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EU Qualcomm fine bolsters credibility on IT competition

05 March 2018 by Robert Bell

EU Qualcomm fine bolsters credibility on IT competition - Read more

The European Commission's €1 billion penalty shows little fear of US complaints of favouritism

On 24 January 2018, the European Commission fined the US chipmaker Qualcomm nearly €1 billion for unfairly blocking its rivals from the LTE baseband chipset market for more than five years.

The commission held that Qualcomm paid billions of dollars to its key customer Apple, on condition that the firm would exclusively buy chipsets from Qualcomm over the period of their agreement. This is contrary to Article 102 of the Treaty on the Functioning of the European Union (TFEU), a pillar of EU competition law.

This is the latest in a series of big fines levied by the European Commission on technology companies, which has previously caused US governments to criticise the European competition law regulator for protecting European technology companies and targeting US ones.

Yet in this present case we see the main protagonists, both the subject of the complaint and the main aggrieved competitor, are US companies. The European Commission would point to this as evidence that it enforces EU competition law neutrally.

Baseband chipsets allow smartphones and tablets to connect to cellular networks, are used both for voice and data transmission and comply with the 4G Long-Term Evolution (LTE) standard. The commission estimated that Qualcomm was by far the world’s largest supplier of LTE baseband chipsets, having market shares of over 90% during the investigatory period.

Qualcomm competed against several other chip manufacturers active in this market. Its main competitor was Intel, which is the largest supplier for chipsets used in computers. Intel tried to challenge and compete with Qualcomm for customers in this market between 2011 and 2016 – but the latter has been judged as not playing fair.

Investigation

Following its own preliminary probe, the commission began its formal investigation on 16 July 2015. On 8 December 2015, the authority sent Qualcomm a Statement of Objections setting out its concerns, followed by a letter sent in February 2017 with more facts relevant to the case.

Between 2011 and 2016 Apple was the leading customer for LTE baseband chipsets, used in its smartphones and tablets. But open and fair competition was not possible on this market due to the deal struck between Qualcomm and Apple.

“Qualcomm’s market dominance twinned with high barriers to entry in this market made its position unassailable”

In 2011, Qualcomm signed an agreement with Apple, under which the chipmaker agreed to pay billions of dollars to Apple so the company would exclusively use its chipsets in the iPhone and iPad range. This agreement was extended in 2013 for three more years.

Under the deal, Qualcomm would cease payments if Apple commercially launched a device with a chipset supplied by a rival. In addition, if Apple did switch suppliers it would return a large part of the payments to Qualcomm.

The effect of this was to deny Qualcomm’s rivals the chance to compete fairly or effectively for Apple’s significant business, regardless of the quality of their products. They were also deprived of business opportunities with other customers that could have followed from securing Apple as a customer.

During its investigation, the commission found internal documents showing that Apple considered switching part of its LTE baseband chipset requirements to Intel. But Qualcomm’s exclusivity condition and the significant payments received were material factors in Apple sticking with Qualcomm until the agreement came to an end.

In September 2016, when its agreement with Qualcomm was about to expire and the cost of switching under its terms was limited, Apple started to source part of its baseband chipset requirements from Intel.

The effect of this anti-competitive arrangement was that until September 2016, Qualcomm denied consumers and other companies the benefits of fair and effective competition – namely more choice and innovation.

Decision

The commission concluded that Qualcomm’s practices amounted to abuse of its dominant position in LTE baseband chipsets by preventing competition on the merits, contrary to Article 102 TFEU.

The authority cited the infringement’s length and seriousness in its decision to fine Qualcomm almost €1 billion. The penalty was set to deter Qualcomm and other market participants from engaging in similar anti-competitive practices in the future, equating to 4.9% of Qualcomm’s turnover in 2017.

The commission also ordered Qualcomm to not engage in such practices or practices with an equivalent aim or effect in the future. Qualcomm’s market dominance, twinned with high barriers to entry in this market – namely the cost of research and development required before a supplier can launch an LTE chipset and the firm’s intellectual property rights – made its position unassailable.

The principal harm caused by Qualcomm’s exclusivity deal was not that Apple received a short-term price reduction because of the payments, but that the condition hindered competitors from being able to compete for Apple’s significant business.

Having reviewed the evidence, the commission found that both consumers and competitors suffered as a result of Qualcomm’s conduct. This assessment took into account, among other things:

  • The extent of Qualcomm’s market dominance
  • The significant amounts paid by Qualcomm for exclusivity
  • Broad documentary and other evidence, including Apple’s internal documents, that Qualcomm’s payments reduced Apple’s incentives to switch to rivals
  • The importance of Apple as a customer in the market for LTE baseband chipset suppliers, averaging more than a third of the total market
  • Apple’s position as a leading smartphone and tablet manufacturer influencing other customers’ and manufacturers’ procurement and design choices
  • Qualcomm’s failure to show any objective justification for their practices, including that the exclusivity condition improved efficiency.

To try to justify its behaviour, Qualcomm advanced a price/cost test, which provides that a firm’s pricing practices do not violate the Article 102 competition rules if Qualcomm’s prices cover their costs. This submission was rejected by the commission, which said it failed to show the exclusivity payments could not hurt competition.

Protecting innovation

For the commission, this is another significant strike against the technology sector. In recent years it has seriously focused its enforcement on how technology titans of the modern age conduct themselves and will act if it fears competition, innovation and choice are at risk.

The size of the fine imposed by the commission is notable. Equating to nearly 5% of Qualcomm’s turnover in 2017, it was the third largest fine imposed by the commission to date.

The clear message coming out of this decision is deterrence. It is a message to other companies to stay well clear of similar arrangements – or else.

“Equating to nearly 5% of Qualcomm’s turnover in 2017, it was the third largest fine imposed by the commission to date”

In the aftermath of the decision Qualcomm came out fighting. It stated that it strongly disagreed with the commission’s decision and intended to immediately appeal to the General Court of the European Union.

The grounds for Qualcomm’s appeal are not immediately apparent. But the commission’s case, at least according to the facts outlined in the press release, appears well reasoned.

The Qualcomm decision has parallels with the commission’s 2009 Intel decision, in which it condemned a series of rebates to computer manufacturers and payments to a retailer aimed at squeezing out a smaller competitor. Intel’s appeal in that case was recently heard by the European Court of Justice.

In its judgment, the court was critical of the commission’s lack of rigorous analysis showing that the anti-competitive harmful effects of Intel’s rebate schemes necessary proves an abuse under Article 102. It may well be that Qualcomm’s grounds for appeal will turn on the fact that the commission failed to prove appreciable consumer harm.

Even so, this decision is testament to the determination of the competition commissioner Margret Vestager to aggressively pursue infringements in the technology sector in 2018, shrugging off past allegations of unfairly targeting major US companies.

Yet there is still a balance to be struck. The commission must restrain anti-competitive behaviour among major technology companies without becoming an impediment to future innovation and investment.

Robert Bell is a partner at Bryan Cave

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