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.