As consumers open their wallets to buy the latest and greatest smartphones, tablets and other electronic devices, they may not realize that bad actors in the patent space are inflating the price of these devices, and costs could soon be going up, if Qualcomm gets its way.
Earlier this month, Qualcomm filed a complaint with the U.S. International Trade Commission (ITC) against Apple calling on the regulator to block the importation of all Apple devices that do not use Qualcomm’s licensed chips, claiming that Apple had infringed on its patents.
That action by Qualcomm represents a distraction from the real story here – the mounting evidence that Qualcomm appears to be abusing its market power, attempting to shut out competitors to protect its “modem chip” monopoly, and overcharging manufacturers -- all in the process of ignoring its obligations to license its intellectual property that has been deemed “essential” to a technology standard. Standard essential patents (SEPs) are required to be licensed under fair, reasonable and nondiscriminatory terms (FRAND) – a proven system that drives innovation.
The Qualcomm ITC complaint appears to be a retaliatory reaction against of series of lawsuits and regulatory investigations calling into question Qualcomm’s irregular licensing practices. In January, The U.S. Federal Trade Commission filed a complaint with the U.S. District Court in the Northern District of California claiming that Qualcomm employs “strong-arm” tactics – using exclusivity deals that give rebates to manufacturers who refuse to use competitive chipsets. Fortunately, Judge Koh of California’s Northern District rejected Qualcomm’s motion to dismiss the case last month. Both parties will now address the merits of this case.
Also in January, Apple filed a $1 billion lawsuit against Qualcomm, claiming it engages in anticompetitive tactics to preserve its monopoly on chipsets used to connect electronic communications devices, like iPads and iPhones, to wireless networks. In the suit, Apple claimed, among other things, that it was overcharged for patent royalties, and that Qualcomm had refused to pay rebates that it had promised to Apple.
In addition, Apple claimed it was also being overcharged because Qualcomm collects its patent royalties, not based on the number of devices sold, but as a percent of the device’s final sale price. This allegation means that an iPhone with more features and functions will cost substantially more than a cheaper off-brand phone – even when both high-end and low-end manufacturers use the exact same Qualcomm chip.
In effect, high-end mobile devices are being overcharged, and these extra manufacturing costs are being passed through to consumers in the form of higher prices. It is price discrimination and completely at odds with Qualcomm’s obligation to license its SEPs on a nondiscriminatory basis under FRAND.
In addition, Apple also claimed it was pressured by Qualcomm to provide “false information” to the South Korean Fair Trade Commission (KFTC), the Korean’s antitrust regulator. Announced last December, that investigation resulted in the KFTC fining Qualcomm $865 million for licensing abuses.
But wait there’s more. In February of 2016, the Chinese antitrust regulator fined Qualcomm $975 million and required them to lower their royalty fees. Intel and the Computer & Communications Industry Association (CCIA) have also stated that that Qualcomm overcharges its customers. In addition, competition authorities in Taiwan, Japan and Europe are also taking a closer look at Qualcomm’s business practices.
With mounting pressure from the FTC, private lawsuits, and foreign antitrust agencies, Qualcomm’s complaint with the ITC against Apple seems to be a mere distraction, though it too has the potential to further impede market competition and increase consumer costs. Specifically, Qualcomm’s complaint seeks to block imports of Apple devices and sales of devices already in the country. Not surprisingly, Qualcomm only singles out blocking those devices that use its competitors’ chipsets.
One criteria in deciding whether regulators should block apple products is whether such an action would have adverse effects on consumers. In its complaint, Qualcomm claims that blocking Apple devices would have no consumer impact. Think again. Any time you reduce supply, prices will go up. Moreover, the substitute devices that eventually come onboard will have – you guessed it – Qualcomm chips. This move would preserve Qualcomm’s monopoly and raise consumer prices.
Blocking smartphones and tablets products would clearly reduce consumer choice and economic welfare. That, in fact, is the view of the CCIA, Intel and the App Association, which separately concluded that excluding these devices from the market would limit consumer choice, raise market prices and maintain Qualcomm’s monopoly.
Consumers are quick to embrace new devices and new technologies, and the amazing pace of innovation shows no slowdown in sight, if access to essential technologies is not impeded. Regulators and legislators can protect consumers by reducing Qualcomm’s market power, ending anti-competitive business tactics, and increasing market competition -- or else consumer prices are sure to rise. Consumers deserve better.
Steve Pociask is president of the American Consumer Institute, a nonprofit educational and research organization. For more information, visit www.theamericanconsumer.org or follow me @ConsumerPal.