For example, Amazon Web Services can offer discounts to keep companies from switching to Azure and Google Cloud. That's legal. If Amazon Web Services offered the CEO of Snap a billion dollars (to them personally, not to the company) to use AWS instead of Google Cloud, that's illegal (both for AWS to offer it and for the CEO to accept it).

The only reason why it's illegal for Qualcomm to have taken this action is because it falls afoul of competition regulations. For example, AWS may be the largest cloud provider and it may be a key market, but they aren't so large that they can really shut off the market to competitors. Similarly, none of their customers are so large that they're a significant portion of the market for buying servers. Finally, because AWS doesn't control buying servers or data centers (and companies often do invest in that when they hit a certain scale), it's hard to argue that they're shutting out competition.

By contrast, Qualcomm specifically created a plan to make sure it wouldn't be profitable for competitors to develop high-end modems. While more Android phones are sold than iPhones, the iPhone is a very significant portion of the high-end phone (and modem) market. If Apple committed to Intel or another manufacturer, that company would have the sales necessary to create high-end modems that would challenge Qualcomm. Absent Apple committing to that, it's unlikely that any company would be willing to spend the money developing competition to Qualcomm. Plus, Qualcomm's discounts mean that a company like Intel would look at the situation and note that if they did develop a competitor, Qualcomm would simply discount their chips for a year or two and drive them out of the business. If you're Intel and you develop a competitor and no one buys your chips for a couple years, you'll exit the business.

You're allowed to offer discounts to get companies to choose your products or stay with your products. However, you're not allowed to use discounts to choke off competition.

From what I understand of the situation Qualcomm is accused of: 1) Qualcomm has patents on LTE and other wireless technology that they committed to licensing under FRAND (fair, reasonable, and non-discriminatory) terms. 2) If you want Qualcomm chips, you need to agree to a license for those patents on Qualcomm's terms and not challenge the terms as violating FRAND. 3) Because Qualcomm got you to agree to very high licensing rates for their patents, they could then discount their chips a lot to keep competitors from getting a foothold.

Let's say you're Apple. You need Qualcomm's modems because they're the only high-end modem supplier in the world. So you agree to their non-fair license rates. Intel looks like they might enter the market and create a second seller of high-end modems. Qualcomm offers a steep discount on chips so that you won't buy Intel's and so Intel doesn't have enough sales to continue in the market. You have to pay Qualcomm's very high non-fair license rates even if you use Intel chips because you still need Qualcomm chips for some of your phones. Qualcomm's discount on their modems came with the caveat that you only use Qualcomm modems. So, Apple could buy some modems from a competitor, but they'd still have to pay Qualcomm's very high license rates and more for the Qualcomm chips they needed -or- they could take the discount on Qualcomm chips.

Over the past two generations of iPhone, Apple has been trying very hard to break Qualcomm's monopoly. They're propping up Intel's modem business with the hopes that they can switch 100% off Qualcomm in the future and get rid of what they see as Qualcomm violating their FRAND licensing requirements. But they couldn't do that without a competitor for modems. Because Qualcomm operated "no license, no chips" and Apple couldn't shut down iPhone production for years until a competing high-end modem came around, they had to play ball. At this point, they only really need Qualcomm for Sprint and maybe some other small carriers. In a pinch, Verizon does have non-CDMA, VoLTE-only (voice over LTE) phones.

It is illegal to accept bribes, but this isn't a bribe. A bribe would have been to offer a reward to some Apple execs to tip the scale in Qualcomm's favor against Apple's interests. "If your town chooses us for your broadband, you might find a new Porsche in you driveway," is a bribe. "If your town chooses us for your broadband, we'll charge residents 20% less than Comcast," isn't a bribe. "...we'll also upgrade the town's electrical system...we'll sponsor after-school coding classes for students in town...we'll throw a dance party for everyone in town," aren't bribes because the benefit isn't a personal one for the person making the decision. Qualcomm isn't accused of offering a bribe to key execs at Apple. If Qualcomm's actions hadn't been anti-competition, there's nothing wrong with discount payments. Almost all companies offer discounts off list prices if they're dealing with enterprises. The issue is that it's anti-competition and that's why Qualcomm is the only one in hot water. Apple wants the competition and has been doing more to stimulate it than anyone else seems to have been.

