America's biggest, quietest tech monopoly has finally come under fire.
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If you made a cell phone call this year, you probably used a Qualcomm chip. The company makes the best modems to connect to cellular networks, but according to a federal complaint, it's also spent years twisting arms and threatening partners to make sure that none of its competitors get a chance to do so.
Apple then trotted up behind the FTC with a similar, but much less consumer-friendly complaint that could lead to lower-quality iPhones. Together, the two complaints are going to provide the first big test of President Donald Trump's competition policy. In short: is a monopoly okay if it keeps business in America?
Qualcomm Holds Verizon's Phone
Both complaints start with the fact that if you want to connect to Verizon or Sprint's networks, you have to go through Qualcomm.
President Trump has said he's going to work based on two rules: buy American, and hire American. Back in 1995, the predecessors to Sprint and Verizon chose to go with an American-owned cellular technology, CDMA2000, rather than GSM, a global standard promoted by Europe. At the time, CDMA2000 was also a better technology, with better voice quality and more capacity. But it was controlled by one company, Qualcomm. As GSM was a more open standard, various competing GSM chip firms cropped up, offering competition and lower prices.
The FTC's complaint says Qualcomm has an effective monopoly on CDMA chips for high-end phones. If you wonder why Samsung uses its own processors in most of the world and Qualcomm's in the US, this is why. This doesn't completely prevent other chipmakers from using CDMA2000—Mediatek just started to build Sprint chipsets—but the amount Qualcomm charges to license the technology makes it hard for them to make a profit on it.
"OEMs have had limited practical alternatives to Qualcomm for the supply of CDMA processors. Qualcomm has used its dominant position to obtain onerous and anticompetitive supply and licensing terms from OEMs," the FTC says.
The only way for our carriers to break free of Qualcomm's control would be to kill their CDMA2000 3G networks. The Canadian carriers decided to do that a few years ago, so they could get cheaper GSM equipment. But Verizon and Sprint will keep CDMA2000 going until at least 2020, probably because it would cost them so much to switch over their huge networks.
The FTC also says Qualcomm has a similar stranglehold over 4G LTE chips, but that argument is weaker because Samsung, Huawei, Mediatek and Intel are all selling LTE chipsets right now.
Qualcomm charges more for the elements of LTE technology that it owns than other companies that are part of the LTE standard do, the complaint says. And it makes cellular manufacturers pay extra for use of Qualcomm technology, even if they buy other companies' chips.
Qualcomm, for what it's worth, denies that it's abusing its power. "Qualcomm has never withheld or threatened to withhold chip supply in order to obtain agreement to unfair or unreasonable licensing terms," the company says.
Here's the Trump twist: Breaking Qualcomm's back will benefit Apple and Intel, but it'll also benefit non-American companies like Mediatek, Samsung, and Huawei, all of whom would like to better compete with Qualcomm in making modems. It would lead to less money from Korean and Chinese smartphone makers flowing into Qualcomm's coffers. It might lead to a net loss of jobs in the US and a net loss of profits from the US. But it would also probably lower prices and improve competition.
Apple Just Wants Cash
Apple has also been chafing against Qualcomm's dominance for years. The company used non-Qualcomm modems when iPhones were AT&T-only, because those phones didn't need CDMA2000. But when Apple decided to start making iPhones for Verizon, it signed on with the Qualcomm monopoly.
Qualcomm offered Apple great prices on its chips as long as the company didn't also use anyone else's modems. Apple says that is unfair, and that when it started using cheaper Intel modems this year for some iPhones, Qualcomm raised its rates.
Apple is no good guy here, though. Its demand for rebates comes because this year, it decided to buy cheaper Intel modems. As a study by Cellular Insights showed, the Intel modems don't perform as well as Qualcomm's, yet Apple is charging consumers the same amount for the lesser-performing products. In other words, Apple wants to pay less for its parts and give you a lower-quality product for the same amount of money as the better one they had been selling before.
The Apple/Qualcomm deal is just about the balance of profits. Qualcomm makes the best modems in the business, but has also suppressed competition. Apple wants to charge you the same amount as it did before, for a lower-quality iPhone. Neither is looking out for you.
But the FTC litigation asks some serious questions about whether the government should protect an American company against its competitors, if the competitors include foreign firms. In his inaugural address, Trump said, "protection will lead to great prosperity and strength." Dropping the FTC's litigation against Qualcomm would test that theory.