Qualcomm Vindicated and Enlightened Antitrust

Yesterday, news broke that the US Court of Appeals overturned the 2019 ruling in favor of the FTC over Qualcomm on antitrust behavior. There is so much to unpack in this ruling, many that have specific implications on future antitrust rulings, but also critical elements in IP protection law.

I’ve written many articles on the battle between the FTC and Qualcomm. I attended two days of the trial in San Jose as key witnesses took the stand to help make a case for the FTC. From the two days, I attended, and the subsequent material I read, I never personally felt the FTC met its burden to demonstrate both competitive harm and consumer harm. After I read the opinion ruling reversing the decision in favor of the FTC, I’ve concluded that any antitrust body, in today’s tech economy, will have a much more difficult time proving the burden of both competitive and consumer harm than I would have thought a week ago.

I want to unpack a few things, but anyone that is desiring to go deep in the weeds like me, I recommend reading the full ruling of the reversal and the opinion of the appeals court since this may need to be referenced should any antitrust suits come against the likes of Amazon, Google, Apple, etc.

Below a few things from this reversal opinion that strike me as important to internalize.

Monopolies are Not Illegal
I’ve alluded to this point before, that many tech companies acquire dominant market position not because they acted like a monopolist but because they have superior products. In an earlier analysis on the FTC v. Qualcomm trial, I made this point which is highlighted by the FTC’s own definition of monopolization:

Obtaining a monopoly by superior products, innovation, or business acumen is legal; however, the same result achieved by exclusionary or predatory acts may raise antitrust concerns.

The US court of appeals opinion similarly underscores this point here on p.25″

“The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not [itself] unlawful; [instead,] it is an important element of the free-market system.” Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004) (“Trinko”).

“The opportunity to charge monopoly prices—at least for a short period—is what attracts ‘business acumen’ in the first place; it induces risk-taking that produces innovation and economic growth.” Id.

“To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful [under § 2] unless it is accompanied by an element of anticompetitive conduct.”

Keeping all of this in mind is incredibly important anytime we think about, or read the headlines about companies being monopolists. In many ways, all these points above resonate quite succinctly with comments both Jeff Bezos and Tim Cook have made about their passionate obsession with the customer and their drive to make the best products in the market. If they acquire dominant market positions because of that bent, there is nothing wrong with that, and the free market system encourages it. The element that then comes under scrutiny is the competitive behavior said companies with market power engage in when it comes to harming competition, which has to be followed with as harm to the consumer. In the case of both Apple and Amazon, I’m increasingly convinced any suit will have a hard time fulfilling the burden of sufficiently proving both competitive and consumer hard. Specifically, since both company’s practices, in many ways, dramatically benefit the consumer. I’m sure some will disagree with this point.

Just to emphasize what the Appeals Court opinion specifically calls out regarding my point (emphasis BOLD mine):

Accordingly, plaintiffs are required to prove “anticompetitive abuse or leverage of monopoly power, or a predatory or exclusionary means of attempting to monopolize the relevant market.” Allied Orthopedic, 592 F.3d at 1000 (quoting Foremost Pro Color, Inc. v.Eastman Kodak Co., 703 F.2d 534, 545–46 (9th Cir. 1983)); see also United States v. Grinnell Corp., 384 U.S. 563, 570– 71 (1966) (distinguishing “willful acquisition” of monopoly power from “development as a consequence of a superior product, business acumen, or historic accident”). “[T]o be condemned as exclusionary, a monopolist’s act must have an ‘anticompetitive effect’”—that is, it “must harm the competitive process and thereby harm consumers.” Microsoft, 253 F.3d at 58. “In contrast, harm to one or more competitors will not suffice.” Id.; see also Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993)

I also found this sentence helpful. Antitrust laws are directed “not against conduct which is competitive, even severely so, but [only] against conduct which unfairly tends to destroy competition itself.” Again, these cases will be quite hard to make against the bigger tech firms because of the actual competitive environment they have created from a free-market context.

