Qualcomm Used Patent Monopolies To Shake Down The Entire Mobile Phone Industry For Decades

from the and-we-all-suffered dept

Just a few weeks ago, Qualcomm and Apple settled a massive patent dispute on the eve of a trial. In the run-up to the settlement, Apple had made a really compelling case that Qualcomm’s practices involve blatant abuse of its patents to jack up prices to insane levels and to limit any real competition. Just recently we wrote about how media-tracking giant Nielsen was abusing patents for anticompetitive purposes, but they looked like blatant amateurs compared to Qualcomm. As we noted in that post, our founding fathers worried quite a bit about the impact of patent monopolies and how they would stifle innovation and competition. James Madison said:

“But grants of this sort can be justified in very peculiar cases only, if at all; the danger being very great that the good resulting from the operation of the monopoly, will be overbalanced by the evil effect of the precedent; and it being not impossible that the monopoly itself, in its original operation, may produce more evil than good.”

And Thomas Jefferson, who grudgingly ran the patent system for a while (and where he tried to institute rules to prevent abuse) seemed to regret the entire concept of patents:

… generally speaking, other nations have thought that these monopolies produce more embarrassment than advantage to society; and it may be observed that the nations which refuse monopolies of invention, are as fruitful as England in new and useful devices.

But one quote regarding such monopolies that sticks most with me is that of UK Parliament member Thomas Macauley, who gave a famous speech in 1841, in which he declared:

Sir, that I may safely take it for granted that the effect of monopoly generally is to make articles scarce, to make them dear, and to make them bad…

He further noted that if there is a case that the only way to remunerate people is through such a monopoly they may grudgingly be granted, but warns of the evil this will enable if allowed to do more than incentivize the original creation:

It is good that authors should be remunerated; and the least exceptionable way of remunerating them is by a monopoly. Yet monopoly is an evil. For the sake of the good we must submit to the evil; but the evil ought not to last a day longer than is necessary for the purpose of securing the good.

I’m thinking about these quotes, yet again, in relation to Qualcomm. Just a month after settling the lawsuit with Apple, a federal judge in an ongoing antitrust lawsuit filed by the FTC, laid out in massive detail just how evil Qualcomm has been in using its monopoly powers to stifle innovation and competition. The 283-page ruling is incredibly damning — and if you don’t feel like reading the whole thing, Tim Lee over at Ars Technica has an only slightly shorter summary of just how Qualcomm’s shake down scam worked.

I read every word of Judge Koh’s book-length opinion, which portrays Qualcomm as a ruthless monopolist. The legal document outlines a nearly 20-year history of overcharging smartphone makers for cellular chips. Qualcomm structured its contracts with smartphone makers in ways that made it almost impossible for other chipmakers to challenge Qualcomm’s dominance. Customers who didn’t go along with Qualcomm’s one-sided terms were threatened with an abrupt and crippling loss of access to modem chips.

“Qualcomm has monopoly power over certain cell phone chips, and they use that monopoly power to charge people too much money,” says Charles Duan, a patent expert at the free-market R Street Institute. “Instead of just charging more for the chips themselves, they required people to buy a patent license and overcharged for the patent license.”

Qualcomm — which it should be noted has been one of the most aggressive agitators against patent reform (and sometimes in favor of making patent law much, much worse) — is basically the world’s largest patent troll, and it loved every minute of it.

Qualcomm’s patent licensing fees were calculated based on the value of the entire phone, not just the value of chips that embodied Qualcomm’s patented technology. This effectively meant that Qualcomm got a cut of every component of a smartphone?most of which had nothing to do with Qualcomm’s cellular patents.

“Qualcomm charges us more than everybody else put together,” Apple executive Jeff Williams said. “We’ve never seen such a significant licensing fee tied to any other IP we license,” said Motorola’s Todd Madderom.

And, of course, Qualcomm leveraged its position to hold everyone over a barrel:

These high royalties reflected an unusual negotiating tactic called “no license, no chips.” No one could buy Qualcomm’s cellular chips unless they first signed a license to Qualcomm’s patent portfolio. And the terms of these patent deals were heavily tilted in Qualcomm’s favor.

