Broadcom’s Proposed Acquisition of Qualcomm: A Bad Deal for Innovation and Consumers

Antitrust policy in the United States and around the world is, ideally, a flexible framework, grounded in economics that antitrust authorities apply to protect consumers from anticompetitive business activity. While this flexible fact-based approach has its virtues, it undoubtedly creates a degree of uncertainty and discretion that companies can exploit to their economic advantage, seeking to use antitrust complaints for added leverage in supplier negotiations or to knock down rivals who have a superior product. Well-meaning antitrust authorities, grappling with complex facts and economics, and naturally attracted to exciting high-profile cases, risk finding themselves unwitting accomplices. Complaining parties will seek out the most sympathetic jurisdiction — often those that may lack fundamental due process protections and that use industrial policy in place of economically sound antitrust analysis — and it can spread across the globe from there. Particularly in the technology sector, business disputes now routinely breed global antitrust combat, with innovation and long-run consumer welfare sometimes the losers.

Though certainly not alone among successful U.S. technology companies, in recent years Qualcomm has found itself enmeshed in just this kind of global antitrust warfare, facing complaints and investigations in multiple jurisdictions, including the United States and South Korea. Though the allegations and theories of harm differ, most focus at least in part on Qualcomm’s licensing model.

Qualcomm has committed to various standards-development organizations that it will license its essential 2G, 3G and 4G patents on fair, reasonable and nondiscriminatory (“FRAND”) terms. Qualcomm has had FRAND commitments in place for more than two decades. And for more than two decades it has followed industry practice and licensed its essential patents to end-device manufacturers, like smartphone and tablet makers, rather than upstream component manufacturers, like other chip suppliers.

There are many legitimate procompetitive reasons why end-device licensing has been the norm in the smartphone sector, including primarily the nature of the products and technologies. Many essential patents cover technology that optimizes the wireless system and network and is not narrowly housed in any single component. Requiring essential patent owners to license upstream component makers would greatly increase the transaction costs and complexity of licensing negotiations, making it more difficult for essential patent owners to receive an adequate reward for their investments in innovation. And to what end? Qualcomm’s licensing model is not likely to harm chipset rivals because Qualcomm does not assert its patents against component makers. These suppliers are free to compete unencumbered on price and quality. But under the patent laws, Qualcomm cannot provide licenses to component makers without at least partially exhausting its rights at an artificially low level and interfering with its ability to engage in efficient portfolio licensing at the end-device level.

The smartphone sector has thrived under the end-device licensing model that is now under attack by firms who primarily implement rather than contribute technology to standards. But implementers, pursuing their own profit motives, understand that component level licensing will make it difficult, if not impossible, for essential patent owners to fairly monetize their intellectual property and will lead to artificially lower royalty payments. They have been engaged in a sustained effort to persuade antitrust enforcers that firms like Qualcomm that engage in efficient end-device portfolio licensing are somehow misbehaving.

The investigations and enforcement actions against Qualcomm reflect the success of this sustained lobbying by self-interested implementers. But the environment is plainly shifting. Soon after taking over at the U.S. Department of Justice Antitrust Division, Assistant Attorney General Makan Delrahim announced a course correction in antitrust policy toward the exercise of patent rights — including standard-essential patents subject to a FRAND commitment. In a speech delivered on Nov. 10, 2017, Delrahim stated that antitrust enforcers “have strayed too far in the direction of accommodating the concerns of technology implementers … and perhaps risk undermining incentives for IP creators who are entitled to an appropriate reward for developing break-through technologies.” And just a few weeks later, on Nov. 29, 2017, the European Commission issued a long-awaited communication describing what it considers a preliminary set of “best practices” for essential patent licensing for the 5G/internet of things sectors. Perhaps recognizing that a radical shift in existing practices might derail competition and innovation for the IoT, the commission deleted language from prior drafts recommending component-level licensing in favor of “access for all” — the model Qualcomm follows today.

Qualcomm is now the target of a hostile takeover bid by rival chipmaker Broadcom. Broadcom has reportedly indicated that it would abandon Qualcomm’s licensing model, a move that should concern anyone who cares about innovation in the wireless telecommunications sector. Short-term gains to implementers will lead to long-term damage to innovation and consumer welfare. Consumers are likely to suffer more immediate harm as well. Recent economic research indicates that changing from the current end-user licensing model (with royalties set as a percentage of the final device price) to per unit component licensing is likely to increase device prices for consumers, as device makers would face higher incremental costs.

Broadcom’s proposed acquisition of Qualcomm faces significant regulatory hurdles — which will result in protracted review and significant distraction to Qualcomm at a critical time in the industry. Anyone looking forward to the next generation of wireless communications and connected devices should hope these two companies remain vigorous competitors, pursuing their separate visions for what tomorrow should look like, for many years to come.

Lisa Kimmel is a former attorney advisor to U.S. Federal Trade Commission Chairwoman Edith Ramirez and current senior counsel in the Antitrust Group at Crowell & Moring LLP. The views expressed in this article are her own and do not necessarily represent the views of her firm or any of its clients.

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