TELECOMS: Fairness Needed In Qualcomm Judgment
Bottom line: The NDRC should force Qualcomm to change some of its licensing practices but not force it to lower prices in its upcoming antitrust settlement against the company.
All eyes will be on China’s anti-monopoly regulator in the days ahead, when it’s expected to rule in a case involving the pricing and licensing policies of global smartphone chip leader Qualcomm (Nasdaq: QCOM). The case is the latest in a string of recent similar antitrust probes by Beijing against major companies. But it’s also quite different because it involves licensing practices for proprietary technology, which aren’t typically included in the conventional definition of monopolies.
That difference has attracted strong attention from a wide range of parties, from Qualcomm’s many Chinese customers, to the US government, which has cautioned Beijing not to confuse maintaining fair market competition with protectionism.
The regulator needs to take extra care with this important decision to demonstrate its neutrality and dedication to free and fair competition, and avoid letting politics play a role. By doing so, it will send the message that any company — be it domestic or foreign — is free to operate in China’s markets as long as it plays by the rules and doesn’t try to stifle competition with unfair business practices.
Qualcomm’s case first became public during the summer, when reports emerged that it was being investigated for anti-competitive practices by the powerful National Reform and Development Commission. The case was often grouped together with other similar probes against companies ranging from software giant Microsoft (Nasdaq: MSFT) to luxury car maker Audi, which were accused of everything from operating true monopolies to misleading pricing based on strong their market position.
Unlike those cases, Qualcomm operates in a relatively competitive space, vying for business with a wide range of other cellphone chip makers like MediaTek (Taipei: 2454) and Marvell Technology (Nasdaq: MRVL), just to name a few. What’s more, Qualcomm’s pricing and licensing conditions are well known to all of its customers, since they must sign agreements when they want to use the company’s chips in their cellphones.
But many of China’s up-and-coming smartphone makers were unhappy about Qualcomm’s licensing contracts, which imposed some unusual conditions on them on issues like competition and cross-licensing between each other. Those smartphone makers are some of China’s fastest-rising high-tech manufacturers and include the likes of Xiaomi and Lenovo (HKEx: 992), which were the world’s third and fourth largest brands in this year’s third quarter.
Complaints from Chinese manufacturers were a major factor that caught the NDRC’s attention, prompting it to launch its probe more than a year ago. The case has become a regular fixture in the headlines since then, with Qualcomm’s President Paul Jacobs traveling to China last month to discuss the issue.
The NDRC has now held 7 rounds of discussions with Qualcomm since launching its probe, and the regulator was quoted late last week saying it was near a settlement in the case. (English article) In another sign that an announcement will come soon, media also reported late last week that Qualcomm dropped the prices on some of its older chips in China to levels more comparable with competitors. (Chinese article)
The settlement is expected to see Qualcomm face a large fine, possibly as high as $1 billion, which would break the previous record of nearly $500 million levied earlier this year against British drug maker GlaxoSmithKline (London: GSK) for massive bribery of doctors and health officials to buy its products. While the fine will be large, changes to Qualcomm’s pricing and licensing practices could be far more damaging by costing the company billions of dollars in lost revenue in the years ahead.
The importance of the case prompted US President Barack Obama to personally raise the subject with Chinese President Xi Jinping when the 2 met in Beijing last month. Obama expressed concern that China might be trying “to lower the value of foreign-owned patents and benefit Chinese firms employing foreign technology,” according to a US government official.
Some industry observers acknowledge that Qualcomm’s current licensing practices are more far-reaching and excessive than those of its peers. But it can impose such conditions because its chips are generally considered the best in the industry, leading manufacturers to strongly prefer its products to those of its rivals.
The NDRC should take an even-handed approach to this case, and force Qualcomm to remove some of its excessive licensing practices while resisting pressure to force it to lower its prices too much, if at all. Such an approach is especially important as China encourages its own high-tech companies to develop their own exclusive technology, and would send the message that all firms should be rewarded for such development as long as they remain reasonable in their licensing practices.
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