Qualcomm did not specifically created a "plan" to discourage potential customers from choosing competitors. It was Apple who proposed the rebate deal with exclusivity and Qualcomm acquiesced to Apple's demand. Then Apple started parading around telling regulators that they were FORCED into that agreement. In hindsight, it was Qualcomm's contract lawyers' oversight to have let that big one slip. Qualcomm has been under regulators' radar for decades, but they might have felt it was ok to let that one in since it was their own customer Apple, not Qualcomm, demanding that exclusivity.

Your understanding of the situation is a bit skewed: (1) yes, Qualcomm is a leading wireless inventors and owns the largest wireless patent portfolio (2) even if you don't use Qualcomm chips, you have to pay Qualcomm licensing fees. You are allowed to challenge their FRAND licensing practices and, for almost a full decade, Apple has done this every time their contract is up for renewal with Nokia, Ericsson, Samsung and pretty much every wireless patent holders WITHOUT any evidence that there is a breach of FRAND. (3) Qualcomm's rate is higher because the share and importance of their IPs and, again, because Apple is a huge volume customer. Apple was never in rush to get the latest and greatest tech.

https://web.archive.org/web/20170419042209/https://www.ftc.g...

In the FTC complaint against Qualcomm, they say that Qualcomm, "Extracted exclusivity from Apple in exchange for reduced patent royalties. Qualcomm precluded Apple from sourcing baseband processors from Qualcomm’s competitors from 2011 to 2016. Qualcomm recognized that any competitor that won Apple’s business would become stronger, and used exclusivity to prevent Apple from working with and improving the effectiveness of Qualcomm’s competitors."

They also say that Qualcomm, "Maintains a “no license, no chips” policy under which it will supply its baseband processors only on the condition that cell phone manufacturers agree to Qualcomm’s preferred license terms. 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. According to the Commission’s complaint, this is an anticompetitive tax on the use of rivals’ processors. “No license, no chips” is a condition that other suppliers of semiconductor devices do not impose. The risk of losing access to Qualcomm baseband processors is too great for a cell phone manufacturer to bear because it would preclude the manufacturer from selling phones for use on important cellular networks."

So, the situation alleged seems to be that 1) phone makers can't forgo access to Qualcomm's chips because they need them for high-end phones; 2) Qualcomm won't sell you chips unless you agree to their preferred license terms rather than FRAND terms; 3) Qualcomm's control of the only high-end modems means that they can charge a much higher royalty on their patents (since companies will pay the higher royalty because they need Qualcomm's chips) and they can accept lower margins on the chips to make sure that competitors can't get into the market (and competing chips get subject to Qualcomm's anticompetitive tax if the manufacturer wants access to Qualcomm chips for any of its devices).

Qualcomm also refuses to license their patents to competitors like Intel or MediaTek because they want a percentage of the handset cost rather than a fixed fee. The FTC has alleged that this alone is a violation of FRAND.

According to one study cited by the FTC, Qualcomm's share of "highly novel" LTE patents was 13% compared to 19% for Nokia and 12% for Ericsson and Samsung, but Qualcomm gets paid far more than they do in licensing fees.

You've said that Apple could challenge the licensing fees, but what's alleged is that Qualcomm would stop selling you their modems if you challenged their preferred licensing fees. Yes, Apple would still have to pay some fee, but it might be much lower than Qualcomm's preferred fees. The problem is that they'd lose access to Qualcomm's chips.

~~

Before the iPhone's Intel use, if you were a phone maker and you wanted to ship a flagship phone, you had to use Qualcomm's chips. There was no alternative modem you could use. Qualcomm had agreed to FRAND terms for their IP. But they saw that phone manufacturers couldn't force them to sell their chips. So, if a phone manufacturer wanted their chips, they'd say, "here are the royalties we prefer for our IP. If you don't agree to these rates, you could challenge them, but then we won't sell you any chips. Without our chips, you can't sell the high-end phones that are your entire margin. So, agree to the rates even if you think they're a bit higher than FRAND."