Once a phone maker had signed its first deal with Qualcomm, Qualcomm gained even more leverage. Qualcomm had the right to unilaterally terminate a smartphone maker’s chip supply once the patent licensing deal expired.

“If we are unable to source the modem, we are unable to ship the handset,” said Motorola executive Todd Madderom in a deposition. “It takes many months of engineering work to design a replacement solution, if there is even a viable one on the market that supports the need.”

That made Qualcomm’s customers extremely vulnerable as they neared the expiration of a patent licensing deal. If a customer tried to negotiate more favorable terms?to say nothing of formally challenging Qualcomm’s patent claims in court?Qualcomm could abruptly cut off the company’s chip supply.

And, of course, Qualcomm used this power to crush the competition and stamp out any kind of non-Qualcomm innovation.

Qualcomm’s first weapon against competitors: patent licensing terms requiring customers to pay a royalty on every phone sold?not just phones that contained Qualcomm’s wireless chips. This gave Qualcomm an inherent advantage in competition with other chipmakers. If another chipmaker tried to undercut Qualcomm’s chips on price, Qualcomm could easily afford to cut the price of its own chips, knowing that the customer would still be paying Qualcomm a hefty patent licensing fee on every phone.

Also notable: right after Apple and Qualcomm settled their legal dispute in April, Intel announced it was exiting the mobile 5G chip space, and admitted it was entirely because of that settlement:

?In light of the announcement of Apple and Qualcomm, we assessed the prospects for us to make money while delivering this technology for smartphones and concluded at the time that we just didn?t see a path,? [Intel CEO Bob] Swan said.

And the ruling a month later made clear, Qualcomm’s patent attack against Apple was very much driven by fear of competition from Intel:

Freed of Qualcomm’s chip supply threat, Apple began to challenge Qualcomm’s high patent royalty rates. Qualcomm responded by cutting Apple off from access to Qualcomm’s chips for new iPhone models, forcing Apple to rely entirely on Intel for the cellular chips in its 2018 models. Qualcomm sued Apple for patent infringement in courts around the world, while Apple pressed the Federal Trade Commission to investigate Qualcomm’s business practices.

And, of course, Qualcomm has long used its patents to directly stifle any competition as opposed to the indirect versions described above:

Chipmakers are ordinarily expected to acquire patents related to their chips and indemnify their customers for patent problems. But Qualcomm refused to license its patents to competitors, putting them in a difficult position.

“The prevailing message from all of the customers I engaged with was that they expected us to have a license agreement with Qualcomm before they would consider purchasing 3G chipsets from MediaTek,” said Finbarr Moynihan, an executive at chipmaker MediaTek.

If a chipmaker asked to license Qualcomm’s patents, Qualcomm would only offer a promise not to sue the chipmaker itself?not the chipmaker’s customers.

As Tim Lee highlights, Qualcomm was so comically evil in executing this plan, it literally laid out the details of how to starve MediaTek (MTK) in a PowerPoint presentation:

This is summarized in the judge’s opinion:

The slide includes the strategy ?make sure MTK can only go after customers with WCDMA SULA,? with an arrow leading to ?Reduce # of MTK?s 3G customers to ~50.?… The next strategy is ?Formulate and execute a GSM/GPRS strategy to destroy MTK?s 2G margin & profit,? with an arrow to ?Take away the $$ that MTK can invest in 3G.? …. Thus, Qualcomm?s refusal to license MediaTek was designed to (and in fact did) limit MediaTek?s customer pool and reduce MediaTek?s revenue base to invest in future cellular generations.

There’s a LOT more in the ruling by Judge Lucy Koh and it basically lays out a road map of pure evil by Qualcomm, allowing it to skim a ton of (literal) monopoly rents off the entire mobile phone market, even when its own innovations were a minimal part of that market — while at the same time abusing its patent position to deliberately stifle competition and innovation. The court order says that Qualcomm needs to renegotiate its licenses, and can no longer use its “no license, no chip” deals that block customers from buying Qualcomm chips if they don’t have a license.

Of course, Qualcomm won’t go down without a fight, and has announced that it’s appealing the ruling. So this will go on for some time. But if you ever want a pure example of the “evil” created by excessive patent monopolies, Qualcomm is about as pure an example as you can find.

