“In the world’s history, certain inventions and discoveries occurred, of peculiar value, on account of their great efficiency in facilitating all other inventions and discoveries. Of these were the arts of writing and of printing, the discovery of America, and the introduction of Patent laws.” –Abraham Lincoln, 1859
While the U.S. government is pulling out all the stops to undermine Huawei’s drive to dominate the 5G future, its own Federal Trade Commission (FTC) is pursuing litigation which, if successful, would seriously damage the only major U.S. competitor to that Chinese company: Qualcomm. Given the importance of the 5G rollout to both national security and economic leadership in this technology, the outcome of this case has major implications for the U.S.-China rivalry in coming decades.
The FTC case was filed just three days before the end of the Obama administration and, for reasons which are hard to fathom, is now being pursued in court by the Trump FTC. The case alleges that Qualcomm abuses its patented technology, which is the acknowledged world leader in mobile communications, to impose larger than warranted royalty fees and conditions on cellphone and infrastructure equipment makers. The theory is that this discourages competition and reduces growth and innovation in the industry. The only Republican commissioner at the FTC in January 2017 dissented vigorously in a highly unusual public statement. She asserted that the filing is “…an enforcement action based on a flawed legal theory…that lacks evidentiary support” and “will undermine intellectual property rights in Asia and worldwide.” The current chief of the antitrust division at the Department of Justice has spoken out against the type of case alleging abuse of patent rights as reflected in pricing structures. Legal scholar Adam Mossoff notes that the FTC case has little real world, empirical support: “Extensive empirical research since 2007 has failed to find any of the predicted harms of stifling innovation or higher prices, and in fact has found the opposite.”
The FTC also alleges that Qualcomm has a monopoly in the “premier smart phone” market, inventing a new economic sector in so doing, and abuses its dominance with higher prices and licensing requirements for the use of its technology. Former Boston University School of Law Dean Ron Cass counters the theory behind this assertion and outlines the economic damage it could cause in the real world: “As a practical matter, in trying to limit competition based on innovation, the FTC undermines an essential basis for economic success. If economic growth is the engine of prosperity, innovation is an essential fuel.” He also notes that cases of enforcing pricing for patented innovations “risks retarding the growth of successful firms at the instance of less successful companies.”
So why is the FTC pursuing this case? The Obama administration was famously friendly to Silicon Valley firms such as Apple and Google. A lawyer for Apple’s supplier network, most of whom build their products outside the U.S., noted in an op-ed: “[Qualcomm] has used its powerful market position to extract unreasonable fees from phone manufacturers…hampering competition in a lucrative tech field and driving up prices for consumers.” This should sound familiar for the maker of the $1,000 smart phone. One analyst noted that the only major difference between an iPad and an iPhone is the phone’s cellular capability. The price difference between the two is around $300. Testimony in the FTC trial showed that Qualcomm, the premier maker of wireless modems, charges about $7.50 for its product, hardly denting the $300 premium for the iPhone. One of Apple’s witnesses at the trial was also forced to admit that, for the 4G/LTE system now dominant in the mobile phone markets, there was no suitable alternative to using Qualcomm’s technology. Apart from Apple and other U.S. firms, the first witness called on behalf of the FTC was Huawei. Other Chinese firms like Lenovo have also testified on behalf of the FTC.
Much of the critique of Qualcomm stems from transparent efforts to undermine its business model from firms and countries which have not been able to match Qualcomm’s leadership. The San Diego-based company invented the process known as Code Division Multiple Access (CDMA) in the 1990s, and it has proven to be the best system for rapid increases in the amount and speed of information flows over mobile networks ever since. It is the undisputed leader in 4G and, according to many analysts, 5G technology. The company has maintained its technological lead by dedicating over 20 percent of its revenues into new research. In the last quarter of 2018 they spent 26 percent of all revenues on research and development. This is about 10 times the average for all companies in the U.S. for investing in new technology and products. Qualcomm already holds over 40,000 patents and has applied for more than 100,000 new ones around the world. Given the importance and rapid growth of communication networks, national antitrust authorities in China, Korea, Taiwan and Europe (all of whom enjoy large trade surpluses with the U.S.) have attacked Qualcomm’s business model. China and Europe have each fined them close to $1 billion for alleged abuse of their dominant technology, and along with Korea and Taiwan have forced them to price their products at lower levels.
While other U.S. firms such as Intel and Apple have tried to match Qualcomm in semiconductor processors and modems, they have not yet succeeded. The only serious competition for 5G is Huawei. The Chinese mobile technology leader enjoys the advantages of a largely closed market for service providers and infrastructure suppliers, giving them huge economies of scale. Huawei has won significant market share, often with generous government financing, worldwide, with 31 percent of Europe’s market and 38 percent of the Asia-Pacific market. There are no significant U.S. makers of basic telecommunications infrastructure equipment like switches. The other main competitors are Ericsson, Nokia and Samsung, although U.S.-based Cisco is strong in some subsegments of the market. But only Huawei can vie with Qualcomm in creating the new 5G operating technology and equipment.
Qualcomm produces semiconductor processors, modems and operating system software to enable 4G and 5G networks. If its business model, driven by profits from these products and from associated licensing fees, is further undermined by an FTC victory in its pending lawsuit, or even a settlement that forces it to lower prices, the field for 5G will be left to Huawei. One analyst Your text to link here…(puts the dilemma bluntly: “Should Qualcomm be taken out of the 5G race by this ruling, Huawei, a strategic instrument of the Chinese government, would become the sole leading technology company in the world to drive the development of 5G technologies. In a matter of years, China would own 5G.”
The White House, the U.S. Trade Representative, and the Departments of Defense, State and Commerce have been laboring to turn the tables on Huawei, which, if not an instrument of the Chinese state, enjoys financial support, a protected domestic market, and massive research aid from it. According to U.S., Australian, and British intelligence services, it aids and abets the technology acquisition, spying and data collection interests of China. Another hand of the U.S. government, albeit an independent agency, is suing to weaken the major U.S. challenger to the Chinese wireless communications juggernaut. Massive economic and national security interests are at stake if the FTC arm prevails. A ruling in favor of the FTC would also undermine the rights and economic models of all patent holders. Hopefully the presiding judge will rule against the FTC—but why won’t the Trump FTC follow the clear position of the U.S. executive branch and suspend its action on grounds of national security?