A racket by any other name: The EC’s shakedown of US tech companies continues unabated.
It’s that time of year again, when the European Commission announces its latest wave of hot new fines that it has conjured up to level the EU playing field against US tech companies. I am really not a cynical person, so I take no pleasure whatsoever in looking at the EC’s behavior through this lens, but… it has become increasingly difficult these past few years to observe the near metronome-like precision of the EU’s penalty racket and not see it for what it is: A protectionist engine that also happens to collect enormous tolls from foreign tech companies, just because it can.
This week, European Competition Commissioner Margrethe Vestager’s Wheel of Fortune landed on Qualcomm, and the San Diego chipmaker’s cost of doing business in the EU until the next spin of the wheel appears to have landed on $272 million. Qualcomm, naturally, is appealing the decision (and the penalty), which seems, as ever, based on equal parts fantasy and complete nonsense from the EC.
This time around, and I am not even kidding, the Commission resorted to digging up the mummified corpse of a 3G-era complaint to earn its pound of flesh. A decade ago, Icera, then a British chipmaker, had alleged that Qualcomm had used predatory pricing to beat it out of deals with handset makers Huawei and ZTE. (No comment.) You can read the EC’s version of the story here.
Icera was subsequently absorbed by Nvidia, and is no more.
Why the Commission got it wrong yet again:
Siding with the ghost of Icera, the Commission ruled that Qualcomm’s alleged “predatory” pricing had “prevented Icera from competing in the market, stifled innovation and ultimately reduced choice for consumers.”
Commissioner Margrethe Vestager also added that “Qualcomm’s strategic behaviour” had “prevented competition and innovation in the market,” and “limited the choice available to consumers in a sector with a huge demand and potential for innovative technologies.”
Okay. Every bit of that is absurd. In case they aren’t immediately obvious to everyone, the four main problems with the Commission’s conclusions are:
1) If “Qualcomm’s behaviour” indeed “stifled innovation, limited the choice available to consumers, and prevented competition,” how is it that between 2009 and today, the mobile industry experienced a massive acceleration in innovation, and an explosion in both competition and consumer choices? Observable, measurable facts standing in direct opposition to the Commission’s reasoning should be by far the most obvious problem with the Commission’s ruling.
2) Huawei and ZTE are only two phonemakers in a sea of phonemakers. It is therefore highly improbable that Icera’s entire business model – and ability to compete in a growing global market – was somehow stifled because it failed to close those two accounts. And yet, that is what the EC concludes, somehow. This makes no practical sense in the real world, and this point should have been obvious to the Commission as well.
3) Evidence suggests that Huawei and ZTE’s decision to go with Qualcomm rather than Icera had a lot more to do with chip performance than with price – as testimony and evidence in other litigation involving Qualcomm and its often frustrated competitors has shown time and time again: Qualcomm’s chips are just better. This point should be easy to validate during the appeal.
4) My (arguably limited) understanding of the case is that so-called “predatory pricing” originally alleged by Icera was limited to a relatively small number of chips. If true, this would also invalidate the EC’s case, as it is highly unlikely that an advantageous price-point applied to a relatively small volume of chips would have much impact on companies like Huawei and ZTE’s decision to buy significant volumes of normally-priced chips from Chipmaker A rather than Chipmaker B. That advantageous pricing would have to be applied to significant volume sales to have a material impact on those customers’ ultimate decision. I concede that there remains a question mark on this point, and expect that it can be verified during the appeal.
If nothing else, the first three points ought to be enough to cast very serious doubts on the validity of the Commission’s ruling.
Qualcomm plans to appeal, as well it should.
Here are the main elements of Qualcomm’s response thus far:
“The Commission spent years investigating sales to two customers, each of whom said that they favoured Qualcomm chips not because of price but because rival chipsets were technologically inferior. This decision is unsupported by the law, economic principles or market facts, and we look forward to a reversal on appeal. […] “Contrary to the Commission’s findings, Qualcomm’s alleged conduct did not cause anticompetitive harm to Icera, the company that filed the complaint.”
I agree, and have nothing further to add for now.
To be continued.
Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.