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What it all boils down to in FTC vs. Qualcomm

Mike Freeman, The San Diego Union-Tribune on

Published in Business News

In the recent antitrust trial attacking Qualcomm's business model, the U.S. Federal Trade Commission drilled down on how the San Diego company leveraged its market power in certain cellular chips to gain the upper hand in patent licensing negotiations with smartphone makers.

It's textbook economics that this type of strong-arm behavior leads to bad things, such as fewer competitors in the smartphone chip market and reduced research and development spending.

In theory, the result over time should be higher smartphone prices, fewer choices and lower quality devices.

But that hasn't happened. In fact, the opposite occurred from 2006 to 2017 in the smartphone market -- roughly the period during which the FTC alleges Qualcomm abused its market dominance in 3G CDMA and premium 4G LTE cellular processors to overcharge for patents.

Smartphone shipments grew from 124 million in 2007 to 1.5 billion in 2017, according to industry research firm IDC. The total value of those shipments jumped from $52 billion in 2007 to $452 billion in that time frame.

Adjusted for better cameras, faster download speeds and other features found in today's smartphones, prices have fallen. And the average price of transferring a megabyte of wireless data has plummeted from $8 in 2006 to one cent in 2016.

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Today, Samsung, MediaTek, Huawei and Intel have significant market share for cellular modem processors. Qualcomm's piece of the overall market is below 40 percent.

And research and development spending by chip design firms -- not only Qualcomm but its competitors -- ranks "among the highest you'll see anywhere outside of pharmaceuticals," said Jonathan Barnett, a professor at the University of Southern California Gould School of Law.

The anti-competitive effect of Qualcomm's business practices is a hurdle the FTC must clear to prove the company violated monopoly laws. It likely will be front and center when U.S. District Judge Lucy Koh eventually makes a ruling in the case.

"The FTC seems to argue that no license, no chips is inherently anti-competitive, and they believe they have economic textbooks backing them up ... and look at all these examples of people complaining that they paid too high a royalty rate," said David Reichenberg, a lawyer who specializes in antitrust cases with the Cozen, O'Connor firm in New York.

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