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In Part 1 of this series, we discussed how, two years ago, when the FTC first filed its case against Qualcomm in US District Court, outgoing FTC Commissioner Maureen Ohlhausen took the extraordinary step of drafting a dissent letter that outlined just how unjustified and ill-advised the FTC’s case against Qualcomm was. She wasn’t wrong. Since the start of the trial earlier this month, the absurdity of the FTC’s case has grown increasingly obvious to analysts, industry experts, and stupefied onlookers alike. Every day in court has pulled the curtain on yet another layer of dubious and poorly articulated theories so easily debunked that one almost cringes at the FTC’s decision to embark on this fool’s errand at all. The FTC’s arguments and witnesses thus far have been so ineffective that if one ever were to suggest that the mercy rule be applied to botched lawsuits, this would certainly qualify as a worthy test case. I really am not exaggerating when I say that I have heard more coherent arguments in Judge Judy’s courtroom than some of the theories that the FTC and some of their expert witnesses attempted to articulate in Judge Koh’s courtroom over the course of the last few days.
If you are only now joining this discussion, I encourage you to swing by Part 1 to get caught up on what was already covered. If you are already familiar with claims 1, 2, and 3, read on.
4. The FTC alleges that Qualcomm refused to sell Apple modem chips during contract negotiations. This is untrue. Based on the evidence presented at trial, Qualcomm’s argument that Apple chose not to use Qualcomm modems in its latest iPhones prevails over Apple’s narrative. The evidence points to a self-inflicted wound entirely of Apple’s making. The FTC, yet again, fails to show any monopolistic, anticompetitive, or illegal behavior on the part of Qualcomm.
Let me try to shed some light on this as I understand the facts.
A short chronology of events: Several years ago, Apple switched from Infineon to Qualcomm as its sole supplier of iPhone modem chips. Intel then bought Infineon and courted Apple’s to try and regain that business. Apple bit and started dual-sourcing Qualcomm and Intel modems in the iPhone 7, then continued to increase the proportion of Intel modems against Qualcomm modems until the iPhone XS/XR, when Apple finally went 100% with Intel. In 2017, Apple sold iPhone X’s with defeatured (read: crippled/throttled) Qualcomm X16 modems.
Based on testimony and evidence presented last week, it also appears that a disagreement over Apple’s request for access to Qualcomm’s new X20 modem source code made some people at Qualcomm a little nervous, especially in light of Apple’s perceived shift towards Intel modems. Why? For starters, because there is no need for Apple to access Qualcomm’s sensitive modem source code. (Qualcomm already customizes its modems for Apple AND provides teams of engineers to help Apple integrate their modems and software into iPhones.) The request must have also been met with concern since Qualcomm probably already suspected foul play on the part of Apple with regard to their Master Software Agreement (MSA). (The software in question was the source code for the X16 and accompanying software tools.) Indeed, Qualcomm filed suit soon thereafter (in late 2017), and that litigation eventually grew into a trade secrets misappropriation case. In light of what must have been, at the very least, strong suspicion on Qualcomm’s part that Apple might not be honoring the terms of the MSA, turning over next-gen X20 modem software to Apple without some kind of financial commitment or guarantee would have been reckless.
Apple’s dual-source policy and the subsequent erosion of Qualcomm modem share in iPhones put in question Apple’s commitment to the kind of volume purchases of the X20 that would make Qualcomm’s massive front-end investment in a new iPhone modem and integration assistance worthwhile. Qualcomm (logically) moved to cover that risk by once again relying on the kind of volume-tiered incentives that had always encouraged (but not forced) Apple to commit to purchasing a high volume of Qualcomm modem chips. As I understand it, the proposed structure had two main components: The first was a volume-tiered incentive schedule (the more chips Apple bought, the higher the rebate), and a commitment by Apple to not purchase large commercial quantities of Intel modem chips. This way, Qualcomm could recoup its investment over time, and ensure that Apple could not turn around and suddenly decide to source, say, 95% of its modem chips from Intel. Qualcomm was also reportedly open to granting Apple access to the X20’s source code if Apple agreed to certain volume buys in 2018 and 2019.
