Earlier this year, mobile chip giant Qualcomm (NASDAQ:QCOM) settled with China regulators, ending a prolonged antitrust investigation that commenced in 2013, and agreed to pay a nearly $1 billion antitrust fine. The settlement hurt GAAP earnings per share to the tune of $0.58 per share that quarter, but it was well worth it because Qualcomm could put the matter behind it.
With one antitrust investigation in the rear-view mirror, another has popped up in its place. European antitrust regulators have now decided to take a look at Qualcomm's business practices.
This sounds familiar
The European Commission has opened two separate antitrust investigations to see whether or not Qualcomm has abused its market power to undermine competition. The investigations will look at the company's pricing tactics, as regulators suspect Qualcomm may be leveraging its scale and pricing chips below cost in order to push out rivals. Also at issue is Qualcomm potentially offering discounts for chips if OEMs agree to purchase exclusively from Qualcomm.
Theoretically, the fines could reach upwards of 10% of Qualcomm's top-line sales worldwide, but realistically, that's an extremely unlikely outcome. After all, Qualcomm's TTM revenue is currently $27.5 billion, which would put the maximum fine at $2.75 billion. Qualcomm will likely end up settling for far less, much like it did in China. But these types of investigations often take years to play out anyway, so Qualcomm is unlikely to see any immediate impact. Qualcomm maintains the allegations "are without merit."
It's worth noting that European regulators hit Intel with a 1 billion euro fine for similar practices six years ago.
With great power comes great regulatory scrutiny
The reality is that these types of antitrust probes are simply par for the course when any company becomes too dominant, as Qualcomm has when it comes to both smartphone technology licensing as well as component sales. The U.S., Japan, and South Korea have been putting pressure on Qualcomm because of the unique (and profitable) place it occupies in the value chain.
If investors look at the China settlement, the net result is a positive impact on the QTL licensing business. As part of the settlement, Qualcomm agreed to revise the license terms for its 3G and 4G essential patents, and as a result, Qualcomm is now seeing an influx of agreements. On the last conference call, Qualcomm noted it now has 125 total licensees under the new terms, and the rate at which it is inking these deals is only accelerating. At the same time, compliance in China with OEMs reporting shipments is also on the rise.
The point here is that Qualcomm is used to navigating uncertain regulatory waters, and it always comes out ahead. It's true that I recently decided to sell my own shares personally, but that wasn't because I had doubts about the underlying business. I just lost confidence that the stock could outperform the broader market, since a strong business doesn't always equal a strong stock.
In time, this European antitrust probe will just be water under the bridge.