About a year after the U.S. Federal Trade Commission and Apple (NASDAQ:AAPL) both lodged legal complaints against Qualcomm (NASDAQ:QCOM) over illegal anticompetitive practices, the European Commission has just announced that it is imposing a 997 million euro ($1.2 billion) fine against the mobile chip giant "for abuse of dominant market position."
The central allegation is that Qualcomm paid Apple billions of dollars for exclusivity, whereby Apple agreed not to purchase baseband modems from rival suppliers. These payments were royalty rebates for what Apple has called "extortion-level royalties," but the attached string of "forced" exclusivity may have crossed a legal line, and antitrust regulators aren't happy about it.
The latest in a string of regulatory actions against Qualcomm
Apple and Qualcomm inked their first exclusivity deal in 2011, but it was renewed in 2013 through 2016. Intel (NASDAQ:INTC) promptly came onboard as a second modem supplier as soon as this deal expired. That exclusivity agreement only cemented Qualcomm's position as the dominant supplier of modems in the global market for the crucial chips that allow mobile devices to connect to cellular networks.
From the European Commission's release:
The agreement made clear that Qualcomm would cease these payments, if Apple commercially launched a device with a chipset supplied by a rival. Furthermore, for most of the time the agreement was in place, Apple would have had to return to Qualcomm a large part of the payments it had received in the past, if it decided to switch suppliers. This meant that Qualcomm's rivals were denied the possibility to compete effectively for Apple's significant business, no matter how good their products were. They were also denied business opportunities with other customers that could have followed from securing Apple as a customer.
The agreement constitutes a breach of the European Union's antitrust regulations. The European Commission points out that while market dominance is not illegal, abuse of that position to restrict competition is. Between 2011 and 2016, the period that European regulators investigated, Qualcomm enjoyed over 90% market share, and Qualcomm's behavior only amplified existing barriers to entry, the most notable being the substantial research and development costs associated with developing modems and bringing them to market.
Qualcomm fights back
Apple has clearly cooperated with the European Commission. The release references Apple internal documents several times, and Apple cooperated with South Korean regulators last year in 2016 during that country's antitrust investigation. South Korea fined Qualcomm a record $865 million in December 2016, which is still pending in courts.
Qualcomm has appealed the decision, saying it "strongly disagrees" with the announcement, although the company does not detail its defense beyond vague statements that it is "confident [the Apple] agreement did not violate EU competition rules or adversely affect market competition or European consumers."
Slowly but surely, Qualcomm's anticompetitive playbook is coming to light, and those practices are now catching up to it in court.
Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.