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Companies: apple, intel, mediatek, qualcomm

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Comments on “Qualcomm Used Patent Monopolies To Shake Down The Entire Mobile Phone Industry For Decades”

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That Anonymous Coward (profile) says:

But we don’t need any oversight, no looking at possible reforms, all we need is more of these laws so we can stay king of the mountain.

Why compete when you can spend less time & money to just make sure no one else can climb the hill? How much better might things have gotten if they had to compete with an upstart with a better mousetrap?

But Congress believes if they hand it out, it isn’t a monopoly. But this has NOTHING to do with the money flowing into their coffers to keep the job they use to screw citizens they are supposed to do the best for.

Anonymous Coward says:

Re: Re:

The rather odd thing about Qualcomm is that while their licensing department is the epitome of evil, their R&D is actually top notch, and they’ve been developing things that are a generation ahead of the rest of the industry.

Of course, the REASON they’re a generation ahead could quite easily be due to the licensing department preventing anyone else from having the time, money, and legal confidence to bring similar tech to market….

Anonymous Coward says:

Re: Free Market

As the quotes from Jefferson and others in the article attest, it’s not that black and white. We do need the patent system but, at the same time, it needs a massive overhaul to ensure the Qualcomms of the world (foreign companies hold US patents, too) can’t pull this kind of crap.

For one, how is it they’re able to force users of their chips to license their patents when those companies aren’t replicating Qualcomm’s IP, they’re purchasing and using Qualcomm’s product? Patent licensing should only be an option in cases where the licensee wants to reproduce your technology, not simply consume your products.

For another, patents last far, far too long and are far too easily extended almost indefinitely. There ought to be a strict and short lifespan for patents, no more than 5 years and with no extension possible. Perhaps even shorter in certain fast-moving fields such as wireless technology.

Anonymous Coward says:

Re: Re: Free Market

… generally speaking, other nations have thought that these monopolies produce more embarrassment than advantage to society; and it may be observed that the nations which refuse monopolies of invention, are as fruitful as England in new and useful devices.

What part of Jefferson opinion in that make patents necessary?

Anonymous Coward says:

Re: Re: Re: Free Market

Don’t be a pedant.

All of the quotes taken as a whole and Jefferson’s role as head of the patent system for a time proves that he agreed that patents had a role but were too easily abused. Even then, right at the start, the patent system needed reform. Despite this, they kept the patent system so clearly they thought the benefits outweighed the deficiencies.

James Burkhardt (profile) says:

Re: Re: Re:3 Free Market

In the days of guilds and master/apprentice training, It was not unheard of for the unexpected death of a master to result in knowledge of methods and the use of tools to accomplish specific tasks to be lost. These trade secrets were guarded jealously. This limited the capacity for innovation and lead to the risk of the progress of the arts being lost.

Patents were intended as the solution – a means of revealing to those skilled in the trade, if not the general public, new developments without sacrificing, in the short term, the exclusivity that kept those developments secret.

We see that the system in the modern day is not succeeding at this goal. Expansion of patentability, expansions of patent scope, and failures in the system to research prior art have moved the system toward protectionism, rather than encouragement to publicly reveal innovation.

And in the modern era there is a serious question if the exclusivity is the best option to achieve that encouragement. I would say it probably is not. But to say that patents in their totality are purely protectionism is incorrect.

Anonymous Coward says:

Re: Re: Re:4 Free Market

it is almost impossible for industrial knowledge to be lost, if the process is well understood at a scientific level, by those carrying it out. However what has happened several times in history is that a particular ore has run out, and nobody has stumbled on a replacement. Damascus steel is the most famous example, and it properties came not from the steel making process, but rather an alloying element in the ore used to make it. Knowing you need ore from a particular mine is not useful when there is no more ore left in the mine.

Mason Wheeler (profile) says:

Re: Re: Re:5 Free Market

That’s one theory. The fact is that nobody is really sure, and even the best modern-day research can only come up with steel that is "very similar to" Damascus Steel, because the relevant knowledge has been lost.

