This is an outrageous event, and one that is unlikely to happen any more in today’s corporate scandals. At least that is the view of the EU Commission. It announced today that Apple and its chip supplier Qualcomm have reached an agreement in 2011 that Qualcomm will make substantial cash payments to Apple, only for Apple´s guarantee to use only Qualcomm chips. Quote from the EU Commission:
Then as today, Apple was a key customer for LTE baseband chipsets, being an important maker of smartphones and tablets with a premium brand image worldwide. In 2011, Qualcomm signed an agreement with Apple, committing to make significant payments to Apple on condition that the company would exclusively use Qualcomm chipsets in its “iPhone” and “iPad” devices. In 2013, the term of the agreement was extended to the end of 2016.
According to EU Competition Commissioner Vestager, Qualcomm was able to:
“… illegally shut out rivals from the market for LTE baseband chipsets for over five years, thereby cementing its market dominance”.
That’s why Qualcomm now has to pay a fine of 997 million Euros to the EU Commission! A small and fine monopoly that Apple was well paid for! The amount paid by Qualcomm to Apple for this agreement is not mentioned. In its publication, the European Commission describes in detail that Apple even considered switching to Intel chips – but then Apple would have had to reimburse Qualcomm for the money it had paid. According to the EU Commission, this “encrustation of the market” (our word creation) is blocking innovation and competition in this very important market.
Qualcomm defends itself
Qualcomm has already formally responded and intends to appeal to an EU court. It can´t be seen that they have infringed EU competition law. quote:
Qualcomm (Nasdaq: QCOM) today confirmed it has received a decision from the European Commission (EC) relating to an expired agreement between Qualcomm and Apple Inc., which was in effect from 2011 through 2016, for the pricing of modem chips. The EC alleges that certain provisions of this agreement were in violation of European Union competition law and has imposed a fine of approximately 997, 439,000 million Euros (approximately $1.23 billion USD at current exchange rates). Qualcomm strongly disagrees with the decision and will immediately appeal it to the General Court of the European Union. The EC decision does not relate to Qualcomm’s licensing business and has no impact on ongoing operations. “We are confident this agreement did not violate EU competition rules or adversely affect market competition or European consumers,” said Don Rosenberg, executive vice president and general counsel of Qualcomm. “We have a strong case for judicial review and we will immediately commence that process.”
EU Commission with interesting details
Here are further comments by the EU Commission in its own wording (very interesting to read):
The European Commission has fined Qualcomm €997m for abusing its market dominance in LTE baseband chipsets. Qualcomm prevented rivals from competing in the market by making significant payments to a key customer on condition it would not buy from rivals. This is illegal under EU antitrust rules.
Commissioner Margrethe Vestager, in charge of competition policy, said: “Qualcomm illegally shut out rivals from the market for LTE baseband chipsets for over five years, thereby cementing its market dominance. Qualcomm paid billions of US Dollars to a key customer, Apple, so that it would not buy from rivals. These payments were not just reductions in price – they were made on the condition that Apple would exclusively use Qualcomm’s baseband chipsets in all its iPhones and iPads.
This meant that no rival could effectively challenge Qualcomm in this market, no matter how good their products were. Qualcomm’s behaviour denied consumers and other companies more choice and innovation – and this in a sector with a huge demand and potential for innovative technologies. This is illegal under EU antitrust rules and why we have taken today’s decision.”
Qualcomm’s practices and the market for LTE baseband chipsets
Baseband chipsets enable smartphones and tablets to connect to cellular networks and are used both for voice and data transmission. LTE baseband chipsets comply with the 4G Long-Term Evolution (LTE) standard.
Qualcomm is by far the world’s largest supplier of LTE baseband chipsets. But there are other chip manufacturers active in this market – Intel (the largest supplier for chipsets used in computers), in particular, has tried to challenge and compete with Qualcomm for customers.
The agreement made clear that Qualcomm would cease these payments, if Apple commercially launched a device with a chipset supplied by a rival. Furthermore, for most of the time the agreement was in place, Apple would have had to return to Qualcomm a large part of the payments it had received in the past, if it decided to switch suppliers. This meant that Qualcomm’s rivals were denied the possibility to compete effectively for Apple’s significant business, no matter how good their products were. They were also denied business opportunities with other customers that could have followed from securing Apple as a customer.
In fact, internal documents show that Apple gave serious consideration to switching part of its baseband chipset requirements to Intel. Qualcomm’s exclusivity condition was a material factor why Apple decided against doing so, until the agreement came to an end. Then, in September 2016, when the agreement 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. But until then, Qualcomm’s practices denied consumers and other companies the benefits of effective competition, namely more choice and innovation.
Breach of EU antitrust rules
Qualcomm’s practices amount to an abuse of Qualcomm’s dominant position in LTE baseband chipsets by preventing competition on the merits.
Market dominance is, as such, not illegal under EU antitrust rules. However, dominant companies have a special responsibility not to abuse their powerful market position by restricting competition, either in the market where they are dominant or in separate markets.
Today’s decision concludes that Qualcomm held a dominant position in the global market for LTE baseband chipsets over the period investigated (i.e. between at least 2011 and 2016). This is based in particular on its very high market shares, amounting to more than 90% for the majority of the period. The market is also characterised by high barriers to entry. These include the research and development expenditure required before a supplier can launch an LTE chipset and various barriers related to Qualcomm’s intellectual property rights.
Qualcomm has abused this market dominance by preventing rivals from competing in the market. It did so by making significant payments to a key customer on condition that it would exclusively use Qualcomm chipsets. The issue with such an arrangement is not that the customer receives a short-term price reduction, but that the exclusivity condition denies rivals the possibility to compete.
Based on a variety of qualitative and quantitative evidence, the Commission found that both consumers and competition have suffered as a result of Qualcomm’s conduct. This assessment took into account, among other things:
the extent of Qualcomm’s dominant position;
the significant amounts paid by Qualcomm in exchange for exclusivity;
a broad range of contemporaneous 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: Apple accounts for a significant share of LTE chipset demand (on average one third). Apple is also a leading smartphone and tablet manufacturer, which can influence other customers’ and manufacturers’ procurement and design choices. By making sure that rivals had no chance to compete for any of Apple’s important business, Qualcomm’s conduct had an effect on the LTE baseband chipset market as a whole; and
that Qualcomm did not demonstrate that the exclusivity condition created any efficiencies, which could have justified Qualcomm’s practices.
The Commission also assessed and rejected a “price-cost” test submitted by Qualcomm. The Commission concluded that the results of this test failed to support Qualcomm’s claim that its exclusivity payments were not capable of having anti-competitive effects.
On this basis, the Commission concluded that Qualcomm’s illegal practice had a significant detrimental impact on competition. It excluded rivals from the market and deprived European consumers of genuine choice and innovation.