What’s key here is that even if Apple didn’t agree to those terms, it could still buy X20 modems in any quantity it wanted, just without access to the source code and development tools. The FTC’s argument is debunked, and it is debunked a second time with this: As an alternative, Qualcomm offered Apple to continue using the X16 modem in new iPhones. Since Apple had defeatured the X16 in the iPhone X, a non-crippled X16 would still be a considerable improvement over the defeatured version. (Note that, at the time, the X16 was a generation ahead of Intel’s XMM7480 modem. Apple had defeatured the X16 – or throttled it – in the iPhone X, presumably to bring it down to XMM7480-like performance. Re-enabling the X16’s features and allowing it to run as designed would have matched or exceeded Intel’s new XMM7560 modem.) The option to use an unthrottled X16 would therefore not have been a case of Qualcomm suggesting that Apple settle for a substandard or otherwise outdated modem.
- Apple had access to the X16 and the source code (from 2017 iPhone X). Apple could have used the chips in XS/XR phones, since it had already integrated them. Apple was also continuing to buy X16’s (as Apple continues to sell a lot of iPhone X’s). And because Apple has a habit of making advance purchases to protect itself from eventual shortages, Apple likely had large quantities of X16 modem chips on hand.
- Despite Apple’s MSA (Master Software Agreement) with Qualcomm, Apple allegedly failed to protect sensitive Qualcomm software. Qualcomm filed suit against Apple. You will likely be hearing more about the lawsuit in the coming months. That is likely why Qualcomm resisted Apple’s pressure to be given access to the X20’s source code.
- Qualcomm had already spent a lot of money to customize the X20 for Apple, and would have provided engineers to support its integration had Apple wanted to put the X20 in its next generation of iPhones. If anything, Qualcomm was motivated to recoup this NRE and sell X20’s to Apple.
- Apple could have purchased the X20 with source code and tool access. Qualcomm CEO Steve Mollenkopf had signaled that he would be willing to compromise on that, IF Apple committed to volume purchases for 2018 and 2019. His reasoning was likely that if Apple continued to violate the terms of the MSA, or ultimately used Qualcomm’s source code to build its own modem, Qualcomm would at least recover some of its losses through volume purchase commitments. It was a risk that Qualcomm, in my opinion, needed to mitigate, given Apple’s past behavior with Qualcomm and other suppliers, and Qualcomm’s exposure.
- Unlike what Apple COO Jeff Williams said in court, this was not a dispute over software. Qualcomm offered Apple access to it as long as Apple committed to safeguard it. Apple also already had the software for the X16 and could have used it… but chose not to.
Reminder: Despite all of the ongoing lawsuits and disagreements between Qualcomm and Apple, Qualcomm still provides X16 modems to Apple, and Apple continues to sell iPhone X’s with those chips, once again contradicting the FTC’s narrative that Qualcomm refuses to sell modem chips to Apple.
One question I keep circling back to again and again during this debacle is how the FTC ever allowed itself to become a proxy for Apple in its war against Qualcomm. For obvious reasons, that should have never happened.
Tune in for Part 3, in which I will take a short break from addressing specific elements of the case to instead paint a bigger picture of what is really at stake should the FTC, despite the absurdity of its case, somehow manage to prevail. What worries me the most about all of this is that, should Judge Koh rule in favor of the FTC and, in so doing, inadvertently tossed the value of technology IP in the US into a shredder, the biggest winner, aside from large smartphone vendors like Apple, Samsung, and Huawei, would be China. In light of China’s strategic ambitions and how important 5G could be to the US economy and national security, this is no small consideration. I will explain this in greater detail in Part 3.
Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.