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How the future of critical US technology investments, US 5G leadership, and US National Security could be irreversibly damaged by a faulty verdict.
The FTC’s very strange case against Qualcomm: A recap of what has happened so far.
United States District Judge Lucy Koh may be the most powerful person in America right now. Over the course of the next few weeks, she alone will get to decide whether the United States will be able to continue to act as a buffer against China’s technology ambitions, or if the case she is presiding over will clear the way for China to become the dominant technology superpower in the world. No date has been set for a ruling, but her decision could come before the end of February.
To say that the case in question, filed two years ago by the Federal Trade Commission against Qualcomm – the San-Diego-based world leader in wireless chips, wireless technology development, and technology R&D – has been a head-scratcher, would be an understatement. From its inception, the case’s premise was so blatantly flawed and poorly thought out that even then-outgoing FTC Commissioner Maureen Ohlhausen went to the extraordinary step of publicly condemning it. Several weeks ago, the case finally entered its trial stage, and things only got worse from there: The FTC’s self-contradictory allegations of wrongdoing by Qualcomm were swiftly picked apart and debunked day after day in the court room. The FTC’s chosen expert witnesses, citing flawed economic and patent theory of their own construction, saw these theories eviscerated by actual industry experts pointing to sound, proven economic mechanisms, and more importantly, empirical facts. Objective observers of the proceedings have been left wondering how a case so devoid of merit to begin with, and – adding insult to injury – so poorly argued, even got as far as it did. (No real oversight at the FTC for nearly a year and a half was likely a key contributing factor to this case moving forward at all.)
In the end, the FTC failed to show – let alone prove – that Qualcomm had engaged in anticompetitive behavior, that it had used its dominant position in the LTE modem chip market to exert undue pressure on handset makers, or that its standard essential patent licensing fees harmed competition or the public. Quite the contrary: court testimony and mountains of evidence instead showed that Qualcomm’s licensing model has in fact increased competition, accelerated innovation, and benefited handset makers and consumers between 2006 and 2016. What the FTC had alleged were “unreasonable” licensing rates for access to its massive patent portfolio turned out to amount to only a few dollars per phone, and agreed upon with handset makers in fair, ethical, bilateral negotiations. The FTC’s assertion that Qualcomm had refused to sell modem chips to Apple turned out to be a fantasy – a fact that FTC attorneys should have discovered on their own during the case’s discovery phase. Even the notion that not licensing SEPs to other component (chip) vendors was anticompetitive turned out to be false. (As most SEPs relate to overall device functionality, also licensing various components would inject impossible levels of complexity and overhead into the licensing value chain, and would cause unnecessary harm to patent holders, which is why most standard-setting bodies in the world require device-level licensing.) I bring up this last point because it is critical to the rest of our discussion.
The degree to which the FTC failed to meet its burden of proof with regard to any element of its case against Qualcomm is stunning. The case has even drawn sharp criticism from the US Justice Department’s own antitrust chief, Makan Delrahim, whose concern about the FTC’s overreach may be well warranted, at least in this instance. And yet, against all reason or logic, there is still a chance that the FTC could prevail if Judge Koh allows it.
In a perfect world, Judge Koh would have had no trouble poking holes in the FTC’s case theory long before the start of the trial. In a perfect world, Judge Koh would have noted the FTC’s comically contradictory arguments long before Qualcomm’s attorneys pointed them out in court. In a perfect world, the mounds of evidence and legitimate expert testimony disproving the FTC’s case would make this Judge Koh’s easiest decision of the last decade. But this is not a perfect world, and the FTC, having not only failed to prove its case but also managed to turn every aspect of it into a confusing mess for Judge Koh to make sense of, could still see the court rule in its favor.
How a win for the FTC would decimate critical 5G R&D investments in the US.
And here is where things get dangerous: Should Qualcomm lose this case, and the FTC prevail, remedies sought by the FTC would take a wrecking ball to Qualcomm’s licensing model, which funds its investments in technology research and development. The short of it is this: If Judge Koh were to mistakenly buy into the argument that Qualcomm engages in anticompetitive behaviors that have caused harm, and that the San Diego chipmaker (and consequently other IP holders in the future) should be required to license different IP to many vendors in the value chain, the most direct consequences would be a dramatic loss of profits to re-invest in further R&D. If that weren’t enough, taking Qualcomm’s simple licensing model (just one small fee for access to its entire portfolio or its SEPs) and turning it into a piecemeal patent-by-patent licensing model, would effectively make patent licensing for large US patent holders unmanageable.