~~

Yes, Apple would still have to pay Qualcomm a royalty. However, if they didn't tie Qualcomm's preferred licensing to their chips, that royalty might be lower. If Qualcomm licensed their IP to competitors (as the FTC says is required under FRAND commitments), Apple's royalty would be a lot lower.

"When Apple sought relief from Qualcomm’s excessive royalty burden, Qualcomm conditioned partial relief on Apple’s exclusive use of Qualcomm baseband processors from 2011 to 2016. 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."

Can you cite things that show Apple having originated the exclusivity? I mean, that's from an official court filing (https://www.ftc.gov/system/files/documents/cases/170117qualc...).

Apple wanted lower royalties. Maybe Qualcomm worried they'd get another company to create a flagship modem and then challenge Qualcomm's royalties. If I were Qualcomm, I would have. So, by requiring exclusivity, I could choke off competition to my modems and make sure that phone manufacturers had to continue paying me high royalties.

If Qualcomm legitimately thought that their IP was worth as much as they were getting paid for it, then they wouldn't have to tie the rates to access to their chips.

~~

1) According to the FTC, Qualcomm doesn't have the largest portfolio for LTE technologies. Nokia has 46% more "highly novel" standards essential patents for LTE than Qualcomm.

2) The complaint is that you couldn't challenge Qualcomm's preferred rates because they'd deny you access to their modems and without their modems, you'd be dead in the water.

3) The FTC complaint alleges the opposite. a) Qualcomm's IP is less important; b) Apple wasn't in the driver's seat and it was Qualcomm's plan to require exclusivity when they asked for relief from royalties they believed were too high.

2) No, Qualcomm's FRAND licensing rate is published to the public time to time, so they don't look like they are ripping off anybody (or unfair). It's around 3%-5% range per device -- and it is not cheaper than whatever their agreed "preferential" rate is. Apple and FTC fanangled some nebulous calculus to come up with that absurd figure and claim that Qualcomm overcharged Apple. Ask them, not me -- and I bet you'd be surprised how far and silly they are willing to go to make their case against Qualcomm.

3) Apple's view on patent licensing is that while Apple's own frivolous design/utility patents are worth $7-$8 per end-user device (see Apple vs Samsung), everyone else's should be $0.00000X per smallest component that embodies them (see Apple vs Samsung, Nokia, Ericsson, Moto, etc). So Apple's problem here is that wireless companies like Qualcomm have for decades collected 3%-5% per end-user device and Apple doesn't want to pay that much, or anything close to that amount. Apple has little negotiating power since they have so few wireless patents to cross-license, but they are a huge volume customer. With Qualcomm, Apple managed to negotiate some discount, or "rebates" in exchange for exclusivity -- which btw was purposed by Apple, not forced upon by Qualcomm. But Apple still thinks it's too much. Instead of direct legal challenge which had not worked for Apple for years, Apple cleverly persuaded regulators to go after Qualcomm for anti-trust/anti-competition violations, which apparently looks like Apple had planned all long with the exclusivity deal.

It's not difficult to understand where Apple stands on these licensing issues if you've followed their lawsuits past several years. I don't want to sound like a tin-foil hat, but at this point, especially after seeing Qualcomm's countersuit, it's not difficult to see how Apple might have plotted all this years ahead.

> In fact, internal documents show that Apple gave serious consideration to switching part of its baseband chipset requirements to Intel. Qualcomm's exclusivity condition was a material factor why Apple decided against doing so, until the agreement came to an end. Then, in September 2016, when the agreement was about to expire and the cost of switching under its terms was limited, Apple started to source part of its baseband chipset requirements from Intel. But until then, Qualcomm's practices denied consumers and other companies the benefits of effective competition, namely more choice and innovation.

http://europa.eu/rapid/press-release_IP-18-421_en.htm

Chances are good it says that any disputes are to be governed by the laws of, say, the State of California. Since California doesn't adopt EU law as its own public policy, it would be likely to enforce the contract (unless it violated California law in some way).

