A billion-dollar question: What was really behind Qualcomm's surprise ten-digit gift to Apple?

Is the chip company an abusive monopolist – or tough negotiator?


The chip industry's strong-arm tactics have been laid bare this month in the anti-trust legal battle brought by America's Federal Trade Commission (FTC) against Qualcomm.

But as we enter day five of the trial, it's become clear that the case may pivot around a single payment made by Qualcomm to Apple back in 2011.

It was a strikingly large sum – one billion dollars, no less – and formed the heart of a complex contract signed by the two companies that some argue proves Qualcomm is guilty of abusing an effective monopoly, and others claim proves that it operates within a complex and competitive market.

A group of people hold out mobile phones in a circle. Photo by Shutterstock

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Qualcomm had sought to hide the fact that it paid $1bn to Apple to secure a five-year exclusive agreement with the company to introduce its cellular broadband modem into the iPhone. Even the judge at one point wasn't sure whether that fact has been disclosed or not.

The payment is critical in that the FTC claims that it proves Qualcomm was using its position as the owner of several "standard-essential patents", or SEPs, on communications technologies to cut deals it would never have been able to negotiate otherwise.

Qualcomm has refused to license that technology to its competitors and, since the patents are critical for smartphones, has used that position to force companies into signing contracts that they would never agree to otherwise, i.e. it is using its monopoly position to distort the market and is damaging competition. That's the FTC's case.

But Qualcomm paints the payment quite differently: it says that Apple insisted on the $1bn payment as an "incentive" and to cover the costs of switching to its radio modem chips from Infineon to Qualcomm in its new phone designs.

Such payments are apparently relatively common in the industry but Qualcomm CEO Steve Mollenkopf admitted in court that it was far bigger than normal. As Mollenkopf tells it, Qualcomm only pushed to become a sole supplier of modem chips to Apple after that $1bn incentive was insisted upon in an effort to recoup such a massive outlay. It wasn't, he claims, an effort to shut out rivals.

Apple wouldn't give Qualcomm a promise to buy a minimum number of Snapdragon modems, Mollenkopf noted, so the company pushed to become the exclusive supplier.

Rebate

But things get more complicated: as part of the deal, Qualcomm agreed to give Apple a $7.50 "rebate" on each phone. The end result of that, Apple supply chain executive Tony Blevins explained, was that it was simply too expensive for Apple to drop out of the deal.

According to Blevins, Apple wanted to make sure it has at least two suppliers to a number of critical components in its phones but the "very, very large" rebate meant that it wasn't financially practical – and so Apple dropped plans to include an Intel chip in its new iPad Mini. When the agreement finally ran out, Apple jumped ship.

Things get more complicated. According to Apple COO Jeff Williams, Qualcomm insisted as part of the deal that Apple come out against the WiMax standard that was being developed by Intel and say it wouldn't support it. And that negotiation formed part of a conversation where the licensing rate was more than halved, according to Williams.

There are other troubling things written into Qualcomm contracts too: that anyone signing an agreement with it automatically has to license their intellectual property back to Qualcomm – something Apple baulked at.

The FTC has also focused in on what it has termed the "no license, no chips" agreements that Qualcomm insists on as a critical part of any agreement. Such a deal is only possible because of its monopolistic position, the government argues [PDF]. And it is making the case that due to this arrangement, other companies have been unable to challenge Qualcomm because to do so would cut them off from chip supplies.

An FTC expert witness pointed out that Qualcomm has largely managed to stay out court hearings over enforcing patents while competitors Ericsson, Nokia and InterDigital have frequently been in court and subject to court orders. He argued that the "no license-no chip" agreement is behind the disparity.

The court has also heard of several times in which a Qualcomm executive explicitly threatened to cut off a company from the chip supply chain if they challenged the company. It was at one meeting where Qualcomm told an Apple exec that the company would have to pay more for its cellular modem chips "because you can afford to" that solidified Apple's decision to walk away from Qualcomm as soon as it practically could, Williams said in court.

Ecosystem

Qualcomm's Mollenkopf disagrees with those assertions: the company only sells its chips to companies that license its patents because its intellectual property covers the whole phone ecosystem, not just phones and chips, he argued in court. The license fees are what the company uses to fund its research and development into new technologies, the company says.

And even Apple admitted that it felt that Qualcomm's technology was several years ahead of rivals (at least back in 2011), which is why it agreed to such onerous terms.

In short, it's complicated. And the answer as to whether Qualcomm is abusing its market position and damaging competition, or if it simply engaging in strong negotiation to make sure that other companies can't get an upper hand is hidden within contracts that include several contradictory factors.

So far at least, the FTC's strongest argument appears to be all the times that Qualcomm has managed to cut a deal that its competitors cannot, and the fact that other companies like Apple have admitted that they wouldn't have signed those deals if they felt they had another option.

The FTC wants to be able to force Qualcomm to license its SEPs (standard-essential patents) to competitors at a reasonable rate: something that it says would force greater competition into the market and remove Qualcomm's monopolistic hold.

It's not clear yet whether the FTC has managed to make a strong enough case but truth be told it doesn't look good for Qualcomm. In the end, it may all revolve around how the court decides to view the fact that it paid Apple a billion dollars to get its modem chips into iPhones. ®


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