While this may serve the financial interests of companies like Apple (in the short term) and Huawei (in the near and long term), it would cut US patent holders at the knees and decimate technology R&D investment in the US for decades. This wouldn’t just create a logistical nightmare for Qualcomm, harm its investors, and effectively shatter the Android space’s (with the notable exception of Huawei and Samsung) ability to compete against Apple (the FTC’s biggest ally in this case). It would also create a domino effect of devastation for the entire US tech sector and for US national security.
How decimating critical 5G R&D investments in the US would hand China control over the future of 5G, weaken the US technology sector’s ability to compete globally, and undermine US national security.
If US patent holders like Qualcomm are suddenly forced to license their IP for pennies on the dollar, they will no longer be able to make large R&D investments profitable. And if they can no longer make large R&D investments profitable, they will no longer be able to fund them.
Why this matters: Unlike China, where the government heavily subsidizes technology R&D (which benefits companies like Huawei and ZTE) the US government does not prop up its leading critical engines of technology R&D. This means that a ruling against Qualcomm in this case will essentially kill its ability to continue to fund critical investments in 5G (and equally vital technologies). This, at the exact moment when Huawei, its ONLY global competitor, is aggressively pushing to establish dominion over 5G technologies and cripple the United States’ ability to lead in 5G. (Note Huawei’s relentless push to insert itself into the digital fabric of the entire world despite warnings that it may be using its market position in 5G infrastructure as a technological Trojan Horse.)
There are only two companies leading the development of 5G in the world today: Qualcomm and Huawei. That’s it. The third, fourth, and fifth closest contributors are nowhere close. Should Qualcomm be taken out of the 5G race by this ruling, Huawei, a strategic instrument of the Chinese government, would become the sole leading technology company in the world to drive the development of 5G technologies. In a matter of years, China would own 5G. Period. There is no Plan B for the US. Not only would the precedent set by this case prevent any of Qualcomm’s US-based competitors from hypothetically taking over, no US-based company, not even Intel, is anywhere close to being able to take over for Qualcomm today. (To believe otherwise is to misunderstand the difference between the ability to develop 5G-enabled products and the ability to drive research into 5G or be a leader in the 5G standards space.)
Another point to note is that the Chinese government, through its application of anti-monopoly laws to force Qualcomm to lower its rates in China, already took a chunk out of Qualcomm’s licensing revenue, reducing it to give Huawei (and ZTE) an advantage in 5G R&D spend, while also reducing Huawei’s device licensing costs.
The short of it is that while this case appears to be a simple antitrust suit filed by the FTC (seemingly on the behest of Apple, whose global campaign of litigation against Qualcomm may be itself motivated by an effort to pay as little as possible for access to Qualcomm’s IP portfolio), taking a step back reveals that it is far more complex than that. This case may indeed represent an inflection point – one that will decide the future of technology leadership around the world: If Qualcomm loses, the US loses. Huawei, and consequently China, will become the dominant force in 5G. And if the US loses its ability to compete against China in 5G, it will never get it back.
“But it’s just 5G. Who cares? How can 5G be that important?”
If 5G doesn’t seem like a big deal now, in Q1 of 2019, it is because 5G deployments have barely begun. Wireless operators haven’t even rolled out 5G services yet. 5G phones are still months away from being available. 5G is mostly an abstraction, somewhere between “faster than 4G” and having something to do with the IoT and smart cities, and maybe self-driving cars. What people fail to realize though, and what I fear Judge Koh may not yet be entirely aware of, is that 5G will, over the course of the next decade, grow to become the fundamental fabric of our technology, financial, and infrastructure ecosystems.
Banking, manufacturing, education, agriculture, energy production, transportation, healthcare, law enforcement, scientific research, environmental management, and national defense will all depend on 5G technologies to function, and to fight against cyber- and terrorist attacks. Following Release 16, 5G will transition from merely being “another G” to being the connective tissue that makes every critical part of our digital infrastructure work properly. That is why the world cannot afford for the US to abandon its leadership role in 5G, and allow China to become the world’s only 5G superpower. And if you don’t care about the world, you should at least care about the future of the US.
Why no one should expect a magic bullet to save us this time.
