- Getty/Chip Somodevilla
A newly unsealed antitrust suit from the Federal Trade Commission alleges that Qualcomm entered into an anticompetitive deal with Apple to keep its modem chips in Apple’s products, including the iPhone and iPad.
The deal allegedly included “substantial incentive payments” on the condition that Apple would continue using Qualcomm’s baseband processors “exclusively” in all iPhone and iPad models from 2011 and 2012.
“In all, Qualcomm’s 2011 and 2013 agreements with Apple provided for billions of dollars in conditional rebates from Qualcomm to Apple,” according to a complaint filed by the FTC.
Qualcomm not only makes the chip that lets phones like Apple’s connect to high-speed LTE wireless networks, but it also owns a significant amount of the underlying patents and intellectual property.
Qualcomm licenses that IP to other companies, like Intel and MediaTek, that also make LTE baseband processors.
Basically, the FTC is alleging that Qualcomm strong armed phone makers by essentially bundling its chips along with its licenses. If a phone maker like Apple were to use Qualcomm’s chips, then it would get a deal on the associated property licenses. If a phonemaker were to use a competitor’s chips, then it would pay extra IP royalties.
The discount on the licenses was allegedly paid to Apple in the form of conditional rebates. Conditions allegedly included not using a competitive wireless technology backed by Intel, agreeing not to sue Qualcomm over royalties, and using Qualcomm chips in forthcoming iPhones and iPads.
Qualcomm and Apple allegedly struck deals in 2007, 2011, and 2013 over these royalties.
“Under these agreements, Qualcomm provided Apple large lump sum payments that constituted partial relief from Qualcomm royalties. Qualcomm conditioned this relief on Apple’s exclusive use of Qualcomm baseband processors in new iPhone and iPad models,” according to the suit.
The FTC did not charge Apple, and in its complaint, suggests that Apple may have chafed under Qualcomm’s licensing deals.
Qualcomm vigorously refuted the premise of the FTC’s claims against it, saying that “the complaint is based on a flawed legal theory, a lack of economic support and significant misconceptions about the mobile technology industry.”
“Qualcomm has never withheld or threatened to withhold chip supply in order to obtain agreement to unfair or unreasonable licensing terms. The FTC’s allegation to the contrary — the central thesis of the complaint — is wrong,” the company said in a statement.
Qualcomm also accused the FTC of accelerating its investigation and filing the complaint days before a change in administration, and a time when two of the commission’s five seats are vacant.
‘No license, no chips’
If Apple or another phone maker were to use another company’s baseband processor, Qualcomm would ask for higher royalties on its IP. “The FTC alleges that this tactic forces cell phone manufacturers to pay elevated royalties to Qualcomm on products that use a competitor’s baseband processors,” the FTC said in a press release.
One possible reason that Qualcomm allegedly struck the deal with Apple is that if Apple were to use a different supplier, that supplier might become more competitive with Qualcomm.
“Qualcomm’s exclusive supply arrangement with Apple denied other baseband processor suppliers the benefits of working with a particularly important cell phone manufacturer and hampered their development into effective competitors,” the FTC wrote in its complaint.
Ultimately, Qualcomm has few competitors for high-end baseband modems. In the past year, Intel has started to supply LTE modems for the iPhone 7, but tests showed that the Qualcomm-equipped iPhone 7 has marginally better wireless performance than the one with Intel’s baseband chip.