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Insight

Chipping away at the competition

Nick Pimlott
29/01/2018
On 24 January 2018, the European Commission fined Qualcomm €997million for making payments to Apple, its key customer, in return for Apple's agreement to buy exclusively from Qualcomm. Qualcomm is the world's biggest maker of baseband chipsets that comply with the 4G Long-Term Evolution (LTE) standard – these are chips that allow devices such as smartphones and tablets to connect to a network.

On 24 January 2018, the European Commission fined Qualcomm €997million for making payments to Apple, its key customer, in return for Apple's agreement to buy exclusively from Qualcomm.

Qualcomm is the world's biggest maker of baseband chipsets that comply with the 4G Long-Term Evolution (LTE) standard – these are chips that allow devices such as smartphones and tablets to connect to a network.

Factual background

In 2011, Qualcomm signed an agreement with Apple, committing to make significant payments (totalling billions of US dollars) to Apple on the condition that Apple would exclusively use Qualcomm chipsets in its iPhones and iPads. That agreement lasted until the end of 2016 and made clear that: 

  • Qualcomm would terminate the payments if Apple launched a device with a chipset supplied by a rival; and
  • Apple would have to pay back to Qualcomm a large part of the payments it received in the past, if it decided to switch suppliers.

Breach of competition law

The Commission concluded that Qualcomm held a dominant position in the global market for LTE baseband chipsets over the period investigated (2011-2016). This was based on Qualcomm's high market shares (more than 90%) and the fact that market is also characterised by high barriers to entry because of (i) the R&D expenditure required before a new entrant can launch an LTE chipset; and (ii) barriers related to Qualcomm's intellectual property rights.

Qualcomm abused this dominance by preventing rivals from competing in the market through its exclusivity condition. Considering qualitative and quantitative evidence, the Commission found that both consumers and competition suffered as a result of Qualcomm's conduct. This was based on, inter alia:

  • the extent of Qualcomm's dominant position;
  • the significant amounts paid by Qualcomm in exchange for exclusivity;
  • evidence that Qualcomm's payments reduced Apple's incentives to switch to rivals: internal Apple documents revealed that Apple gave serious consideration to switching part of its baseband chipset requirements to Intel but Qualcomm's exclusivity condition, including the cost of switching was a material factor in why Apple decided against doing so;
  • the importance of Apple as a customer in the market for LTE baseband chipset suppliers: Apple accounts for on average one third of the share of LTE chipset demand. By making sure that rivals had no chance to compete for Apple's significant business, and opportunities with customers that could have followed from securing Apple as a customer, Qualcomm's conduct had an effect on the LTE baseband chipset market as a whole; and
  • that Qualcomm did not demonstrate that the exclusivity condition created any efficiencies.

Impact of Intel

This was the Commission's first abuse of dominance decision since the Court of Justice of the EU's (CJEU) ruling in Intel, which had also concerned exclusivity rebates.

In Intel, the CJEU gave guidance on how the Commission has to prove its case on whether exclusivity rebates amount to an abuse of dominance.  In particular, the CJEU held that, where the party under investigation provides evidence to this effect, the Commission is required to assess the 'as efficient competitor test' – that is, whether a competitor as efficient as Intel would have had to offer prices which would not have been viable and that, accordingly, whether the rebate scheme was capable of foreclosing such a competitor from the market ("AEC test").

In Qualcomm, the Commission considered the AEC test submitted to it by Qualcomm but found that its results failed to prove that the rebates were not capable of harming competition. On this basis, the Commission concluded that Qualcomm's illegal conduct had a significant detrimental impact on competition. It excluded rivals from the market and deprived consumers of genuine choice and innovation for cheaper, better chips.  Qualcomm has said that it will appeal the decision immediately.

Commentary

The importance of internal documents

Competition Commissioner Vestager made clear how important the internal documents received from Apple were, allowing them an understanding they "could never have achieved just by looking at prices and costs". She also made clear in a recent speech that internal documents were also important in the Commission's decision to fine Google last year for favouring its own comparison shopping service. In that case, the documents showed that Google knew its service wasn’t doing well and so Google decided to promote its own service over that of its rivals.

The importance of internal documents cannot be understated and is not exclusive to dominance cases: in 2016, internal documents showed the Commission that the merger between Wabtec and Faiveley was not likely to reduce competition. Internal documents can help the Commission understand the markets and the companies' future plans. This is significant for all companies, whether in relation to obtaining merger clearance, or for customers such as Apple, and suppliers such as Qualcomm in abuse of dominance cases.

No fundamental change and no one 'gold standard'

As far as exclusive rebate arrangements are concerned, the Intel judgment hasn't prompted fundamental changes in how the Commission examines particular rebates and that although the CJEU has clarified the legal framework tests showing the effect an exclusivity rebate has, it will be for the Commission to decide on the best method in each case.

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