Making Sense of the Apple, Oops I Mean FTC Case Against Qualcomm

Let me begin by reaffirming that I have the utmost respect for our system of checks and balances, and for the authoritative bodies that regulate our many industries. With technology moving at breakneck speeds, we need vigilant, capable, empowered watchmen at the helm to keep enterprises honest and make sure they play by the rules. This is especially true when some of those companies have the power to abuse their size and technological capabilities to gain an unfair market advantage. Over the past several months, we have seen technology giants like Google and Facebook be called to DC to provide testimony relating to potential technology abuses that, in some cases may have impacted the outcome of elections, and in others, may have been reckless or negligent with people’s privacy and personal data. These issues are often as consequential as they are complex, and therefore necessitate the highest degree of scrutiny from our country’s highest seats of vigilance. Unfortunately, however, some of those bodies go astray.

Case in point: A deceptively important legal battle that may ultimately decide the future of open innovation in the tech sector is being fought this month under the watchful eye of Judge Lucy Koh, in United States District Court (Northern District of California, San Jose). In the case, the Federal Trade Commission (FTC) is contesting Qualcomm’s longstanding technology licensing practices and alleging that they are anticompetitive. (A follow-up to this article will explain why, in our view, they are not.) Aside from the FTC’s case slew of questionable assertions, the aspect of this case I find most troublesome is that, at first glance, its underpinnings seem driven not by a legitimate concern about Qualcomm’s licensing practices being “harmful” to competition (there is no evidence that they are) but rather about siding with Apple in its contentious dispute with Qualcomm.

While other companies have also been drawn into the case, some media coverage has inexplicably zeroed in not on Qualcomm or the FTC, or the details of the case itself, but on Apple. Specifically, on Apple’s sob story of being allegedly bullied and somehow extorted by a company 1/10th its size, among other dubious claims. As it turns out, the alleged “extortion” isn’t extortion at all. What Apple is crying foul about adds up to only about $7.50 per phone for access to a vast patent portfolio – a portfolio that includes Qualcomm’s standard essential patents, which contribute to the cellular standards for everything from 3G on up to 5G – without which smartphones would be pretty much useless.

Apple complaints aside, the case is complex and rich enough to warrant hours of discussion, but for the sake of expediency, I only want to review three (paraphrased) statements from Apple that caught my eye today. If the depressing lack of innovation over the past decade wasn’t enough fuel for my growing disdain for Apple, Apple’s arguments about this case certainly will. Fair warning: if you are a hardcore Apple fan, you may not want to read on, as my opinions will most certainly not appeal to your world views.

