The European Union has opened an informal investigation into Qualcomm, raising questions about what it believes could be anticompetitive practices in the market for radio frequency (RF) chips crammed in 5G smartphones. The EU is trying to figure out whether Qualcomm abused its dominant position in 5G modem chips to illegally curb competition in RF parts, the company said last week in its first financial report of 2020.
Qualcomm, the world's largest vendor of chips used in smartphones, is the global leader in the market for modem chips that connect to 3G, 4G, and 5G networks. But the company is also increasingly selling RF components that condition, amplify, and filter out analog radio signals before sending them to the baseband processor. Power amplifiers, switches, filters, tuners and other chips are packaged in the so-called radio-frequency front-end or RFFE.
New 5G modems need to support more frequency bands than the modems chips used in 4G smartphones. But that also means more RF components are needed to accommodate the wide range of frequency bands used by 5G networks around the world. Qualcomm is trying to convince customers that they only need to buy its 5G modems and radio frequency ICs. It has also rolled out antenna modules as part of its pre-integrated 5G solutions.
Qualcomm has landed supply deals for RF components with Google, Samsung Electronics, LG Electronics, and China's Oppo, Vivo and Xiaomi, among others. Steve Mollenkopf, chief executive of Qualcomm, said last week that almost all of the devices equipped with its 5G modems are paired with its RF modules. He added that more than 275 devices on the market or in development are tapping its 5G modems, up from 230 over its last quarter.
Qualcomm said it was in the process of responding to a new investigation by the European Commission, which called on the company to turn over information in December 2019. The commission, the EU's top competition regulator could impose hefty fines or demand changes to its business practices if a violation is uncovered. The EU could impose fines up to 10% of the company's annual sales for overstepping antitrust laws, the company said.
"It is difficult to predict the outcome of this matter or what remedies, if any, may be imposed," Qualcomm said in the earnings report. But it added: "We believe that our business practices do not violate EU competition rules."
The EU has clamped down on the San Diego, California-based company in recent years. Qualcomm was fined $1.2 billion in 2018 for paying Apple billions of dollars to use its chips exclusively, blocking out Intel and other rivals for half a decade. Last year, Qualcomm was fined more than $270 million for predatory pricing, forcing an emerging rival out of the business a decade ago by selling 3G baseband modes for less than its production costs.
Qualcomm is trying to snatch market share from other major players in radio frequency ICs, including Qorvo, Broadcom and Skyworks Solutions. Last month, Broadcom said it entered into long-term contracts to supply Apple with high-performance wireless components and modules to the Silicon Valley giant, giving it guaranteed spots in iPhones and other devices into 2023. Broadcom said it will make $15 billion over the life of the deals.
Akash Palkhiwala, Qualcomm's chief financial officer, said its sales of RF components would grow 50% in the second quarter of 2020. Qualcomm has also stated that it could squeeze 50% more money out of every smartphone by charging steeper prices for the advanced technology in its 5G modems and cross-selling its RF parts. Integrating its 5G modems and RF parts has helped cut development costs in early 5G smartphones, analysts say.
The investigation could add to the regulatory issues that have dogged it in recent years. The company has been slapped with billions of dollars in fines over the last half decade in China, Europe, and South Korea while trying to foil legal threats around the world. Qualcomm has also been fighting legal battles with US Federal Trade Commission (FTC), which three years ago accused it of using anticompetitive tactics to reinforce its monopoly in modems.
Last year, a federal court ruled that Qualcomm illegally hurt competitors in the modem chip market and abused its dominance to force unnecessary patent license fees on smartphone vendors. Qualcomm has delayed the part of the verdict that required it to grant new patent licensing deals to rivals, which it has never done before. The US District Court also ordered Qualcomm to stop forcing its customers to sign patent licenses before buying chips.
The company is attempting to defeat the verdict on appeal. The verdict, if it stands, could force Qualcomm to overhaul its highly profitable patent licensing business. The company has argued that the court's orders would change its patent licensing agreements in ways that would be impossible to undo if the verdict is overturned. Last year, Qualcomm said it continued to honor the terms of its licensing deals while the appeals process plays out.
Qualcomm is also appealing the roughly $1.5 billion of fines slapped on it by the European Commission.