A Ruling for IP Protection
Specific to Qualcomm, in this case, I want to highlight how this ruling will be seminal when it comes to IP protection. Which I think is important in the context of encouraging innovation. This ruling quite clearly justifies Qualcomm licensing business model practice. Something that has come into question frequently before and during the 2019 trial. What sat at the center of this case what Qualcomm’s dealings when it came to their contractual agreements with FRAND (Fair Reasonable and Non-Discriminatory). FRAND in itself is open to interpretation as what is fair and reasonable is entirely subjective depending on the context. Plaintiff’s complained about licensing, and royalty mandates placed on them in order to deal with Qualcomm. Qualcomm felt their IP was valuable and wanted to be fairly compensated for it. There are two sides to this coin whenever FRAND is in dispute.

Where I think this debate starts to get interesting, and it is a bit specific to Qualcomm’s IP and RND, is when it has become clear how valuable the IP and Qualcomm’s RND investment in wireless actually is. The FTC used Intel quite extensively as a case study in a company wanting to compete but being bullied by Qualcomm and making it difficult. Other cases of competitors listed were Samsung, Huawei, and MediaTek. In every case, the competition’s products were not as good as Qualcomm’s, and I don’t believe this is even disputed. Qualcomm’s negotiations in the license and royalties were not the issue competitors could not make chips that could go toe to toe with Qualcomm. It’s because wireless is exceptionally hard, and no company, other than Qualcomm, spends all its energy solely on being the best in wireless technology.

It’s worth mentioning here that even before this reversal, and even after it looked like the FTC had won, Qualcomm succeeded in acquiring every single smartphone OEM as a licensee. And just last quarter, they finally resolved a years-long battle with Huawei over licensing technology. A fundamental reason for this was 5G. Consider this point about Apple.

I have it on extremely good authority that the main reason Apple decided to finally acquire a license from Qualcomm was because of their struggles building a 5G device, and specifically around Intel’s challenges to succeed in 5G. Again, challenges Intel faced simply because this is not a core competency, not because of Qualcomm’s licensing or royalty fees. It became clear to Apple they needed Qualcomm and the access to their portfolio to get a quality 5G device out the door. I think the difficulty in 5G transition and Qualcomm’s extensive expertise and portfolio for 5G is the main reason they have now secured a license with every smartphone OEM. Again, emphasizing how difficult wireless is.

In this context, then, should any claim around FRAND interpretation be taken into consideration when it is nearly essential that the company providing the technology be involved for the OEM even to begin to compete? This is again not by nature of discriminatory practice since the US Court of Appeals’ opinion affirmed Qualcomm does not engage in OEM discriminatory practices but uses the same practices with all of them equally.

The point I’m making here is the access to Qualcomm’s SEP portfolio is essential to compete, others simply can’t without it in any meaningful way. Qualcomm’s continued investment in RND and IP is the sole reason OEMs can compete in the first place. For what it’s worth, I think it has to be taken into consideration that undoubtedly, Qualcomm’s technology enables competition AND that even those who license their technology and build competitive products still fail to compete with them at any scale. It is this point that makes this entire debate that difficult. There is not another company that can make as good of modems as Qualcomm, so whether or not they would behave in an anti-competitive way to that hypothetical competitor, we may never know.

At the beginning of the Appeals Court opinion, they make a specific point between anti-competitive and hypercompetitive practices. All the points I just made, were among those that the court reasons Qualcomm fell more into the enabling of hyper-competition and not anti-competitive practices. And the point I made about pricing and licensing, and the challenge of wireless sticks out here. Qualcomm actually makes it easier by these practices, and their spend on RND to meaningfully move forward and compete. I could argue it would be much more expensive for a company to go at it alone and attempt to spend the RND themselves necessary to compete. This is why I think this ruling is well-positioned as protection for IP business models and ultimately good for innovation in many ways.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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