Qualcomm Used Patent Monopolies To Shake Down The Entire Mobile Phone Industry For Decades

from the and-we-all-suffered dept

Just a few weeks ago, Qualcomm and Apple settled a massive patent dispute on the eve of a trial. In the run-up to the settlement, Apple had made a really compelling case that Qualcomm's practices involve blatant abuse of its patents to jack up prices to insane levels and to limit any real competition. Just recently we wrote about how media-tracking giant Nielsen was abusing patents for anticompetitive purposes, but they looked like blatant amateurs compared to Qualcomm. As we noted in that post, our founding fathers worried quite a bit about the impact of patent monopolies and how they would stifle innovation and competition. James Madison said:

"But grants of this sort can be justified in very peculiar cases only, if at all; the danger being very great that the good resulting from the operation of the monopoly, will be overbalanced by the evil effect of the precedent; and it being not impossible that the monopoly itself, in its original operation, may produce more evil than good."

And Thomas Jefferson, who grudgingly ran the patent system for a while (and where he tried to institute rules to prevent abuse) seemed to regret the entire concept of patents:

... generally speaking, other nations have thought that these monopolies produce more embarrassment than advantage to society; and it may be observed that the nations which refuse monopolies of invention, are as fruitful as England in new and useful devices.

But one quote regarding such monopolies that sticks most with me is that of UK Parliament member Thomas Macauley, who gave a famous speech in 1841, in which he declared:

Sir, that I may safely take it for granted that the effect of monopoly generally is to make articles scarce, to make them dear, and to make them bad...

He further noted that if there is a case that the only way to remunerate people is through such a monopoly they may grudgingly be granted, but warns of the evil this will enable if allowed to do more than incentivize the original creation:

It is good that authors should be remunerated; and the least exceptionable way of remunerating them is by a monopoly. Yet monopoly is an evil. For the sake of the good we must submit to the evil; but the evil ought not to last a day longer than is necessary for the purpose of securing the good.

I'm thinking about these quotes, yet again, in relation to Qualcomm. Just a month after settling the lawsuit with Apple, a federal judge in an ongoing antitrust lawsuit filed by the FTC, laid out in massive detail just how evil Qualcomm has been in using its monopoly powers to stifle innovation and competition. The 283-page ruling is incredibly damning -- and if you don't feel like reading the whole thing, Tim Lee over at Ars Technica has an only slightly shorter summary of just how Qualcomm's shake down scam worked.

I read every word of Judge Koh's book-length opinion, which portrays Qualcomm as a ruthless monopolist. The legal document outlines a nearly 20-year history of overcharging smartphone makers for cellular chips. Qualcomm structured its contracts with smartphone makers in ways that made it almost impossible for other chipmakers to challenge Qualcomm's dominance. Customers who didn't go along with Qualcomm's one-sided terms were threatened with an abrupt and crippling loss of access to modem chips.

"Qualcomm has monopoly power over certain cell phone chips, and they use that monopoly power to charge people too much money," says Charles Duan, a patent expert at the free-market R Street Institute. "Instead of just charging more for the chips themselves, they required people to buy a patent license and overcharged for the patent license."

Qualcomm -- which it should be noted has been one of the most aggressive agitators against patent reform (and sometimes in favor of making patent law much, much worse) -- is basically the world's largest patent troll, and it loved every minute of it.

Qualcomm's patent licensing fees were calculated based on the value of the entire phone, not just the value of chips that embodied Qualcomm's patented technology. This effectively meant that Qualcomm got a cut of every component of a smartphone—most of which had nothing to do with Qualcomm's cellular patents.

"Qualcomm charges us more than everybody else put together," Apple executive Jeff Williams said. "We've never seen such a significant licensing fee tied to any other IP we license," said Motorola's Todd Madderom.

And, of course, Qualcomm leveraged its position to hold everyone over a barrel:

These high royalties reflected an unusual negotiating tactic called "no license, no chips." No one could buy Qualcomm's cellular chips unless they first signed a license to Qualcomm's patent portfolio. And the terms of these patent deals were heavily tilted in Qualcomm's favor.

Once a phone maker had signed its first deal with Qualcomm, Qualcomm gained even more leverage. Qualcomm had the right to unilaterally terminate a smartphone maker's chip supply once the patent licensing deal expired.

