The ongoing saga between FTC and Qualcomm
It is unbelievable when one of the world’s richest companies complains that it is an undue burden to pay for the innovations that power its high margin products. But it sure looks like a well-orchestrated war on innovation with sinister motives, when a government agency such as the FTC (Federal Trade Commission) joins hands with it in beating down its much smaller (10x) supplier that is a proven technology pioneer.
I am talking about the trial that is underway between the FTC and Qualcomm in the U.S. District Court in San Jose, California. I am not a lawyer, instead, a passionate engineer who was part of the 2G, 3G, 4G, and now 5G transitions. I know first-hand what it takes to conceive, build, and deploy wireless technologies. Here are my thoughts on this legal tussle and its potential consequences.
Wireless communication, especially for broadband data, is a fascinating invention that it is largely invisible—literally and metaphorically. Unlike beautiful smartphone screens, artful industrial designs, or clever apps, wireless has been an enigma attracting little attention or appreciation. You only realize its importance when out of coverage! Oh, the agony, the insecurity, and the fear of missing out! The device is called a smart “phone” for a reason: without the “phone” functionality, most of those smarts have little value!
“Wireless data” is the defining technology of the smartphone, not just another feature
Why am I explaining the importance of wireless data? In the current FTC trial, the Commission’s lawyers and witnesses put forward two complaints: 1) Licensing fees should be based on the modem’s price, not that of the device, and 2) Qualcomm’s licensing fees are too high. Looking at the first, wireless data is the fundamental and defining technology of any smartphone. Also, it is a misconception to think that wireless data technology is only contained within the “modem” block. In reality, the functionality is the result of a comprehensive system design that makes the smartphone work as a complete device, with all subsystems and software in it. Additionally, the design includes complex interactions with numerous infrastructure and network (radio, core, and cloud) elements to function as a well-orchestrated system. So, it would be disingenuous and utterly ridiculous to limit the value of all of this technology to a small percentage of the price of a modem.
On the licensing fees argument, fees should be determined by the value the technology imparts to the overall usefulness of the device, and not correlated with a single isolated part. Also, the valuation of wireless technology should be market-driven, not arbitrarily or subjectively determined by the FTC or other regulatory authority. If you accept the notion of regulatory price-fixing, then why stop with Intellectual Property (IP)? Why not also regulate the price of smartphones? If you look at the recent price increases, it may not be a bad an idea after all! Jokes aside, as witnessed by the spectacular proliferation of smartphones over the last decade, market pricing of wireless technology IP has benefited the mobile industry and the consumers.
The value of Qualcomm’s IP has been accepted by most of the industry, as illustrated by more than 300 negotiated licenses. Moreover, after a lengthy investigation by and negotiations with the Chinese regulator, the NDRC (National Development and Reform Commission), Qualcomm agreed to a settlement that included rates deemed fair by the Chinese agency. It is telling that even Chinese OEMs agree that the licensing rates are fair, despite these OEMs having far thinner margins and much smaller scale than Apple, who makes most of the mobile industry’s profits (almost 90% by some estimates). So, it would seem that the subjective claim of Apple–“license fees are too high”–doesn’t pass the sniff test. It is interesting to note that many of FTC’s witnesses in the trail, such as Huawei, Apple, and Intel, are Qualcomm’s arch-rivals.
Will the FTC case against Qualcomm help or harm consumers?
Let’s examine the premise of this case and how it relates to FTC’s mission, which is to ensure fair competition so that consumers benefit from wider choices and lower prices.
When you look at the US smartphone market, there are two dominant players, and others are smaller, emerging players. I believe any negative action by FTC will further exacerbate this situation by eliminating these smaller players. Wireless innovation is extremely hard, time-consuming, and capital intensive. Qualcomm invests billions of dollars in R&D every year. A lot of this investment is done very early, years before a market even exists, which means there are significant risks involved. For example, Qualcomm has been investing in 5G since 2014, and commercial devices will only start entering the market in 2019 and 2020. For a company like Qualcomm, the only way to recoup such large, ongoing investments is to license its technology to as many smartphone OEMs as possible. Moreover, most of these OEMs don’t have the money to do their own R&D, and they rely on Qualcomm’s innovations to cost-effectively compete with the big OEMs. This creates a vibrant, highly competitive marketplace that offers consumers a wider range of choices and affordable prices, the ultimate goal of FTC. A great example of this is 4G LTE, which enabled many new and very innovative smartphone OEMs to enter the market. They are growing stronger and are expected to be formidable competitors in 5G. The virtuous cycle repeats as Qualcomm reinvests large portions of its licensing revenue back into R&D to offer a continuous stream of innovations.
In the absence of an entity like Qualcomm, most OEMs would be deprived of new technologies. Only a few big OEMs would be able to invest billions into technology development, and it’s unlikely that these vertically-integrated players would share most of their technology with others. Most other OEMs would not be able to afford to invest on their own and probably exit the market. This outcome would be the opposite of the FTC’s mission. If you don’t believe this, look at how aggressively Apple, Samsung, and Huawei have been trying to vertically integrate by either acquiring or building as much of their own technology as possible.
Beware of the consequences
Any attempt to trivialize or delegitimize Qualcomm’s IP and its role in the industry will have a long-lasting impact not only on the smartphone market but on the entire tech industry. If the FTC undermines companies’ ability to earn rewards for the investments, or worse, arbitrarily caps the value of their technology, it will discourage the American innovation and severely curtail the flow of capital to those innovations. Small and medium-sized companies that are the backbone of this innovation engine will be the most affected. So, in essence, this trial may (unwittingly?) amount to a war on the American innovation engine, and a negative outcome will ultimately hurt American consumers by decimating competition and choice in the marketplace; this is the antithesis of the FTC’s very existence and charter.
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