Qualcomm Slapped With €1 Billion EU Fine For Secret Agreement With Apple

After issuing a record €2.42 billion ($2.71 billion) fine against Google for "abusing its dominance in search" in June 2017, Margrethe Vestager, the European Union's antitrust commissioner, slapped US chipmaking giant Qualcomm with a €997 million ($1.23 billion) antitrust fine Wednesday after it declared that the company's arrangement for Apple Inc. to exclusively use its chips in its smartphones and other consumer devices was illegal, according to the Wall Street Journal.

The EU declared that Qualcomm had abused its dominant position by paying billions of dollars to Apple from 2011 to 2016 in a secret agreement whereby Apple wouldn't buy chips from rivals, making it next to impossible for other companies to compete.

Margrethe

Margrethe Vestager

Of course, Qualcomm can still appeal the decision. But judging by the hard line that EU antitrust authorities have taken against Google, Facebook, Apple and other US tech giants, its chances of prevailing aren't great...

"These payments were not just reductions in price - they were made on the condition that Apple would exclusively use Qualcomm’s baseband chipsets in all its iPhones and iPads," said EU antitrust chief Margrethe Vestager. “This meant that no rival could effectively challenge Qualcomm in this market, no matter how good their products were.”

Qualcomm can appeal the EU’s decision to the bloc’s highest courts, though the company would still have to pay the fine and change any conduct while the court case plays out, a process that can take years.

The decision has no repercussions for Apple because the accusations don’t center around a cartel.

Shares of Qualcomm fell more than 2% after the ruling. Vestager found that Apple was "seriously thinking" of switching to Intel chips during the term of the agreement, but the company was forced to wait until it expired to begin sourcing the chips, as Bloomberg pointed out.

"Apple was seriously thinking of switching" from Qualcomm to Intel chips "which would have made a big difference to Intel," Vestager told reporters at a Brussels press conference. "It would have cost Apple a lot of money" if it switched chips while the deal was in place and it only started to source from Intel when the agreement was about to expire in September 2016.

“The outcome is that rivals are prevented from challenging dominant companies with more innovative products," Vestager said. The fine represents 4.9 percent of Qualcomm’s revenue in 2017, the EU said.

Vestager said the decision sends a warning to other companies who would contemplate using similar practices: “Don’t go there.”

The antitrust wing of the European Commission is only the latest international body to punish the chipmaker: Antitrust officials in China, South Korea and Taiwan have already fined the company a total of $2.6 billion over its licensing policies and pricing.

From California to Beijing, Apple has accused the chipmaker of “exclusionary tactics and excessive royalties” that it alleges have cost it billions of dollars in recent years.

Qualcomm

As Bloomberg pointed out, the Qualcomm case has parallels with the EU’s 2009 finding that Intel’s rebates to computer manufacturers and payments to a retailer were aimed at squeezing out a smaller chipmaker. The EU’s top court has ordered a lower tribunal to reexamine Intel’s appeal and weigh whether the EU can merely assume that such tactics are illegal without proving they were harmful to rivals and competition.

Qualcomm has persistently argued that its business model allows for fair compensation for the innovation that its chips enable. The San Diego-based company also blames Apple for stirring up regulatory attacks and is seeking to block sales of iPhones that do not use its modem chips in several key markets.

The Financial Times pointed out that Qualcomm’s mounting legal issues have hit the share price of Qualcomm and opened the door to a $130 billion hostile takeover bid from rival Broadcom.

European officials are still investigating if Qualcomm abused its dominance between 2009 and 2011, when it sold a type of baseband chip set to two customers below cost “with the aim of forcing (rival) Icera out of the market”, according to the commission charge sheet.

The European Commission launched its investigation in July 2015 and issued a charge sheet five months later.