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Qualcomm wraps up defense after expert rebuts FTC witness

Up next is the FTC's rebuttal on Monday. Closing arguments from both sides come Tuesday.

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The Federal Trade Commission and Qualcomm have been fighting in a San Joe, California, courtroom since Jan. 4.

Shara Tibken/CNET

Qualcomm on Friday wrapped up its defense against US Federal Trade Commission allegations that it operates a monopoly in mobile chips. 

The company called Aviv Nevo, a University of Pennsylvania economics and marketing professor, to rebut claims made by FTC experts. It also called Alex Rogers, the current head of its licensing business, to reiterate how Qualcomm's licensing business operates. 

Nevo testified that the FTC's theory that Qualcomm uses its power in the chip market to charge excessive royalty rates "is just not born out of actual market data." He noted "there's no support for the theory in the data." Nevo also testified that the mobile industry is strong and that Qualcomm had legitimate business reasons for its licensing policies. 

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"At a high level, this is a thriving industry," Nevo said. "Prices are declining. Quantities are skyrocketing."

Rogers testified that Qualcomm doesn't withhold chips from customers and that it's been offering lower rates to licensees for the past couple of years. 

Qualcomm has been battling the FTC 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 presented witnesses including its head of licensing and its chief technology officer

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's also said customers choose its chips because they're the best and that it's never stopped providing processors to customers, even when they're battling over licenses.

Earlier this week, Qualcomm called company executives; representatives from handset makers and chip rivals; and industry experts to dispute the FTC's allegations in the case. 

The company sought to show that competition is healthy in the mobile chip market and that it hasn't hampered the industry. Its primary witnesses this week sought to counter testimony from an FTC witness who determined Qualcomm's licensing terms helped it maintain a monopoly. 

The company wrapped up public testimony shortly after 3 p.m. PT on Friday. It ended its case with a seven-minute sealed video deposition from a Samsung executive. 

Rebutting the FTC 

Qualcomm's expert testimony on Friday sought to rebut analysis from Carl Shapiro, a professor of economics at the University of California, Berkeley, who took the stand last week. Shapiro analyzed the impact of that "no license, no chips" policy and Qualcomm's royalty rates on handset makers, chip rivals and consumers. He concluded that Qualcomm has 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 patent royalties. That raises the cost for rivals, weakens them as competitors and fortifies Qualcomm's monopoly power, Shapiro said. 

Nevo on Friday said he used Shapiro's theory and tested it based on real world data to see if the theory was true. He looked at rates Qualcomm charged for licensing during its times of alleged market power and at other times. According to the FTC's theory, rates would be higher during times Qualcomm was strong. But in fact, that's not what Nevo found based on his tests and the data.

Instead, Nevo testified that Qualcomm's royalty rates are the same no matter which chip a company uses in a mobile device. That's because licensing terms are set before chip rates and last for 10 to 15 years or longer, while chip prices and contracts are set every year. So the royalty rate doesn't affect the choice of the chip, he said. 

Shapiro's "theory is just not there to support his conclusions," Nevo says. "It's not based in market reality. It doesn't fit how things actually happen in this industry. As a result, the predictions he gave really can't be trusted."

Nevo also said there were legitimate business reasons for Qualcomm's licensing policies. 

"One is reduction in transaction cost," he said. "The other is allowing rival chipmakers to operate freely with access to tech without a need for a license."

During cross examination, FTC attorney Jennifer Milici attempted to poke holes in Nevo's methodology and conclusions. Nevo admitted that he excluded many companies, including Samsung, Sony, BlackBerry and LG, from his analysis because of the nature of their contracts. By excluding them, he removed a large portion of the phone market. And Nevo didn't consider elements of cross licenses with companies like Motorola, as well as other factors that could impact royalty rates. 

Milici also said that those companies testified they feared losing access to Qualcomm's chips if they didn't agree to high license rates, something counter to what Nevo testified. 

Nevo later clarified that he excluded those companies because their agreements had unusual terms, like "very large" upfront fees. But he didn't ignore those contracts completely. Instead, he examined Samsung, Sony and BlackBerry on qualitative terms and determined their pacts weren't consistent with the FTC's assertions. 

Other Qualcomm experts

On Tuesday, Tasneem Chipty, a specialist in competition policy and antitrust economics from consultancy Matrix Economics, accused Shapiro of taking a "shortcut" when evaluating whether the mobile chip market was competitive. Shapiro 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 or "coerce OEMs [handset makers] into onerous business terms that would rob them of billions of dollars."

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. And Qualcomm felt competitive pressure to give price discounts and other concessions to win business, she testified. 

Another Qualcomm 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 contract 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, for one, "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. 

No license, no chips

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 heart of the FTC's case against Qualcomm is a so-called "no license, no chips policy." 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.

And some of those executives have said in live testimony and video depositions presented by Qualcomm that its rivals didn't have the technology required for their devices. 

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. Though Intel also couldn't meet Apple's chip requirements for the iPad, it would've 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.

And Fabian Gonell, senior vice president of licensing strategy and legal counsel for Qualcomm's licensing business, said last week that Qualcomm doesn't have all the power when it comes to negotiating licensing contracts. Instead, handset makers have options to reach terms they view as more favorable, he said. 

He pointed to agreements with Samsung, Sony Mobile and others that differed from Qualcomm's normal packs. Gonell also noted that Qualcomm didn't stop providing chips to them while the licensing agreements were being disputed, and he added there was no part of Qualcomm's licensing agreements that wasn't negotiable.  

Gonell noted that Oppo and Vivo stopped paying Qualcomm for over a year because of a licensing dispute, while Huawei also cut off payments. Apple, through its contract manufacturers, hasn't paid for licensing Qualcomm's technology in over two years. But Qualcomm kept shipping all of them chips, Gonell testified. 

"If there's a licensee disputing the terms of its license, we continue to supply chips if they want them," he said. 

Still, during its cross examination of Qualcomm licensing chief Rogers on Friday, the FTC pointed to an email from Eric Reifschneider to a Sony Mobile exec, which was forwarded to Rogers. In it, Reifschneider wrote, "QCT (Qualcomm's chip business) has been shipping chips to SMC (Sony Mobile) for almost three weeks now without a license in place. It will not be possible for that to continue." The FTC attorney asked, "That's a threat to cut off chip supply isn't it?"

Rogers said he wasn't familiar with the email. 

The last word

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

But 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 to 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. 

And Nevo on Friday said if Qualcomm doesn't license at the device level anymore, things could get complicated fast. If Qualcomm switched to simply licensing at the chip level, it would need to offer multiple tiers because some of the technology would apply to an overall phone, not just the processor. 

"The number of license agreements would be large," Nevo said. But the real issue "is the fact each negotiation now will become a lot more complex. Parties, chipmakers and OEMs, would have incentives to point to the other party as the one actually practicing on the license." 

In the trial, the FTC will have the last word before closing statements, which will take place Tuesday. 

Shapiro will take the stand Monday to reiterate his findings and rebut the testimony from Qualcomm's experts. Other potential witnesses include executives from Samsung, Huawei, ZTE and BlackBerry (via video depositions), as well as Derek Aberle, Qualcomm's former head of licensing, and Jeff Altman, another former Qualcomm executive (both also by video depositions). 

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