Yesterday, Judge Koh ruled in favor of the FTC in their anti-trust lawsuit against Qualcomm. I’m sure many people saw the news, but didn’t unpack it to a large degree and consider the implications. While I will not consider this an in-depth legal analysis, I think a few important observations are worth making.
Before diving in, it’s important to remember that the goal of the court system is to not work on bias, or even factor in outside information. Any case, and its result, comes directly from testimony presented and facts exposed in the court room. Thus, it is important to remember that Judge Koh is making a ruling on what she observed and learned from what happened in the court room alone. I say this because we as outsiders will leverage our bias in forming an opinion which is something we have the luxury to do. That being said, if we look beyond bias and look more at some of the worrying precedents that are now set via this official ruling it opens up the door to some interesting discussions and implications.
Dangerous Precedents
I’ve spoken with a number of readers on this matter who disagree, so may it be known I’m comfortable with disagreement :), but I still believe this whole case was based around several dangerous arguments. The first was the narrow definition and limited time frame which was the focus of the argument for Qualcomm acting anti-competitively. The FTC disregarded a basic understanding of monopoly power via market share and instead narrowed the focus of their argument to only the premium modem segment. To reiterate this point, the entire case against Qualcomm behaving in a monopoly manner was that their monopoly behavior happened only in an area that is less than 20% of the global smartphone market. The FTC did not state Qualcomm behaved anti-competitively in the entire smartphone modem market, only the less than 20%. Now, we can’t discount how valuable that market is, however, the FTC used Apple as the star example as a victim and Apple has ~80% of that premium smartphone segment, along with the highest ASPs of any competitor. So you do have to appreciate the irony.
If anti-trust behavior can now be argued by a narrow definition of a segment of the market, then it opens the door for lawsuits to every part of the technology industry. A company with less than 20% market share, who acts uncompetitively can now be sued or indicated as a monopolist. I understand there are additional circumstances to consider, but I remain convicted that a dangerous precedent is set now that a narrow definition of monopoly has been established. Apple should be the most worried, since by this new definition they have a monopoly on the premium smartphone market.
The other precedent that was set in this case, which again should worry Apple, was the FTC did not at any time present any actual economic evidence of harm to competition or to consumers. I found this fascinating. The burden of proof was on the FTC to prove harm to competition and consumers and they never once provided such evidence. Instead, they used the argument presented by their star expert witness Carl Shapiro, whose economic theory of anti-trust posits that anti-competitive behavior can be established on the POSSIBILITY of harm. Thus not needed any actual evidence of harm and one only needs to present a compelling case the possibility of harm exists. There are wide ranging implications to this, that are worth a healthy debate, but I have a hunch if this sticks it is going to create significant headaches for tech companies in the future.
I’m still going through the more than 200 pages of Judge Koh’s decision and reasonings and will present more analysis on this matter once I’ve reviewed everything. Lastly on this topic, it does not appear Judge Koh’s decision will impact the settlement and agreement between Qualcomm and Apple since both companies entered into that agreement knowing the FTC case was still outstanding and took risks accordingly in negotiations.
Huawei Loses Arm License
I don’t want to go too deep in the weeds here but there are a few interesting things that came out of this recent blow to Huawei where Arm is complying with there US order to not provide technology to Huawei. I first incorrectly tweeted that Arm was acting on their own initiative in stating they will no longer provide IP to Huawei. My reasoning was that Arm is not a US a company and therefore was under no obligation to comply with the US order. However, it was clarified to me by Arm that because Arm IP is developed here in the US, they were then subject to the US order. What makes this even more interesting is there are a lot of international companies who do create IP in the US and thus opens up a much wider net of companies who are not going to be able to provide IP to Huawei, or even greater China in this ban.
Overall between Google, Intel, Microsoft, and now Arm, it looks really bad for Huawei amidst this trade dispute. But on the Arm front it is important to understand Arm licensees have access to IP 2-3 years in advance of any official Arm launch. Meaning Huawei still has access to the latest Arm IP and a host of IP Arm hasn’t even announced yet. What they will be cut off from is any new IP from Arm from this point in time. This is relevant because it likely won’t impact Huawei/HiSilicon’s roadmap for the next year or so but if this trade dispute does not get resolved soon it will impact their longer-term roadmap.
Something to consider, and I’ll likely dive into deeper at some point, is what is happening now is a broader technology ban on China from the West, since it seems like European and even Japanese companies may be taking similar stances against Huawei. This is absolutely a war and instead of cutting off food via sanctions we are cutting off technology. The implications here are significant. Briefly, China may have underestimated how much they, and their technological ecosystem rely on Western technologies. Surely, they have considered this as they have been working to create their own homegrown ecosystem of technology but they have made little progress on that especially when it comes to scaling their proprietary solutions like silicon specifically. This trade war will likely accelerate these efforts but this is a clear inflection point for China and a moment of truth if they can overcome the many challenges they have had with homegrown proprietary core components and software.
Second, and this one could be a big one, China controls the worlds majority of rare earth material used in many technology products and smartphones specifically. How much? Note this statistic according to the US Geological Survey: China is by far the largest producer of these elements globally, accounting for 71% of global production and 37% of global reserves. While it would be quite difficult to just limit and cut off the US from this supply without hurting Chinese companies and other global non-US customers, it is important to note that if they resort to desperate measures they can significantly hurt the rest of the world due to their control of rare earth materials.
What a time to be alive!
