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Qualcomm didn't have enough power to hurt chip competition, expert testifies

Another expert says the success or failure of rivals had to do with their foresight, investment and execution -- not Qualcomm's practices.

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Qualcomm has faced competition in mobile chips from Samsung, Huawei and others. 

Angela Lang/CNET

Qualcomm doesn't have enough "market power" to hurt competition in the mobile chip market, one of the expert witnesses for the company testified Tuesday. 

Tasneem Chipty, an expert in competition policy and antitrust economics, pointed to instances where Qualcomm did things like cut chip pricing in response to strong MediaTek processors hitting the market or Intel possibly winning business with Apple. That helped Qualcomm win business, she said, but it didn't mean the company was anticompetitive.

"Qualcomm doesn't have sufficient market power to coerce OEMs [handset makers] into onerous business terms that would rob them of billions of dollars," said Chipty, who runs her own Boston-based consulting firm, Matrix Economics, and has previously testified and consulted for the US Justice Department on antitrust issues. 

She noted that Qualcomm actually lost 50 points of market share in premium handsets from 2014 to 2017 while rivals such as MediaTek, Huawei, Samsung and Intel were gaining. As of March 2018, all of the new, premium handsets from Apple and Huawei used chips from companies other than Qualcomm, while only 35 percent of Samsung's premium handsets used Qualcomm modems, Chipty said. 

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"Qualcomm felt competitive pressure from Intel" when it came to Apple, Chipty said. "And for that reason, it innovated more, and it gave price discounts. That's not to say Intel would have actually won the [Apple business] for 2015. Those are two separate things."

Qualcomm has been battling the Federal Trade Commission in a San Jose, California, courtroom since Jan. 4. The FTC wrapped up its antitrust case against the company on Jan. 15, and Qualcomm has since been presenting its defense.   

Matthias Sauer, an Apple executive and a witness called by Qualcomm, testified last week that Intel's modems didn't meet the technical standards required for the company's iPhones in 2014. While Intel also couldn't meet Apple's chip requirements for the iPad, it would have used them anyway, he said, had Qualcomm not offered incentives to stay with its chips. His remarks echoed comments from colleague Tony Blevins earlier in the trial.

Along with determining that the modern chip industry is characterized by "dynamic competition," Chipty concluded the competition wasn't appropriately incorporated into one FTC expert's definition of market power and that the expert had overstated Qualcomm's market power. Chipty also said that Qualcomm's agreements with Apple were supported by legitimate business reasons and didn't hurt competition. 

The FTC has accused Qualcomm of operating a monopoly in wireless chips, forcing customers like Apple to work with Qualcomm exclusively and charging excessive licensing fees for its technology in part by wielding its "no license, no chips" policy. But Qualcomm says the FTC's lawsuit is based on "flawed legal theory." It also has said that customers choose its chips because they're the best and that it has never stopped providing processors to customers, even when they're battling over licenses.

Rebutting the FTC 

Chipty's testimony seeks to rebut analysis from an FTC expert who took the stand last week. Carl Shapiro, a professor of economics at the University of California, Berkeley, analyzed the impact of Qualcomm's so-called no license, no chips policy and Qualcomm's royalty rates on handset makers, chip rivals and consumers. He concluded that Qualcomm had monopoly power over CDMA modem chips and over premium LTE modem chips through 2016.

Shapiro testified that Qualcomm is using its market power and its monopoly power over chips to extract an "unusually high amount" for royalties for patents. That raises the cost for rivals, weakens them as competitors and fortifies Qualcomm's monopoly power, Shapiro said. 

Chipty on Tuesday accused Shapiro of taking a "shortcut" when evaluating whether the mobile chip market was competitive. He looked at what chips were in premium handsets instead of looking at the industry innovation and competition leading up to those design wins, Chipty said. In many cases, Qualcomm won those designs by cutting prices or adding new features. 

"Shapiro has overstated Qualcomm's market power," Chipty said. She said there's no "evidence of consistent and unconstrained market power of the type" that would hurt competition.

And she also pointed to the CDMA market in China, which quickly soared and saw new entrants like Samsung and Huawei in only a couple of years. 

"Rapid entry is possible," Chipty said. "Not only is it possible, it happened."

Testimony by Chipty and other Qualcomm witnesses sought to contradict statements by Apple and others that they felt they had no option but to accept licensing terms they didn't like so they wouldn't lose access to Qualcomm chips. 

Foresight, investment, execution

Another expert, Edward Snyder, Dean of the Yale School of Management and a professor of economics and management, on Tuesday testified that real-world analysis "does not support the claim that Qualcomm's alleged contact caused anticompetitive harms in the industry." 

He noted that three factors explain a company's success or failure -- foresight, investment and execution. Snyder evaluated Intel, MediaTek, Broadcom and others to examine their position in the market and how they performed based on those three factors.