"If we are unable to source the modem, we are unable to ship the handset," said Motorola executive Todd Madderom in a deposition. "It takes many months of engineering work to design a replacement solution, if there is even a viable one on the market that supports the need."

That made Qualcomm's customers extremely vulnerable as they neared the expiration of a patent licensing deal. If a customer tried to negotiate more favorable terms—to say nothing of formally challenging Qualcomm's patent claims in court—Qualcomm could abruptly cut off the company's chip supply.

And, of course, Qualcomm used this power to crush the competition and stamp out any kind of non-Qualcomm innovation.

Qualcomm's first weapon against competitors: patent licensing terms requiring customers to pay a royalty on every phone sold—not just phones that contained Qualcomm's wireless chips. This gave Qualcomm an inherent advantage in competition with other chipmakers. If another chipmaker tried to undercut Qualcomm's chips on price, Qualcomm could easily afford to cut the price of its own chips, knowing that the customer would still be paying Qualcomm a hefty patent licensing fee on every phone.

Also notable: right after Apple and Qualcomm settled their legal dispute in April, Intel announced it was exiting the mobile 5G chip space, and admitted it was entirely because of that settlement:

“In light of the announcement of Apple and Qualcomm, we assessed the prospects for us to make money while delivering this technology for smartphones and concluded at the time that we just didn’t see a path,” [Intel CEO Bob] Swan said.

And the ruling a month later made clear, Qualcomm's patent attack against Apple was very much driven by fear of competition from Intel:

Freed of Qualcomm's chip supply threat, Apple began to challenge Qualcomm's high patent royalty rates. Qualcomm responded by cutting Apple off from access to Qualcomm's chips for new iPhone models, forcing Apple to rely entirely on Intel for the cellular chips in its 2018 models. Qualcomm sued Apple for patent infringement in courts around the world, while Apple pressed the Federal Trade Commission to investigate Qualcomm's business practices.

And, of course, Qualcomm has long used its patents to directly stifle any competition as opposed to the indirect versions described above:

Chipmakers are ordinarily expected to acquire patents related to their chips and indemnify their customers for patent problems. But Qualcomm refused to license its patents to competitors, putting them in a difficult position.

"The prevailing message from all of the customers I engaged with was that they expected us to have a license agreement with Qualcomm before they would consider purchasing 3G chipsets from MediaTek," said Finbarr Moynihan, an executive at chipmaker MediaTek.

If a chipmaker asked to license Qualcomm's patents, Qualcomm would only offer a promise not to sue the chipmaker itself—not the chipmaker's customers.

As Tim Lee highlights, Qualcomm was so comically evil in executing this plan, it literally laid out the details of how to starve MediaTek (MTK) in a PowerPoint presentation:

This is summarized in the judge's opinion:

The slide includes the strategy “make sure MTK can only go after customers with WCDMA SULA,” with an arrow leading to “Reduce # of MTK’s 3G customers to ~50.”... The next strategy is “Formulate and execute a GSM/GPRS strategy to destroy MTK’s 2G margin & profit,” with an arrow to “Take away the $$ that MTK can invest in 3G.” .... Thus, Qualcomm’s refusal to license MediaTek was designed to (and in fact did) limit MediaTek’s customer pool and reduce MediaTek’s revenue base to invest in future cellular generations.

There's a LOT more in the ruling by Judge Lucy Koh and it basically lays out a road map of pure evil by Qualcomm, allowing it to skim a ton of (literal) monopoly rents off the entire mobile phone market, even when its own innovations were a minimal part of that market -- while at the same time abusing its patent position to deliberately stifle competition and innovation. The court order says that Qualcomm needs to renegotiate its licenses, and can no longer use its "no license, no chip" deals that block customers from buying Qualcomm chips if they don't have a license.

Of course, Qualcomm won't go down without a fight, and has announced that it's appealing the ruling. So this will go on for some time. But if you ever want a pure example of the "evil" created by excessive patent monopolies, Qualcomm is about as pure an example as you can find.

Filed Under: antitrust, extortion, licensing, lucy koh, mobile phones, monopolies, no license no chips, patents, shake down
Companies: apple, intel, mediatek, qualcomm