Qualcomm Takes Hit in EU -- WSJ

By FeaturesDow Jones Newswires

Antitrust regulator fines chip maker $1.23 billion over Apple supply pact

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 25, 2018).

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The European Union again flexed its legal muscle against a U.S. tech giant by hitting Qualcomm Inc. with a EUR997 million ($1.23 billion) antitrust fine on Wednesday for payments it made to Apple Inc. for the device maker's exclusive use of Qualcomm chips.

EU antitrust chief Margrethe Vestager said Qualcomm had abused its dominant position by paying billions of dollars to Apple from 2011 to 2016 on the condition it wouldn't buy from rivals, hindering competition in the market for so-called baseband chips, which connect smartphones and tablets to cellular networks. The illegal payments were made directly rather than through discounts, the EU said.

"These payments were not just reductions in price -- they were made on the condition that Apple would exclusively use Qualcomm's baseband chipsets in all its iPhones and iPads," Ms. Vestager said. "This meant that no rival could effectively challenge Qualcomm in this market, no matter how good their products were."

Qualcomm, the world's largest supplier of baseband chips, said it "strongly disagrees with the decision" and would appeal to the EU's second-highest court.

The company would still have to comply with the EU's decision during an appeal. Qualcomm has three months to pay Brussels, but pending the outcome of an appeal it has the option of transferring a bank guarantee.

Qualcomm joins other U.S. tech giants that have felt the heat from the EU's antitrust authorities in recent years. The commission last summer fined Alphabet Inc.'s Google EUR2.42 billion for abusing its dominance with its shopping service and in 2016 ordered Apple to return EUR13 billion in allegedly unpaid taxes to Ireland. The companies are appealing those decisions.

"This is a huge fine by any standards and shows that Commissioner Vestager is starting 2018 very aggressively," Assimakis Komninos, a Brussels-based partner at global law firm White & Case, said of the Qualcomm fine.

The decision has no repercussions for Apple because the accusations don't point to the existence of a cartel.

The EU's move Wednesday, which is the culmination of a probe opened in 2015, fits into a broader strategy to boost and improve digital markets across the bloc's 28 member states. As part of that project, the European Commission, the bloc's executive, has pursued strict privacy legislation, antitrust investigations and other rules that would rein in the behavior of large U.S. tech companies.

The Qualcomm fine follows a decision last week by the EU regulator to clear the company's acquisition of NXP Semiconductors NV but only under strict conditions. A separate EU antitrust investigation is continuing over whether Qualcomm sold baseband chips below cost to force a competitor, Icera Inc., out of the market.

Wednesday's decision pertains to an agreement Qualcomm signed with Apple in 2011, under which the chip maker committed to pay the iPhone maker on the condition it would use only Qualcomm's chips in its devices. Two years later, the contract was extended until the end of 2016. The EU declined to say how much Qualcomm paid Apple.

In their agreement, Qualcomm spelled out that it wouldn't only cut off payments but also require the return of large chunks of past payments if Apple decided to use a rival's chips.

The company entered into the contract with Apple as a way to protect investments it had to make to produce an unguaranteed amount of chips that met Apple's specific standards, Qualcomm general counsel Don Rosenberg said in an interview.

"Apple always likes to have its own particular version, so we have to make an enormous investment in producing what they want," Mr. Rosenberg said of the exclusivity payments to Apple. "We want to make sure that we're protecting ourselves so that we will recover that investment."

An Apple spokesman declined to comment.

Qualcomm said it continues to supply baseband chips to Apple for its products. The companies no longer have an exclusivity payment agreement with each other, according to an EU official.

The commission said Apple at one point considered switching to chips from Intel Corp. but initially decided against doing so largely because of the agreement with Qualcomm, the EU said. Apple eventually started sourcing some of its chips from Intel in the fall of 2016, shortly before the contract with Qualcomm was due to expire.

The EU action adds to a string of bad news for Qualcomm, which has been locked in a wider legal battle involving its licensing practices. The San Diego-based company earns most of its profits from charging handset makers royalties for using its cellular patents.

Apple has made complaints about Qualcomm's licensing, and regulators in several countries have taken the chip maker to task.

The Taiwanese government last year fined Qualcomm $773 million over its patent practices, after South Korea had imposed an $853 million fine the previous year. China fined Qualcomm $975 million in 2015.

A suit is pending by the U.S. Federal Trade Commission, which has homed in on Qualcomm granting partial relief to Apple for high royalties on the condition it exclusively use Qualcomm's chips.

Qualcomm has contested these actions, saying they are based on misconceptions and flawed legal reasoning, and that its business practices are fair and legal.

The litany of attacks depressed Qualcomm's stock price, paving the way for Broadcom Ltd. to initiate a hostile takeover bid in November. Qualcomm has so far rejected Broadcom's $105 billion offer in what would be the biggest-ever tech deal.

Broadcom is also under investigation by the Federal Trade Commission over whether it engaged in anticompetitive tactics in negotiations with customers, The Wall Street Journal reported last week. Broadcom in response said the review was "immaterial to our business, does not relate to wireless and has no impact on our proposal to acquire Qualcomm."

Tripp Mickle contributed to this article.

Write to Natalia Drozdiak at natalia.drozdiak@wsj.com and Ted Greenwald at Ted.Greenwald@wsj.com

(END) Dow Jones Newswires

January 25, 2018 02:47 ET (07:47 GMT)

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