work and not shady or underhanded means.
    Reply
  • aldaia
    So, according to FTC,
    holding 65% of the LTE baseband processor market is "unfair monopoly in the smartphone market"
    but
    holding more than 80% of the CPU processor market is not "unfair monopoly in the PC market"
    holding 99% of the CPU processor market is not "unfair monopoly in the server market"
    Reply