Plus, if you're say a politician, and everyone throws money at you to bribe you, because they have no risk in doing that (only you do), you may eventually take that risk and cave in (especially since you'd be in a position of power, and you'd think nothing bad could happen to you, even if you do get discovered).

But if you were to punish companies for giving bribes to politicians, I think that would be a more effective way of stopping the whole thing.

Or think if you wanted to bribe a government clerk to do some papers for you faster. You'd know there is a risk for being punished over it, so you may not even try. Even if the clerk would tell you to pay them money to quicken the process, you may think it could be a trap, since he'd be working for the government.

But if the punishment wouldn't affect you, then "it wouldn't hurt to ask" if the clerk accepts bribes to quicken processing your papers. The clerk would be taking the risk, and you wouldn't care if she gets caught. And you'd be willing to pay to get those papers faster.

Making the penalties for accepting bribes be more significant (more than the benefit gained by accepting the bribe) would significantly deter people from taking bribes regardless of how many people or how often.

I think we both have good points, so maybe the solution would be offering and accepting bribes should be illegal and penalized, and both parties should be penalized more than the benefits gained by offering/accepting the bribes. In this case, Qualcomm should be fined a much more significant amount of 4.9%, and apple too should be fined more than the price reductions + payouts they received from Qualcomm

Quote: “Volgens Vestager treft Apple in dit dossier geen blaam; er zou geen bewijs zijn dat Apple de Europese mededingingsregels heeft overtreden.“

Translation: “According to Vestager Apple is not blamed in this case; there seems to be no evidence Apple violated the European antitrust rules”

Apple in particular always tries to have multiple sources for any parts they don't develop themselves. And even for the stuff they develop, they try to have multiple manufacturers. This is a very good idea to do at their scale. Them legally preventing from doing this by forbidding it in a contract is way different than "preventing" them from doing this by just offering them chips at super-cheap prices and hoping for them to take up your offering and to ignore all the other competing offers.

Most likely they didn't yet plan to source the LTE chips from a second supplier at the time they signed the contract, so that limit didn't affect them. Nowadays they do have multiple sources, which is probably why they did not prolong the contract any further after 2016 - because having multiple sources was worth more to them than having this discount.

What does FRAND mean?

Rights holders generally have to agree to license their patents on FRAND terms to get their technology included in wireless standards, in this case CDMA and LTE.

Qualcomm’s license pricing is, unusually in the industry, a percentage of the final retail price of the final device.

Apple’s argument is that this is not, in fact, a reasonable and non-discriminatory price for a license to use Qualcomm’s patents.

It can be. What if Qualcomm gives discount only if Apple buy as many as it need which is fairly predictable. Then Apple would have enough supply and wont need to look for another supplier.

Whether this makes economic sense depends on whether savings_due_to_discount - (price_of_chips_from_second_supplier + lost_value_of_surplus_chips) works out for Apple. That may be a negative number, which means that Apple has these costs for getting the majority of chips from Qualcomm at the super-cheap discount while still having a second supplier actively used in production. But these costs may still be worth the risk mitigation that occurs when having a second supplier in the chain. Especially for Apple, for which lost revenue due to supply constraints can quickly eat up any marginal savings on one component in the supply chain.

The point is: it is an economic decision, which is exactly what it should be, and the decision can be made and re-evaluated at any time. If you exclude second suppliers by contract, it's only an economic decision when the contract is signed, after that the economic decision becomes a non-decision, even if the economic rationale changes (for example because a competitor became better). And that is exactly why this contract clause is anti-competitive and was deemed illegal.

If supplier only needed few % sales from Apple, then Apple could have just given them money for other reasons (funding etc). Thus no loss of choice for consumers. This case is simply money grab.

If those % of sales are not enough, then supplier dies. Loss of choice but now due to legal means.

Apple doesn’t want to buy Qualcomm chips at any price, if it can get replacements from anywhere else. It wants reliable partners, and if possible, to contract manufacture its own baseband chip designs, without paying more to Qualcomm in ostensibly FRAND fees for chips it designs itself than just buying the chips from Qualcomm.