A year ago, then-Singapore-based Broadcom almost managed to acquire Qualcomm after an aggressive hostile takeover bid campaign. Whether Broadcom would have ultimately succeeded and gotten the go-ahead from regulators is a matter of debate, but it got close enough to force the US government’s hand: on the advice of CFIUS (the Committee on Foreign Investment in the United States) and “consideration” of the Defense Production Act of 1950, the White House put an end to the bid with an Executive Order. The EO stated that there was “credible evidence” that Broadcom, “along with its partners, subsidiaries, and affiliates”, “through exercising control of Qualcomm Incorporated (Qualcomm)”, “might take action that threatens to impair the national security of the United States.” Reading between the lines, one wouldn’t be wrong to interpret the US government’s concern to be mostly about 5G, and to suspect that Broadcom’s possible ties to the Chinese government might have been a factor in this extraordinary action to protect Qualcomm, and by default, US national security.
No one should expect another magic bullet here. CFIUS cannot intervene in the FTCs case. The Trump administration cannot – and for good reason – exert executive power over an independent judiciary. The fate of the US’ ability to keep China from becoming the dominant global force in 5G rests entirely on Judge Koh’s shoulders.
And so, the future of US national security and critical technology investments now rests squarely on the shoulders of Judge Koh.
I have questions: At the top of my list is if Judge Koh is aware that the case before her is so significant and has ramification that extend far beyond the narrow focus of this antitrust dispute. Note that as with all cases of this type, the presiding judge has a duty to consider broader implications, including those that affect the public interest, before deciding upon a remedy. (The FTC has a similar duty when prosecuting an antitrust case.)
I also wonder if Judge Koh noticed that one of the expert witnesses that the FTC inexplicably selected to testify against Qualcomm (Michael Lasinski) and his firm (284 Partners) had done extensive work for Huawei, including commercial patent negotiations with Qualcomm, and had served in an expert witness capacity for Huawei before. If that detail somehow escaped the scrutiny of the court, the fact that Huawei itself was also a witness for the FTC, should not.
And that opens up a whole slew of questions for me about the FTC’s overall judgment with regard to this case. First: why would the FTC, whose independence and objectivity are paramount to its mission, allow itself to become an instrument of litigation for Apple? (That particular puzzle has been bothering me since the case was filed.) But now, having followed the trial itself, my second question is this: Given how many experts there are in this field, why would the FTC somehow come to rely so much on Huawei to undermine not only a US technology company already deemed vital to US national security, but the one US technology company that Huawei has every reason to weaken and push out of the way?
People who should be getting national security and conflict of interest briefings at the FTC with regard to Huawei and China clearly haven’t been getting them lately, and that needs to change immediately.
In one of the trial’s final days of testimony, Lorenzo Casaccia, Qualcomm’s VP of technical standards and 5G 3GPP lead was asked who would best be poised to “step in and fill Qualcomm’s shoes” should its leadership in the 5G standards-setting space were to be eroded. His reply: “The main one would be Huawei.” He wasn’t wrong. That is exactly what would happen. Correction: It is exactly what will happen if Judge Koh gets this wrong.
Make no mistake: The fight here is not between the FTC and Qualcomm, as it would seem, but between China and the United States. The danger of not being aware of the bigger game at play is that, to the unaware, Mr. Casaccia’s response could seem insignificant, a simple matter of one company competing against another, as they do. The truth of it, however, is that his answer was perhaps one of the most significant moments in the trial, when the stakes were clearly laid out: He might as well have answered “China.”
Not everyone is aware of China’s multilayered, proxy-driven global campaign to cripple the United States’ ability to lead in 5G, nor is everyone aware that this very campaign cannot be divorced from the cascade of antitrust attacks aimed at Qualcomm around the world, whose principal beneficiary is ultimately always China. Every day that the FTC chooses to continue prosecuting this case without sitting down with Qualcomm to discuss settlement options is another day the FTC allows itself to serve as a hapless tool in China’s 5G ambitions. It is my hope that Judge Koh will not allow herself to fall into the same trap.
In a perfect world, Judge Koh would already be wise to all of this. But as we do not live in a perfect world, and it would be unreasonable to expect a distinguished US District Court Judge to also be an up-to-date expert in geostrategy and China’s complex and impossibly opaque global machinations, I cannot assume that she has already connected those dots, or that she will before rendering her verdict. And that worries me. It should worry us all. Judges are not infallible, after all, nor are they omniscient. Not even the best ones. But if Judge Koh gets this one wrong, the consequences for us all could be dire. The wrong verdict in this case could irreversibly damage the future of critical US technology investments, US 5G leadership, and US National Security all in one fell swoop.
If someone can show me the way to the alarm button, now would be a good time.
Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.