Steel is actually one of the best examples of the legitimate need for a patent system. Wootz (aka. Damascus Steel) wasn’t the first time it was created. Not even close, in fact; the earliest known steel samples date back to ~1400 BC! But because of smiths keeping it a secret, the technology got lost and independently rediscovered so many times that it’s a bit surprising that we have it today at all!

And the reason we have it today–the reason we had an Industrial Revolution that gave birth to the modern age, built on cheap, widely-available steel–is because Henry Bessemer was English and lived in a time when the English patent system existed, and he patented his Bessemer Converter process for industrial steelmaking. And since then, we’ve never lost the ability to make steel again, because it was published for the general public to get their hands on.

But that only happened after secrecy kept losing the technology, over and over and over again, and set back mankind’s progress by literally 3000 years.

Anonymous Coward says:

Re: Re: Re:6 Free Market

Bessemer had huge advantages over the ancient smiths, chemical analysis, and a knowledge of chemical reactions. Also, once he built his factories, and gotten them into production, quite a few people were able to go elsewhere and duplicate the process.

Before that, while how to make steel was reasonably well know, there was no knowledge of the finer points of the composition of ores, or other process inputs, never mind the chemistry to create a particular alloy deliberately.. Knowledge of steel making has been pretty well preserved down through history, but the result has always been variable from area to area, due to variations in ores, fuels and fluxes at a level that people did not understand, because they could not analyse them.

Take iron ore, limestone, and charcoal, and feed into a furnace in these ratios, will produce some sort of steel, but the qualities will depend on the sources of the inputs. If you do not know what is actually in your steel, then you control your product by which mines you get your ores, and that knowledge ceases to be useful when the mine runs out of the ore that you want, and does not help you to find a replacement ore.

Anonymous Coward says:

Re: Re: Re:7 Free Market

That lost & reinvented knowledge is a process that continues to happen today. As American manufacturers were being undercut by cheap foreign-made products and shutting down, the bulk of their acquired knowlege was never directly transferred to those Chinese factories that supplanted them, those low-wage sweatshops who pushed out poor quality products because it was all they were capable of.

Steel is very easy to make but very hard to make well, consistently, in a high-speed mass-production environment. The Chinese had to figure out and essentially re-learn that esoteric knowledge for themselves through trial and error.

Anonymous Coward says:

Re: Re: Re:8 Free Market

That lost & reinvented knowledge is a process that continues to happen today.

There is a level of ability that comes from practice, and which cannot be passed on by books or videos etc. but only by on the job mentoring, or regained via intelligent trial and error. Often what is lost is not the knowledge itself, but rather the experience needed to connect it to a process.

Uriel-238 (profile) says:

Re: Re: Re:9 Woost steel

These days the processes for making tool steel or spring steel are common knowledge and are superior to woost steel for all practical purposes. It just doesn’t feature the colorful patterns in the metal. And yet contemporary steels suitable not just for weapons and armor but mass freight transport systems and space launch vehicles.

Time and technology march on.

If you want to argue technique, I’m pretty sure the US still has a single company in Washington that manufactures our military submarines, and we’ve been hiring them to make new ones not because we need better war subs but because we want them stay in practice. At least that’s how it was in the aughts.

Anonymous Coward says:

Re: Re: Re:6 Free Market

Steel is actually one of the best examples of the legitimate need for a patent system.

Of the need some centuries ago. It’s much harder to keep physical/chemical processes secret these days, and any old arguments supporting patents need to be re-evaluated in that light.

Often, multiple groups are reading the same research papers and coming up with the same ideas, and the patent is awarded somewhat arbitrarily to whoever got there first, even by a matter of days or weeks. If we’re going to have a patent system, we should keep the applications secret for a year or so, and automatically reject it if someone submits the same thing during that time.

Anonymous Coward says:

Re: Re: Re:7 Free Market

Of the need some centuries ago.

You mean back when they could not carry out a chemical analysis, or accurately record temperatures. That is they could not record details in a meaningful way for patents. How can you describe say Woost steel, for others to reproduce, when the critical component is a metal that nobody knows exists, and which is part of the ore you are smelting and melting in you crucible to create the allow steel that is woost.