You can offer a -50% discount to customers (as long as you aren't selling below cost, which would also be illegal in the EU), and then you'd have to assume that the customer will stick with you as long as you offer that discount, or develop a good relationship, and so on.

But you can't enforce that the customer can't also buy the product at 100% of the price or whatever it is from a competitor at the same time it's buying it at -50% from you. If the customer does that, it should be their choice. You can't ban the transactions with your competitors in the deal.

> In June 4, 2008, Korea Fair Trade Commission fined Intel US$25.4 million for giving Samsung rebates to not use AMD processors. Some of the manufacturers involved in the case were Dell, HP, Gateway, Acer, Fujitsu, Sony, Toshiba, and Hitachi.

> In May 2009, the European Commissioner for Competition, Neelie Kroes, fined Intel a record $1.45 billion and ordered it to end its customer rebate program.

> In November 2009, Intel agreed to pay AMD $1.25 billion as part of a deal to settle all outstanding legal disputes between the two companies.

The big differences in how things happen lately are not really into how the law is made, but in how (and if) they are applied.

My personnal point of view:

It took a lot of time for the EU to get out of its shell in that area, but now it's doing a very good job comparatively to the rest of the world, and the fact that we are an agreement or still very different countries ends up being a big advantage here: laws are applied without too much protectionnism or preferentiel treatement.

The FTC, on the other hand, seems to me very much more inclined to make sure the USA goes out ahead that to ensure fair market competiton. This is a shoddy deal between two american companies, and what happens is also theoretically not legal by US laws, so why is the EUC dealing with it while the FTC looks away ?

Posner has literally written the book on the US' Antitrust law, and he is one of the rare writers I enjoy reading even when I vehemently disagree (as I do with his proposal for a largely unregulated market in babies).

Apple's exclusivity with AT&T didn't create a situation where AT&T could crush competitors. That's ultimately the crux. Qualcomm's dealings had been working to eliminate competition in the LTE modem space until Apple started working with Intel. You couldn't get an iPhone on Verizon, but Verizon was still signing up millions of customers without it. It certainly helped AT&T, but it didn't create a market where competition was eliminated or endangered. As Android phones came along, they were a drop-in substitute that other carriers could use. Sure, you might want an iPhone on Verizon rather than Android phone on Verizon, but that falls into the "I want my perfect deal" rather than something really endangering competition. It's clear Verizon would continue to be a successful company offering competition even without the iPhone.

Qualcomm was the only company offering high end modems. Companies might buy modems from Intel or others if they made high-end modems, but Intel isn't going to make a high-end modem if no one is going to buy it. By requiring exclusivity, Qualcomm made it so that there weren't enough customers to support an alternative high-end modem.

To come up with a hypothetical iPhone scenario, let's say that Apple launched the iPhone in 2007 on all networks and required AT&T, Verizon, Sprint, and T-Mobile to commit that they would only sell iPhones and no competing smartphones. Google might invest in Android, but there'd be no one to buy the devices. Sure, a few people would buy them outside of the carriers, but there wouldn't be enough demand to be profitable, Google would invest less and less (maybe even shut it down) while Apple poured money into iPhone R&D. A few years later, Android would be gone.

Apple's exclusivity with AT&T actually helped competition. Verizon wouldn't have promoted Android heavily if they had access to the iPhone. People would have bought iPhones 2007-2008. Instead, they often bought Android devices because they were on Verizon or Sprint or T-Mobile and that's all that was available. Apple's exclusivity helped Android gain a foothold. It wasn't until 2011 that the iPhone launched on Verizon and that 3.5 year period gave Android the time it needed to flourish.

Sure, Apple's move wasn't consumer-friendly. However, if anything, it helped competition. Regulators aren't about making sure that everything is the most consumer-friendly. They're about making sure that you aren't stifling competition. Apple's exclusivity didn't harm wireless competition: Verizon was still doing well over that 3.5 year period. Apple's exclusivity, if anything, helped competition in the smartphone OS/device market. As such, there wasn't a problem that needed correcting.

