FTC rests case against Qualcomm, arguing it's a monopoly in mobile chips

The US government has accused Qualcomm of unfairly hurting competitors and charging excessive royalties for its technology. Qualcomm's defense began later Tuesday with co-founder Irwin Jacobs.

Shara Tibken Former managing editor
Shara Tibken was a managing editor at CNET News, overseeing a team covering tech policy, EU tech, mobile and the digital divide. She previously covered mobile as a senior reporter at CNET and also wrote for Dow Jones Newswires and The Wall Street Journal. Shara is a native Midwesterner who still prefers "pop" over "soda."
Shara Tibken
6 min read

Carl Shapiro, a University of California professor of economics and an expert witness for the FTC, took the stand Jan. 15 in the trial against Qualcomm. 

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The US Federal Trade Commission on Tuesday presented its last witnesses and evidence in its case against Qualcomm. Now it's up to Qualcomm to defend itself in the coming days against claims it's a monopoly in wireless chips. 

The  FTC , aided by chipmaker Intel and iPhone vendor Apple, filed suit two years ago, accusing Qualcomm of forcing customers like Apple to work with it exclusively and charging excessive licensing fees for its technology. The US believes 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. 

Qualcomm has argued the FTC's lawsuit is based on "flawed legal theory." It's 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. 

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The trial kicked off Jan. 4 in US District Court in San Jose, California. Testimony covers negotiations and events that occurred before March 2018 and can't encompass anything after that date. 

During the first six days of the trial, the FTC presented witnesses from companies like Apple, Samsung and Ericsson and experts from intellectual property consultancies and universities. It even called Qualcomm CEO Steve Mollenkopf. The trial has revealed the inner workings of tech's most important business -- smartphones -- showing how suppliers wrestle for dominance and profit.

The FTC rested its case shortly before 3:30 p.m. PT on Tuesday. The FTC took a quick break during its presentation of witnesses to allow Qualcomm co-founder Irwin Jacobs to testify. Jacobs, who spoke on behalf of Qualcomm, talked up the company's long history in CDMA mobile technology. 

Qualcomm's second witness took the stand after the FTC rested its case. Durga Malladi, Qualcomm's senior vice president of 4G and 5G, detailed Qualcomm's innovation in the mobile market.  

Closing arguments in the trial will take place Feb. 1. 

'No license, no chips'

Key to the FTC's argument is Qualcomm's 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 who 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. 

The FTC has argued the no license, no chips policy gives Qualcomm too much leverage in negotiations and prevents competitors from entering the wireless chip market. Huawei, Intel, Lenovo and others testified during the trial that Qualcomm required them to sign licenses before being able to buy the company's chips. 

And Apple, which has been fighting Qualcomm in patent and licensing lawsuits around the globe, sent two executives to testify on behalf of the FTC. Apple believes Qualcomm's fees are too high; it thinks it should pay a fee based only on the value of Qualcomm's connectivity chips, not the entire device. 

Apple, arguably the most powerful company in technology, said it felt it had no options when it came to negotiating over Qualcomm's licensing fees. 

Tony Blevins, Apple's vice president of procurement, on Friday testified that Apple wanted to build an Intel communication chip into its iPad Mini 2, released in fall 2013, but Qualcomm's hardball business methods crushed the plan. Apple didn't like relying solely on Qualcomm for modem chips, Blevins said, but in exchange for exclusive use of its chips, Qualcomm offered Apple rebates that reduced costs so they were no longer "exorbitant."

And Apple Operating Chief Jeff Williams on Monday testified that his company felt that it had to sign contracts for amounts it thought too high -- a royalty of $7.50 per iPhone -- in order 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. 

Apple  wanted to use  Qualcomm's   4G LTE  processors in its 2018  iPhones , but the chipmaker wouldn't sell to it, Williams said. Qualcomm did continue providing Apple with chips for its older iPhones, including the iPhone 7 and 7 Plus, but it wouldn't give Apple chips for last year's iPhone XSXS Max and XR, Williams said.

"We have been unable to get them to support us on new design wins past that time [when Apple filed a lawsuit against Qualcomm]," Williams said. "This has been a challenge."

Williams' comments appear to contradict testimony from Qualcomm's Mollenkopf from Friday. He said on the stand that as of spring 2018, Qualcomm still was trying to win a contract supplying chips for iPhones, but that it hadn't "had any new business" from Apple since its previous contracts expired. Because of the trial's evidence date limitations, he wasn't allowed to discuss the current state of Qualcomm's business with Apple.

Mollenkopf also testified that Qualcomm's practices of offering a license before selling chips to companies is simply the best way to get things done for the whole industry, not just for his company. That's because Qualcomm's patent licenses cover lots more technology a phone might use than simply what's in his company's modem chips, which let phones talk to mobile networks.

"We only sell to companies with a license because not all the IP [intellectual property] is covered in the chip. What we want to do is make sure the [phone makers] are covered," Mollenkopf said. He pointed to the security framework used when phones connect to a network as an example. "It's not embodied in the chip, it's not in the phones, but it's in all these things," Mollenkopf said. "There's a tremendous amount of IP we generate that makes the system work."

A heavy hammer

Carl Shapiro, a professor of economics at the University of California in Berkeley, took the stand Tuesday to analyze the impact of the 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.

"It's my view they harmed competition in those two markets," he said. 

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"Qualcomm should be commended for its technological achievements," Shapiro added. "But...what's really important is that companies who aren't quite as good or who don't have the scale are not impeded from trying to catch and threaten and challenge the leader."

He 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. 

Losing access to Qualcomm's modems would impose costs on handset makers, including not being able to supply to consumers. 

"That's a very heavy hammer that Qualcomm is bringing down, at least as a threat, in those negotiations," Shapiro said. 

Michael J. Lasinski, CEO of IP consulting firm 284 Partners, on Monday testified that Qualcomm's licensing fees are "far too high to be consistent with their FRAND operations." Standard essential patents must be licensed in a fair, reasonable, and non-discriminatory manner. 

An Ericsson licensing executive, Christina Petersson, said in video testimony that a fair royalty rate for multimode LTE should be 6 percent to 8 percent per device. Lasinski said he determined it should be 6 percent because there's a lot more going into a phone than when Ericsson came up with its rate.

Qualcomm's rates tend to be higher than that amount. Apple wanted to pay $1.50 per device in royalties to Qualcomm, based on a 5 percent fee for the cost of each $30 modem connecting iPhones to mobile networks. Instead, it ended up paying $7.50 per phone, an amount Qualcomm later wanted to raise, Apple's Williams testified. 

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

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