Intel "exhibited ... poor foresight about the industry. They invested inefficiently, and they encountered execution problems," said Snyder, who at one time worked for the Justice Department's antitrust division. MediaTek had good foresight and investment, but it had some execution problems, Snyder said. It has now resolved those, helping it become the No. 2 modem supplier in the world. Broadcom, for its part, failed on all three, Snyder said, causing it to leave the modem industry. 

These companies all succeeded or failed because of independent industry factors, not Qualcomm's business practices, he testified. 

"These independent factors are the things that influence real world outcomes, not the FTC's allegations with respect to Qualcomm's conduct," Snyder said. 

He too attacked Shapiro's testimony, calling his methodology "fundamentally flawed." Snyder emphasized that he looked at "real-world" outcomes, while Shapiro's testimony was based on theory. 

No license, no chips

The "no license, no chips policy" is at the heart of the FTC's case against Qualcomm. Qualcomm sells processors that connect phones to cellular networks, but it also licenses its broad portfolio as a group. For a set fee -- based on the selling price of the end device, typically a phone -- the manufacturer gets to use all of Qualcomm's technology. It's phone makers that pay the licensing fee, not chipmakers. 

To get access to Qualcomm's chips, which are broadly considered to be on the bleeding edge of wireless innovation, a phone maker first has to sign a patent licensing contract with Qualcomm. Qualcomm has long been the leader in 4G LTE, and it's ahead of rivals in the nascent 5G market. The highest-end phones, like those from Samsung, have tended to use its modems. But the FTC argues such a requirement hurts competition and cements Qualcomm's monopoly power.

Apple Chief Operating Officer Jeff Williams last week testified that his company felt it had to sign contracts for amounts it thought too high -- a royalty of $7.50 per iPhone -- to maintain access to Qualcomm's chips. 

"We were staring at an increase of over $1 billion per year in licensing, so we had a gun to our head," Williams said as he explained why Apple signed another licensing agreement in 2013, despite being unhappy with the terms. He added that Apple has wanted to use Qualcomm's chips for its newer devices, but Qualcomm refused to sell processors for the iPhone. 

Other companies like Huawei and Lenovo made similar comments during their testimony. But Qualcomm executives have testified that Qualcomm has never cut off chip supply to companies during contract negotiations. 

Chipty on Tuesday acknowledged during cross examination that she didn't analyze the impact of the no license, no chips policy. 

But Chipty did say she evaluated Qualcomm's licensing agreements with Apple. She determined that the contract terms had legitimate business reasons and didn't represent anticompetitive behavior. Apple demanded that Qualcomm pay large sums up front before actually winning iPhone business, she said.

And Apple buys thin modems that require more investment from Qualcomm that it wouldn't normally make. Qualcomm CTO James Thompson testified last week that if the chipmaker didn't have to release standalone modems for Apple, it wouldn't invest the time and money -- about $250 million annually -- to update them every year. 

Both instances presented business risks to Qualcomm, Chipty said, which justified its contracts with Apple.

Licensing battle

The FTC, aided by chipmaker Intel and iPhone vendor Apple, filed suit against Qualcomm two years ago. The US says Qualcomm has a monopoly on modem chips and harmed competition by trying to maintain its power. Qualcomm's "excessive" royalty rates prevented rivals from entering the market, drove up the cost of phones and in turn hurt consumers, who faced higher handset prices, the FTC said. 

The FTC in the trial has called witnesses from companies like Apple, Samsung, Intel and Huawei and called experts to testify about the alleged harm Qualcomm's licensing practices have caused the mobile industry. The trial has revealed the inner workings of tech's most important business, smartphones, showing how suppliers wrestle for dominance and profit.

Qualcomm has argued that its broad patent portfolio and innovations justify its fees. CEO Steve Mollenkopf, who took the stand two weeks ago, defended the company's licensing practices, saying the way his company sells chips to smartphone makers is best for everybody involved and is the simplest way to license the technology. 

The FTC has said Qualcomm's refusal to give licenses to its chip rivals is part of its efforts to maintain its monopoly. Judge Lucy Koh in November agreed and ruled that Qualcomm has to license its wireless chip patents to its chip competitors like Intel.

Dirk Weiler, head of standards policy at Nokia, testified on Tuesday that it has long been industry standard to license technology to handset makers, not chipmakers. Along with his role at Nokia, Weiler also serves as chairman of the European Telecommunications Standards Institute. The nonprofit standards body's Intellectual Property Rights Policy requires companies give licenses for equipment.  

"What is my understanding of the industry practice is in the case of the cellular business, this means these companies license, for example, the handset and not any subpart of the handset," Weiler said. 

First published, Jan. 22, 3:09 p.m. PT

Update, 4:09 p.m. PT: Adds testimony from another expert

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