Qualcomm to Be Probed by EU on Royalties, People Say (Update1)
By Matthew Newman
bloomberg.com
Oct. 30 (Bloomberg) -- Qualcomm Inc., the world's second- largest maker of mobile phone chips, will be investigated by the European Union over allegations it overcharges Nokia Oyj, Ericsson AB and other handset manufacturers, people with knowledge of the situation said.
The European Commission, the EU's Brussels-based antitrust authority, has told Qualcomm and phonemakers that it will open a formal probe of complaints over royalty rates in the next few weeks, said two people who declined to be identified because the decision isn't public. An EU probe could lead to Qualcomm being forced to lower its rates or fined as much as 10 percent of sales.
``The impact on royalties would be significant and the impact on finances would be catastrophic,'' said Richard Windsor, a mobile phone analyst at Nomura Securities in London. If the EU forces the company to cut the rate in half, Qualcomm's pretax profit in 2007 would drop by a third to $3.3 billion, he said.
The case focuses on how rewards are shared in the $200 billion industry to supply equipment for third-generation mobile phones, which allow users to access the Internet and play videos. Qualcomm contends it's owed royalties on all of the newest 3G handsets because it holds essential patents. Rivals say Qualcomm has fewer patents on 3G phones than on earlier generations and should lower its rates.
Without Merit
Paul Jacobs, Qualcomm's chief executive officer, told the Financial Times in a June 12 interview that he ``won't be surprised'' if the EU launches an investigation and such a probe wouldn't have a ``big effect'' on the company.
Qualcomm, which is based in San Diego, said in a statement Oct. 27 that the allegations are ``factually inaccurate and legally meritless.''
EU spokesman Jonathan Todd said the regulator ``continues to look into the complaints'' from phonemakers about Qualcomm.
Qualcomm is expected to generate 36 percent of its revenue and 64 percent of its profit from licensing its mobile-phone technology in 2006, according to Ehud Gelblum, an analyst with JPMorgan Chase & Co. in New York who rates the shares ``neutral.''
The EU probe will come a year after Nokia and Ericsson, along with U.S. firms Broadcom Corp. and Texas Instruments Inc. and Japan's NEC Corp. and a Matsushita Electric Industrial Co. unit, said Qualcomm reneged on an agreement to provide its technology under fair and reasonable terms. Ericsson and NEC also accused Qualcomm of abusing its dominant position and charging ``excessive'' royalties on patents used for WCDMA, or Wideband Code-Division Multiple Access.
Broadcom
Broadcom filed a similar complaint against Qualcomm last year in the U.S. A federal court in New Jersey dismissed the complaint last month, saying ``Qualcomm's conduct may engender ill-will, but it must have threatened injury to competition -- not just competitors -- to give rise to antitrust liability.'' Broadcom has said it will appeal.
``We care about Qualcomm trying to squeeze us out of the chipset market by leveraging their royalties on technology rather than competing on a level playing field based on price and quality,'' Mark Nelson, a Washington-based partner at Cleary Gottlieb Steen & Hamilton LLP who is representing Broadcom.
Ericsson said in an e-mailed statement that it filed its complaint ``because the commission's intervention is critical to the continued integrity of open standards.''
Texas Instruments urged a commission probe, saying in an e- mailed statement that ``intellectual property abuse in a standards context cannot be tolerated.''
``It is essential that companies whose patented technology is adopted into a standard uphold their commitments to license these patents on fair, reasonable, and non-discriminatory terms,'' Nokia said in an e-mailed statement.
Standards War
The dispute is rooted in the fight between Europe's GSM, or the Global System for Mobile Communications, and the U.S. approach, which allowed companies to develop competing technologies. GSM controls about 80 percent of the worldwide cell phone market, according to Ovum, a London-based research company.
Nokia has become the dominant supplier of GSM phones in Europe, though it also licenses Qualcomm's CDMA technology, which is used in networks operated by Verizon Wireless and Sprint Nextel Corp., two of the three largest U.S. wireless carriers.
Nokia and Ericsson sought a GSM-based solution for the next generation of mobile technology in the 1990s, in an effort to avoid being too dependent on Qualcomm's CDMA. Nokia and Qualcomm have also challenged each other's patents for CDMA and GSM.
Qualcomm's CDMA technology is used by 13.5 percent of the world's 2.5 billion cell phone users, according to Ovum.
Negotiation Ploy
The battle moved to the International Telecommunication Union, the Geneva-based United Nations agency that establishes and regulates standards. Qualcomm and other U.S. wireless equipment makers pushed for a single 3G standard based on CDMA.
In 2000, the ITU approved five incompatible standards for 3G, including WCDMA and CDMA2000, the successor for networks using CDMA.
Qualcomm and several analysts, including Nomura's Windsor, said the complaints were filed to apply leverage on Qualcomm in royalty negotiations. Nokia's agreement with Qualcomm expires in April 2007.
``It's about making Qualcomm sit down at the table and get a gentlemen's agreement,'' said Alan Brown, an analyst at research firm Gartner Dataquest in Egham, England.
To contact the reporter on this story: Matthew Newman in Brussels at Mnewman6@bloomberg.net . |
