Qualcomm founder takes witness stand to defend company against FTC antitrust allegations

15 January 2019 00:00 by Mike Swift

Qualcomm co-founder Irwin Jacobs, an eminence grise in the creation of modern wireless broadband service, took the witness stand in Silicon Valley today to defend his company’s patent-licensing model as one intended to seed the development of new wireless technology, not block competition.

But the former CEO was forced to admit under cross-examination from a Federal Trade Commission lawyer that there was one instance, back in 2004, where Qualcomm may have followed through on threats to cut off the supply of modem chips to a phone-maker, LG Electronics.

"Anybody who says Qualcomm has never cut off a chip shipment is wrong, according to what you just said. Isn't that right?" FTC lawyer Daniel Matheson asked Jacobs.

"It was small number of parts," Jacobs answered. "We may have cut them off. I don’t recall the details."

The acknowledgement came as Qualcomm’s antitrust trial against the FTC continued in San Jose, California. Jacobs described Qualcomm’s effort to create CDMA technology — for “Code Division Multiple Access” — in the late 1980s and 1990s. CDMA underlies the US mobile networks of Verizon and Sprint today, but Qualcomm initially faced intense skepticism the technology would work.

Jacobs said Qualcomm hit on the idea to license its patents to telecom companies such as AT&T and Nokia to bankroll research and development work. “They would take a license, and that would give us some upfront funding as a result of them taking a license. That would fund some upfront R&D,” said Jacobs, now 85.

If CDMA worked, Qualcomm reasoned it would receive ongoing patent royalties, but at a rate “that was low enough that would not impede [technological development] should this become a commercial product,” said Jacobs, who was Qualcomm’s CEO for its first 20 years, until 2005. CDMA, Jacobs said, used digital coding to hold many simultaneous “conversations with different languages,” allowing more voice and data transmission over a smaller amount of wireless spectrum.

“It’s always exciting to see something go from an idea to a project that’s very useful to people everywhere around the world,” Jacobs said. “I must admit that I still get a kick out of it when you go into a restaurant, and everybody has their cell phone out.”

The FTC key allegation in the trial, however, which began Jan. 4, is that the patent-licensing model intended to boost Qualcomm’s highly successful technology has morphed and been abused over the past decade to, as a key FTC expert witness testified today, “trip up the companies behind them.” Throughout the trial, Qualcomm lawyers have said the company never actually cut off the supply of chips, but the FTC's antitrust allegations focus on the years 2006 through 2016, and focus on CDMA chips, not the older WCDMA chips Qualcomm was selling to LG in 2004.

In direct testimony and a later cross-examination, FTC expert witness Carl Shapiro told US District Judge Lucy Koh that Qualcomm had monopoly power over CDMA modem chips and premium LTE chips through 2016, although he acknowledged that the company initially gained that market power through its own innovation. Under questioning from Koh, Shapiro said that Qualcomm’s dominance in LTE chips did not begin until 2011, because that was when the technology began to reach the market.

“Most monopolists got there by being innovative and by having really good products,” Shapiro said during his cross-examination today by Qualcomm lawyer Robert Van Nest. “That’s good. But did they then blockade others from competing?”

The answer to that question in Qualcomm’s case is yes, Shapiro said repeatedly during more than three hours of testimony today.

Shapiro, a former chief economist for the antitrust division of the US Department of Justice and currently a professor with the University of California, said Qualcomm’s “no patent license-no chips” stance damaged competition by limiting the ability of rivals to enter the market, drove up prices for phonemakers, and ultimately forced consumers to pay higher prices for smartphones and tablets.

“Qualcomm is using its market power, its monopoly power, over the chips to extract an unreasonably high royalty for their standard-essential patents, and doing that that is effectively a tax or raises the cost of its rivals, and thereby weakens them as competitors and fortifies Qualcomm’s monopoly power,” Shapiro said.

The effect of Qualcomm’s tactics was to squeeze rival chipmakers’ profit margins and limit their chip sales, and therefore reduce their incentive to do research and development to improve their products to better compete with Qualcomm. "This is kind of a headwind, if you will, that they will be facing," Shapiro said.

The deals between Qualcomm and Apple in which Apple agreed to use Qualcomm chips for the iPhone and iPad in exchange for large incentive payments have received substantial attention during the trial.

Those agreements failed to satisfy the “profit sacrifice test,” Shapiro said his analysis showed, because Qualcomm sacrificed its profits to block competitors such as MediaTek, Samsung and Intel from getting a foothold in that market. “That’s a harm to competition,” Shapiro said.

During his cross-examination from Van Nest, however, Shapiro was forced to acknowledge that Qualcomm’s market share for LTE chips in premium phones that cost $400 or more, such as the iPhone, had declined from 96.7 percent in 2014 to 81 percent in 2015 to 57 percent in 2016 — suggesting there is substantial competition in the modem chip market.

Because of the entry of those new competitors, such as MediaTek, Qualcomm did not have dominant market power in modem chips in 2017 and 2018, Shapiro acknowledged.

Van Nest also pushed Shapiro to acknowledge that he concluded in his expert report that it is “not possible to analyze [the] dynamic chip market at this time” for the emerging 5G market. That could be a key point, because the FTC needs to show that there is ongoing antitrust damage to competition and consumers.

The Qualcomm lawyer also pushed to highlight the limitations of Shapiro’s research, including that the FTC expert had not quantified how much more companies that license Qualcomm’s standard essential patents had to pay because of Qualcomm’s market dominance in chips.

“You haven’t done any quantitative analysis to determine how much of the surcharge you opine about, if any, was caused by [Qualcomm’s] chip leverage,” Van Nest said.

“I have not quantified the royalty surcharge,” Shapiro said. “But I believe it’s substantial.”

“You haven’t quantified the royalty surcharge on any other chipmaker, correct?” Van Nest persisted. Shapiro acknowledged that was true.

Intel began supplying chips to Apple with the iPhone 7 in 2016. Van Nest sought to push Shapiro to acknowledge that he did not analyze chipmakers' research and development spending. But Shapiro pushed back, arguing that a company’s overall R&D spending “is not very informative” because there are so many variables that determine those budgets.

“Qualcomm should be commended for its technical achievements. In a number of respects they were leaders and had superior products. … That’s one of the reasons they achieved market power, not the only one,” Shapiro said, summing up his testimony on redirect.

But he said the antitrust laws require that “companies that don’t have the scale are not impeded from trying to catch up and threaten and challenge the leader. In other words, if a company is ahead, it doesn’t mean they are able to trip up the companies behind them.”

And despite the difficulty of analyzing 5G development, Shapiro said, “I would expect the anticompetitive effects at issue in this case to continue in the future.”

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