The costs of harming Qualcomm
Judge’s decision in antitrust suit could undermine national security
As the U.S. and China careen toward an increasingly adversarial relationship, a national security question looms: Can our country maintain leadership developing, using and deploying key technologies such as 5G, artificial intelligence and robotics? One important drama playing out in U.S. District Court in San Jose will help answer that question for 5G, the foundation of many other new technologies, in which the Sino-American contest is proxied by corporate entities — Huawei for China and San Diego-based Qualcomm for the United States.
Qualcomm stands accused by the Federal Trade Commission, with the active support of Apple and key testimony by Huawei, of overcharging for its industry-founding intellectual property backed by the alleged threat to withhold its industryleading microprocessor chips. If Judge Lucy H. Koh’s ruling, which could happen soon, goes against Qualcomm, a harmful blow could be dealt to the California tech company that has powered the United States’ global competitiveness in wireless technology.
Qualcomm, one of America’s most innovative companies, delivers the technologies underneath many of the smartphone features that consumers value and appreciate most, such as fast data rates, mobile video, GPS navigation, location tracking and more. A very large patent portfolio underpins, and protects, Qualcomm’s vast investment in those technologies.
From its early days, Qualcomm followed the industrystandard practice of licensing these technologies to devicemakers. Later, after Qualcomm started developing chips, Qualcomm adopted industrywide licensing practices that resulted in a reasonable policy that a user of its intellectual property, such as a device-maker, must have a Qualcomm patent portfolio license to buy Qualcomm chips. It is to this practice that the FTC has objected, claiming that Qualcomm’s business model is anti-competitive.
Since by law the FTC regulates competitive conditions, not prices, the commission somewhat dubiously argues that Qualcomm has too much bargaining leverage against Apple and other device-makers, such as Huawei. For example, to reach this conclusion, the FTC arbitrarily segments the market for LTE chips into premium and nonpremium, confines its focus to the premium space where Qualcomm has been successful, then ignores the competitive forces at work in that space, where Qualcomm faces competition not only from MediaTek, Samsung and Intel, but Huawei. (Ironically, Apple dialed down the performance of the Qualcomm chips it puts into its iPhones so that unlucky consumers who got an iPhone with an Intel chip inside wouldn’t notice the slower speed relative to the equivalent Qualcomm-powered iPhones.)
California’s tech companies, big and small, should shudder at the FTC’s “tunnel vision” because highly innovative firms could easily be accused of monopoly in gerrymandered markets, possibly resulting in overturned business models. Bad theories leveraged against innovative firms do not make for sound antitrust policy nor, when those rivals are geopolitical stand-ins for large powers, for sensible national security policy.
Qualcomm’s evident licensing aim is to get Apple — and all users of its technology, whether in America, Europe or in China — to pay for the use of that technology. Patents are not self-enforcing and Judge Koh (if not the FTC) should recognize that Qualcomm’s business model is simply trying to get reluctant and recalcitrant infringers to pay a price sufficient to support the R&D investments needed to propel the industry forward. Without that support, the innovation will not be made in the USA. It is precisely here that an ill-conceived antitrust suit undermines national security.
The regulatory excess on display in FTC vs. Qualcomm would be less troubling if in March 2018 the Committee on Foreign Investment in the United States (CFIUS) had not already explicitly recognized, in blocking an acquisition of Qualcomm by Broadcom, that “a reduction in Qualcomm’s long-term competitiveness ... would significantly impact U.S. national security.” The judgment was that even though Broadcom was Singaporebased, the research contribution made by Qualcomm was simply too important to the U.S. national security to risk such offshore ownership. So now, what Broadcom could not do by acquisition, our own FTC may accomplish through a lawsuit.
There is little doubt that if Judge Koh enters an injunction dissolving Qualcomm’s business model, which is what the FTC has requested, all licensees will cease paying their agreed-upon royalties, and Qualcomm will in short order be in financial distress. And with the FTC and CFIUS at odds and no institutional mechanism to iron out their differences, U.S. national interest may also become a victim.
In sum, it would be selfdefeating, if an effort to resolve an ill-considered antitrust action ended by seriously compromising America’s global competitiveness and national security interests, especially as our confrontations with China over tech theft, trade inequities, the South China Sea, Taiwan and myriad other issues show every sign of becoming more belligerent.
David Teece is a professor at the Institute for Business Innovation, Haas School of Business, UC Berkeley, and chairman of the Berkeley Research Group. Orville Schell is the director of the Center on U.S.-China Relations at the Asia Society.