    1. Apple wanted to use Qualcomm’s chip in its latest phone but Qualcomm wouldn’t sell it to Apple.
      This could not be further from the truth. For two years after Apple switched to Intel as its principal chip supplier, Apple continued to put Qualcomm chips (and IP) into phones, even after Apple stopped paying for them for the IP. (Apple still hasn’t paid over a billion dollars for Qualcomm IP that has continued to be used in their phones.)
      This may be a good time to point out that it is Apple’s contract manufacturers, not Apple, who are Qualcomm licensees. As I understand the facts of the Apple v Qualcomm timeline – outside of the FTC’s suit,- Apple’s Contract Manufacturers (CMs) continued putting Qualcomm chips into Apple phones, even after Apple ordered them to stop paying Qualcomm. (Apple evidently went so far as to promise them immunity from any damages that they may incur as a result to Qualcomm’s counterclaims against Apple.) This suggests no shortage of Qualcomm chips, and no evidence that Qualcomm ever refused to supply Apple with chips. More to the point, why would they? Why would Qualcomm walk away from Apple’s iPhone business? What could possibly motivate a company built on selling technology to every major player in the mobile ecosystem suddenly decide to take a sledgehammer to one of its most lucrative partnerships? The answer it simple: Qualcomm did no such thing.
    2. Qualcomm’s fees are unreasonably high, and the exorbitant cost of the chips and Qualcomm’s licensing portfolio combined is harming consumers by limiting competition and partly responsible for inflating smartphone prices.
      Where to begin?
      For starters, we are only talking about roughly $7.50-$15 per phone. That’s it. Given that new premium iPhones tend to cost upwards of $1,000, the notion that a sub-$15 cost to access 130,000 patent licenses is “unreasonable” or onerous is absurd. (The maximum that Apple pays for all of Qualcomm’s mobile patents, which go far beyond just connectivity amounts to all of about $15.00.) So Apple, the company that rakes in about 62 percent to 90 percent of ALL SMARTPHONE profits, while holding only about 19 percent of the global sales, feels that paying $15.00 for billions of dollars in IP (including significant contributions to the 3GPP standards that allow us to take our phones anywhere and connect to the network) is “unreasonable” and harmful? Really? Is this the part where I feel bad for Apple? Should I cry into one of their mountains of cash sitting in Ireland, waiting to be repatriated back to the US when tax conditions improve?
      Second, Qualcomm’s open and affordable licensing model has clearly not stifled or harmed competition in the mobile industry. Quite the opposite. Qualcomm is a major contributor to standards and one of the most important R&D shops and sources of technology for the mobile industry. Look around. Competition in the mobile industry has never been more diverse and healthy. If Qualcomm harms competition, where is the evidence? The facts simply contradict that assertion.
      Third, if Qualcomm’s $7.50-$15 fees are responsible for driving up the price of smartphones, why haven’t iPhones prices gone down since Apple stopped paying Qualcomm for their IP? Take as long as you need. (I’m sure it is because they are accruing for it and meanwhile couldn’t possibly pass along a discount to the end customer.)
    3. Qualcomm is the reason that Apple won’t have a 5G phone in 2019.
      That is false. Apple made the decision to move its business away from Qualcomm. Its choice of chip suppliers is its own. As far as I know, Qualcomm has no hand in Tim Cook’s supply chain decisions. If Apple’s current chip supplier cannot provide Apple with a premium tier 5G modem, Qualcomm can hardly be held responsible. Note: I’m pretty sure if Apple would pay Qualcomm, that they would still let them use their modems so they could deliver their 5G phones in 2019.

This brings me back to a bigger question: Why is this even a case? How does the 800 LB gorilla that is Apple convince the Federal Trade Commission that they are somehow being victimized by a company a fraction of their size? Could it be that Apple is simply irate because for the first time in what feels like forever, they couldn’t squeeze a technology supplier? Perhaps instead of trying to get out of paying $15.00 per device to access critical technologies that power it, Apple could focus instead on building something new and exciting that people can get excited about again.

As things stand, Apple seems to be getting innovation advice from Gillette these days, only Apple is reportedly starting to stack cameras instead of blades. What’s next? Four cameras? Five? What happened to the Apple that used to innovate and inspire? For that matter, what happened to the Apple that used to take responsibility for its successes and failures? What happened to the Apple that used to source the best possible components and technologies for its products? What happened to that Apple? (Apologies to Gillette. Shaving has truly been better since the introduction of the Fusion razor.) The Apple that seems to be guiding the FTC’s hand in this case is a very different Apple from the one whose products once redefined the mobile industry. The company that Steve Jobs built, a company that welcomed competition and understood its value – would have never weaponized an industry watchdog to pressure one of its technology partners to lower its prices. That Apple would have never pretended to be a victim in an equation in which, from my perspective, it is clearly the aggressor.

Daniel Newman is the principal analyst at Futurum Research. Follow him on Twitter @danielnewmanUV. Futurum Research, like all research and analyst firms, provides or has provided research, analysis, advising, and/or consulting to many high-tech companies in the tech and digital industries. The firm doesn’t hold any equity positions with any companies cited.

Daniel Newman

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. From Big Data to IoT to Cloud Computing, Newman makes the connections between business, people and tech that are required for companies to benefit most from their technology projects, which leads to his ideas regularly being cited in CIO.Com, CIO Review and hundreds of other sites across the world. A 5x Best Selling Author including his most recent “Building Dragons: Digital Transformation in the Experience Economy,” Daniel is also a Forbes, Entrepreneur and Huffington Post Contributor. MBA and Graduate Adjunct Professor, Daniel Newman is a Chicago Native and his speaking takes him around the world each year as he shares his vision of the role technology will play in our future.