What the Qualcomm Antitrust Decision Means for Your Smartphone

In a much anticipated ruling this week, a federal judge found that cellphone chipmaker Qualcomm unlawfully squeezed out rivals and charged excessive royalties to manufacturers such as Apple.

U.S. District Judge Lucy Koh of the Northern District of California issued a 233-page ruling late Tuesday night in favor of the Federal Trade Commission's antitrust allegations and ordered that Qualcomm, which manufactures nearly all the chips in smartphones, must go back and renegotiate its licensing deals.

"It's a decision that has really global effects," said Mike Swift, chief global digital risk correspondent for MLex, a technology and legal publication.

At the crux of this fight and other related fights is Qualcomm's business model and the company's hold on the smartphone market.

Based in San Diego, Qualcomm is the world's largest maker of mobile chips. It created some of the technology integral to cellular networks and holds patents on a range of cellphone technology, including key 3G, 4G and 5G networking components. Because of those patents, all smartphone manufacturers have to pay a licensing fee to Qualcomm, whether they use the company's chips or not.

Qualcomm also has a "no license, no chip" policy, which requires phone manufacturers to pay for an exclusive license in order to buy their chips.  Additionally, Qualcomm has refused to license its patents to rival chipmakers. The company has typically set licensing fees at 5% of the price of the mobile device — something Apple took issue with, arguing that features that make a phone more expensive may have nothing to do with Qualcomm's technology.

According to Swift, two examples stood out to Judge Koh during the trial, which wrapped up testimony in January. In one instance, Samsung attempted to create a cooperative agreement with some manufacturers in Japan to create their own modem technology, but said it abandoned the effort because of Qualcomm's hold on the market. In the other instance, Apple executives testified that they aimed to have multiple suppliers for every part in their phones in order to improve price and quality, but that they were forced to sign an exclusive deal with Qualcomm to provide chips. (Apple recently, while fighting with Qualcomm, also signed a deal with Intel to supply some of its chips.)

Koh, who has overseen a number of smartphone cases, ruled that Qualcomm must:

• renegotiate its licensing deals with customers, without conditioning the supply of chips on their licensing status
• license its patents to rival chipmakers at fair prices
• not sign exclusive agreements that block competitors from also selling chips to smartphone makers like Apple
• submit to FTC monitoring for seven years

"What she's trying to achieve is to inject competition back into the market," said Swift of Koh's decision. "But it's not going to mean a dramatic drop in prices of smartphones."

"We strongly disagree with the judge's conclusions, her interpretation of the facts and her application of the law," Qualcomm general counsel Don Rosenberg said in a statement.

Qualcomm said it will appeal the decision, suggesting the case could still take a few years to resolve. Swift said that means there will likely be no big price drops overnight.

If and when the decision goes into effect, it's not clear what company could immediately step in to compete against Qualcomm in the smartphone chip market, especially in the 5G space.

Apple and Qualcomm Settle

Last month, a separate lawsuit over some of the technology that enables iPhones to connect to the internet was settled between Apple and Qualcomm — with Apple agreeing to pay Qualcomm an undisclosed amount and to continue buying Qualcomm's chips.

The settlement "took the air out of the room for other chipmakers," said Swift, because of the market share that iPhones enjoy.

For the last few years, Intel had been providing 3G and 4G chips to Apple, but immediately after the settlement announced it would not enter the 5G market — leaving just Qualcomm in the burgeoning 5G space.

After Tuesday's antitrust decision, Swift spoke with Intel, but said the company would not comment on whether it will change its decision regarding making 5G chips. Swift said that other companies that could potentially compete with Qualcomm include Samsung, MediaTek and a few large China-based companies, such as Huawei.

Qualcomm has justified its pricing system as a way to recoup the $40 billion it spent over several decades developing wireless technology now essential to smartphones.

Koh's decision could have geopolitical ramifications: If Qualcomm suffers a hit to its profitability, it could mean less spending on research and development at a time when the U.S. is racing China to update to 5G.

"The Trump administration views Qualcomm as almost the crown jewel for the U.S. in terms of U.S. technology development. Similar to the way China views Huawei," said Angelo Zino, an analyst with research firm Center for Financial Research and Analysis. "It will be interesting to see if this gets revisited."

The Trump administration's attitude can be seen in a case from last year, when it blocked Singapore company Broadcom from buying Qualcomm over concerns about national security and who would dominate 5G technology. Earlier this week, an administration ban on doing business with Huawei also led to Google ending the licensing of its Android operating system to the Chinese phone company.

Additional reporting by Tali Arbel and Michael Liedtke, Associated Press.

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