If Apple had launched on all the carriers and required them to exclude Android devices from their lineups, that would have driven out competition. Qualcomm is accused of seeking exclusivity to prevent companies like Intel from producing high-end modems. If all the customers have an exclusivity agreement with Qualcomm, no one would buy Intel's modems. If all the networks had exclusivity agreements with Apple, there'd be no one to buy Android phones.

Apple's exclusivity is more like the exclusivity of Orange is the New Black on Netflix. Maybe I don't want to pay for Netflix to get one show. Maybe I don't want to join AT&T just to get an iPhone. But as long as there's lots of competition and you can replace Orange is the New Black with The Handmaid's Tale on Hulu, there's robust competition, no one's getting driven out of business, etc. Netflix is gaining customers and Comcast might be losing customers, but that's "fair" - or at least fair enough for regulators to ignore it. Comcast can make better exclusive content on NBC, USA Network, Syfy, and Bravo or license it to regain customers. Verizon did push hard for Android devices like the original Motorola Droid to overcome their lack of iPhone.

Again, exclusivity deals might not be great, but anti-trust law concerns itself with companies that are using a dominant, monopolistic position to eliminate competition.

Given the amount of iPhones in circulation, I'm pretty sure Apple needed a significant amount of LTE chips.

"Buy five thousand and I'll give you 10% off"

"Buy five thousand and don't buy from my rivals and I'll give you 10% off"

"Buy five thousand and I'll give you 10% off"

"Buy five thousand for the next few years, and only from us, and I'll give you 20% off, because now we know we'll have cashflow for years"

I’m not being coy; I don’t understand. Isn’t “we will take less money from you if you don’t work with our competitors” one of the cornerstones of a competitive market? I’d understand if the payment went to a corporate officer to act at odds with the interests of his employer, but I guess I don’t see how this is distinct from any other contract to be a sole distributor, sole provider, etc. Certainly their competition could kill such a deal by just beating the price cut?

It used to be legal regardless of your market share, but during the tail end of the Gilded age, we learned the hard way that once someone gets big enough that they can kill the business of their customers/suppliers by refusing to sell to/buy from them, they can stop playing by the rules of a free market where they compete with others to provide a better product or service at a cheaper price, and instead entrench themself as a permanent monopoly that gets monopoly rents and does not have to fairly compete.

So, antitrust laws were born, which limit the kind of actions you can take if you have a commanding market position.

No. "We take less money for our products than our competitor" is a competitive market.

> The agreement made clear that Qualcomm would cease these payments, if Apple commercially launched a device with a chipset supplied by a rival. Furthermore, for most of the time the agreement was in place, Apple would have had to return to Qualcomm a large part of the payments it had received in the past, if it decided to switch suppliers. This meant that Qualcomm's rivals were denied the possibility to compete effectively for Apple's significant business, no matter how good their products were. They were also denied business opportunities with other customers that could have followed from securing Apple as a customer.

Also, no, there are many reasons why the competition couldn't beat them. Be it that Qualcomm is selling at a loss, simply to kill the competition, or be it that the competition can only supply a smaller amount than the buyer needs, but at a lower price. In a competitive market, that smaller supplier could earn money to gradually grow, but the headstart of the established supplier can be used to keep the smaller supplier unable to ever sell.

Part of the reason Apple agreed to such a deal is because having a longer term contract will give them a better per unit price.

If you follow that line of thinking and Qualcomm gets a fine because of that, the commission should also force Apple to purchase LTE chips from multiple suppliers, because they can force the price down so much due to the fact they're 80% of the market. It goes both ways.

Does it still sound okay to you?

http://europa.eu/rapid/press-release_IP-18-421_en.htm

> The agreement made clear that Qualcomm would cease these payments, if Apple commercially launched a device with a chipset supplied by a rival. Furthermore, for most of the time the agreement was in place, Apple would have had to return to Qualcomm a large part of the payments it had received in the past, if it decided to switch suppliers. This meant that Qualcomm's rivals were denied the possibility to compete effectively for Apple's significant business, no matter how good their products were. They were also denied business opportunities with other customers that could have followed from securing Apple as a customer.