Use the Iron ore from this mine is not useful when ore lode has been mined out, and a generation or two down the road, the story becomes one of a lost art, rather than an exhausted source of ore, especially when other ore from the locality do not produce woost, but rather a more ordinary steel..

It’s like traditional Japanese sword making is full of ritual, because that is how you document and pass on a process that you know works, but where you do not know why or how it works.

Uriel-238 (profile) says:

Re: Re: "We do need the patent system"

Why? Why do we need the patent system? What would we lose if all inventions were public domain?

Our patent system is so byzantine and so poorly maintained, it seems to simply be a means for well-funded actors to litigate startup actors out of business, so whatever function the patent system was supposed to serve is not being right now, and perhaps never was.

So let us say we abolished the patent system entirely, what catastrophe would happen?

Anonymous Coward says:

Re: Re: Re: "We do need the patent system"

There will come a time when the patent system MUST be shut down, as the process cannot reasonably be expected to scale indefinitely. When every new patent application must be compared against a gazillion and ever-growing number of previous patents going back many centuries, the workload at the patent office soars while the accuracy steadily diminishes, to the point when the system crashes under its own weight. (Though hopefully the patent system will be reformed long before then, and only the sort of things that require extensive research and development will even be patentable).

Anonymous Coward says:

Have any of Qualcomm’s licensing contracts ever been leaked?

It’s always amusing to see just how one-sided, draconian and extortionary these contracts can be, and just about everyone these days forces you to sign such a contract to be able to do any kind of business with them, and most people who sign such contracts fail to fully understand the potential ramifications of doing so.

Anonymous Coward says:

everything to do with patents, trademarks, copyright, IP etc is designed to allow certain people/industries to make more money than they should/deserve while doing less than originally. the entertainment industry is the best example of greed for doing nothing having secured free incomes for ‘life + 70 years’ for certain people etc and to be able to challenge/shut down places on the net for doing nothing wrong, just because they can and feel like doing so. until those in charge of allowing this sort of travesty to happen are brought to account, it wont stop and those that should be receiving the benefits after a suitable time span, the public, are losing out big time! the whole aim seems to be to achieve 1 or both of 2 things. either to close the internet so that only governments and those they say can access the Internet or the entertainment industries get total control of it allowing only those with explicit permission to access it after paying a fee. either way, the industries will prevent the advancement of technology etc, just as they always do, through simple greed. greed for money, greed for power and greed for control!!

Anonymous Coward says:

Re: Once again our intellectual property institution...

And yet another who would throw out the baby with the bathwater.

I know it’s all the rage right now to pick something to hate, hate it completely just because you dislike some small or even large part of it, then wrap up the whole mess with a partisan bow. But seriously, not everything about IP law is bad, certainly not automatically because some/many abuse it. It does have its good points that we should seek to preserve while demanding that it be fixed rather than abolished.

Utter abolition of just about anything is almost always a terrible idea. Declaring IP law entirely useless to all but evil people only demonstrates a lack of critical thinking ability and smells of playground politics.

Uriel-238 (profile) says:

Re: Re: Throwing out the baby with the bathwater

We’re at a point where having no IP system at all would serve the public better than having the IP system we have today.

So I submit doing a simple thing tomorrow will spare us a lot more harm than spending decades doing nothing while we bicker over what parts of IP law to reform.

Feel free to argue why I would be wrong and why abolishing IP entirely would be catastrophic (to whom?) but right now all it does is pull money from countless poor to the filthy rich.

Feel free to suggest how to reform it so that it would work better than both what we have now and no system at all.

Anonymous Coward says:

Re: Re: Once again our intellectual property institution...

Yeah, let’s continue to allow people to sue smaller companies for daring to have a printer that scans documents to PC. Or permit game companies to use the DMCA to shut down negative reviews by claiming commentary violates copyright law.

Because we clearly haven’t had enough abuse for you to admit we’re at the fucking breaking point.

Lawrence D’Oliveiro says:

Re: Re: throw out the baby with the bathwater

At this point in time, China is in the lead with 5G, and US companies have lost any hope of catching up. And a major factor in that has been Qualcomm’s shakedown tactics against potential competitors.

In other words, arguing about any remaining merits of the patent system is like arguing about any remaining part of the Titanic that is still above water.

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