In the high tech arena, it’s not your grandfather’s competition policy anymore — inevitably, national security, industrial policy, and the race with China form a backdrop to policy and legal spats. For instance, Qualcomm won a decisive victory over Apple last week, when Apple threw in the towel and agreed to a settlement highly favorable to Qualcomm. In applauding the settlement and warning the government to back off further attacks on Qualcomm, The Wall Street Journal warned that such brawls were “making the US less competitive in the global 5G arms race.”
Briefly, the bitter battle between the two companies stemmed from Apple’s charge that Qualcomm had abused its market power and overcharged customers for chips and modems, forcing them to pay excessive patent licensing fees — even when a product wasn’t using Qualcomm equipment. Apple had withheld paying billions of dollars in royalties to Qualcomm as the fight proceeded, and last year had contracted with Intel for advanced 5G chips.
But, as noted by the Journal, looming behind the dispute were the exigencies of 5G competition, and Apple found itself increasingly losing ground. The company’s attempt to foster competition through contracting with Intel was failing. Intel’s mobile chips were proving inadequate, with customers complaining about the quality of iPhones equipped with them. Further, Apple was behind its rivals, Huawei and Samsung, in bringing out new iPhones more fully equipped for 5G tasks. In the end, Apple capitulated, and made a deal with Qualcomm. It scrapped it arrangement with Intel, agreed to pay back the withheld funds, and contracted to use Qualcomm chips in in future 5G-ready phones. In turn, Intel announced that it was exiting the market for phone modems.
Qualcomm’s stock has jumped over 20%, and the company says that it expects that the Apple decision will pave the way for a similar agreement with Huawei, which has also challenged Qualcomm’s pricing strategy. But the company is not out of the woods yet. Pending also is a suit brought by the Federal Trade Commission, which is challenging Qualcomm’s business model of building an advanced patent portfolio and profiting from licensing fees for its chips and modems. Half of Qualcomm’s revenue stems from this source.
The Journal’s Editorial Board strongly urges the FTC to desist. Even if Qualcomm had extracted “monopoly rents,” it argues the market will “self-correct,” citing new competition from other companies. Yet in the past the newspaper itself has posited that that market considerations are not always paramount with the regard to Qualcomm (without admitting that this smacks of “national champion” thinking). When Broadcom launched a takeover bid for Qualcomm — which seemingly had wide stockholder support — the Journal held that due to Qualcomm’s central place in the 5G competition with China, national security considerations might trump the market.
Further, though Apple’s attempt to introduce greater competition in the wireless modem market by bolstering Intel failed (Apple based a good deal of its public defense on the attempt to avoid having a single source for 5G chips), the push for multiple source equipment makers goes beyond this episode. As the Trump administration presses European governments to eliminate Huawei products from their 5G rollout, governments and telecoms operators are resisting, in part because they want to retain Huawei as a competitor to Ericsson and Nokia. In February, at the behest of the European operators, the GSMA, the international association of mobile operators, stated in a public letter: “robust competition among network infrastructure suppliers is essential to European operators’ ability to deliver innovative services to European citizens.” In this case, national security warnings are being balanced against competitive imperatives.
Finally, closer to home, T-Mobile and Sprint have made the 5G race and competition with China a central element of their defense of a proposed merger. So far the Department of Justice is still skeptical, but in the end it will have to balance competitive pros and cons of reducing major US wireless operators from four to three, against Sprint’s dire (and contested) warning that it cannot achieve this goal on its own.
Welcome to the complex world of competition/industrial/security policy.