More From MODOFF on EU Complainers
At what cost victory? Do NOK/ERICY really want to win?
In many markets, QCOM has fostered competition
Without QCOM's efforts to develop CDMA many of today's leading
handset vendors would have had a difficult time entering the market.
The primary motivation behind NOK/ERICY's suit, in our opinion, is
their desire to gain negotiating leverage against QCOM, and to
overcome gaps in their own baseband portfolio. As such they may
ultimately regret inviting government intervention into
the market.
Let’s suppose for the moment that Nokia, Ericsson et.al. persuade the European Competition
Authority that Qualcomm has abused its patents and is overcharging its WCDMA royalty
rates. Presumably they would then ask the Authority to set a new rate for those licenses.
Qualcomm can charge x%, Nokia y%, and so forth. Would this be a victory for Nokia,
Ericsson or any of the other parties to the suit? We do not think so, in fact, we think such a
step would be a major step backward for the industry. Further, we suspect that Nokia and
Ericsson do not want to see this outcome either, or maybe they just haven’t thought it all the
way through.
First, this would essentially invite a government agency to set prices and impose regulations.
We can think of few instances in which this is a good idea. Economics 101 would actually
make the case that such an action stifles competition.
Second, this would not only set the price for a product, this would set the price for
Intellectual Property. This strikes us as a slippery slope, and not only for the wireless industry
but for many sectors of the economy. If a European drug company took issue with a Pfizer
patent could they ask the EU for relief? What if an Indian drug company decided that a Roche
patent was anticompetitive and sued in India. Would any European business welcome a
solution that involved the Indian government setting a price for the drug in question?
In the chemical industries there is a similar argument. How would the chairman of a large
European oil firm react if an American competitor argued that its patents were hindering the
development of the renewable energy industry?
One could make the same point in the music industry. Can the European Competition
Authority argue that David Hasselhoff has cornered the market on TV stars turned “singers”,
and order that he has to cut his hair to give European stars a chance.
The heart of the Nokia/Ericsson case is that Qualcomm charges the same royalty for its
CDMA technology as it does for WCDMA. They argue that QCOM has contributed far less to
the development of WCDMA than it did to CDMA. We would turn that question around.
Perhaps Qualcomm is charging fair value for its WCDMA patents, and is offering its CDMA
patents at a discount. Perhaps that was the only way they could establish CDMA in the face
of aggressive anti-competitive moves by incumbent vendors.
A further complaint is that it offers discounts to handset vendors who use Qualcomm chips
exclusively. Yet we cannot name a single handset vendor that sole sources all of its
basebands from one vendor.
The complainants in the latest suit argue that Qualcomm’s practices reduce competition in
the WCDMA market
.
If that were true, then why was the suit not brought in Japan where WCDMA is far more
advanced? If anything, we would argue that Qualcomm encourages competition. Without the
launch of CDMA we think Samsung and LG would have had a hard time entering the cell
phone market. Today they are number three and four in the space, and conspicuously absent
from the suit. Qualcomm could help bring about a similar change in WCDMA as well. They
have been actively working with handset makers in Greater China to develop new WCDMA
handsets. Qualcomm’s merchant sale of WCDMA chips is a key enabler of a direct threat to
Nokia and Ericsson’s own handset divisions.
We do not know how this case will play out in front the EU. We do argue that government
intervention in the market will likely cause more problems than it solves.
Times of change make incumbents unhappy. They can choose to compete or they can
litigate. Litigation may (and we emphasize may) bring relief, but it will prove temporary in
nature and make conditions worse for everyone. |
