Research Notes

Qualcomm is greedy and stupid. When you have 90% of the chipset market that is the engine of the mobile phone, you shouldn’t pay your customers not to do business with your competitors

EU competition chief Margrethe Vestager’s message to companies that violate European Union competition law is a clear as President Trump’s fair trade message at Davos. If you break the law, we will come after you. She emphasizes that companies that do business in the European Union need to conform to the EU’s laws. The latest guilty party nailed by Vestager’s big hammer is Qualcomm, a US company that makes the chips inside a mobile device which allows it to connect with the mobile network and the Internet.

Founded in 1985, Qualcomm is a unique company that develops unique technology. It has created many essential technologies for 3G, 4G and 5G mobile products. It invests a lot in research and development ($37.9 billion in the last 10 years alone) and files many patents. Your iPhone won’t work without Qualcomm technology.

The chip processor business is similar to pharmaceuticals; the major R&D costs are borne before the first chip is made.  In this world there is only one legal way to buy a monopoly, and that is when you invent something and get a patent. When you have unique technology and patents, you can make a lot of money, and Qualcomm has made a lot of money on its legal monopolies and patents over the years. But as Qualcomm has essentially become a patent factory, a disturbing pattern of licensing abuses and anti-competitive behavior has developed all throughout the world.

The problem is that Qualcomm was not content with its profitable licensing revenues or competing fairly in the market. It became greedy. Instead of competing on its patents’ quality, functionality and price, it tried to buy a monopoly of distribution, and that’s illegal. Qualcomm could have spent more on research, but it directed its energies to limit competition in a market where they have a unique position.

That was a bad decision, especially in the European Union where Margrethe Vestager is the head of the competition authority, the Directorate-Generale for Competition. As the top cop of DG-Comp, Vestager has fined Qualcomm €997 million (USD $1.2 billion) for abuse of dominant market position and harm to consumers. The fine charges that from 2011 to 2016 Qualcomm paid Apple to use only Qualcomm chips in its iPhone and iPad devices.

It would seem that Qualcomm, a company with 90% market share in the mobile chipset market would not want to draw attention to itself by making an illegal deal with the maker of most popular smartphone which earns the lion’s share of the industry’s profits. Indeed Qualcomm called out such anticompetitive behavior in 2009 when it complained to the EU about Intel, which subsequently launched an investigation and fined the company.  Now Qualcomm is doing the same thing that it claimed was wrong.

DG-Comp found that Intel with 80% of the x86 central processing unit (CPU) market for computers abused its dominant position and fined the company €1 billion. Intel gave rebates to computer manufacturers on condition that they buy their CPUs from Intel. Intel paid the EU’s largest retailer to market only computers with its chips. Intel also paid manufacturers to stop or delay the launch of products with competing technologies. The case is now on appeal.

Qualcomm has also appealed the EU decision, saying that its practices have not had anti-competitive effects. But the fact remains that it’s totally unacceptable to abuse dominant position the EU. Qualcomm should be smarter to avoid the mistakes of companies before it, the very companies it claims to be anti-competitive.

Qualcomm is also being sued by the Federal Trade Commission in the U.S. over its abusive licensing practices and has been fined by competition authorities in South Korea, Taiwan and China, so they have had fair warning of what not to do.

While Apple is not implicated in this case, Vestager called out the company in 2016 for getting €13 billion in illegal state aid from Ireland’s tax haven and demanded restoration.

Greed is not good, and smart companies should compete on the quality of their technology, not on the cunning of their exclusive deals. While companies may try to get away with it, in the EU at least, Margrethe Vestager will go after you. Today leaders on each side of the Atlantic are sending a strong signal to companies and governments around the world about fair trade and competition: one is Donald Trump; the other is Margrethe Vestager.

Contact us to get a copy of the report

Request the report