The Most Troubling Part of the FTC Case Against Qualcomm

    I attended the closing arguments for the FTC anti-competitive case against Qualcomm, and I was deeply disturbed by what I saw (a lot of us are having issues with this case). The FTC’s closing arguments seemed to be a collection of poorly applied anecdotes, questionable testimony, and a dramatically disproven theory, all thrown out in an unorganized, rapid fire delivery, interspersed with name calling.

    It felt like Apple had somehow employed the FTC to act against Qualcomm and the FTC was showcasing a rebellion to being directed by a company that should, itself, have been on trial. The judge hasn’t ruled yet, but she likes to rule quickly and seemed to side with the FTC early on. That now seems far less certain. (Judge Koh, the federal trial judge, seemed very engaged in the case and seemed to pivot toward allowing Qualcomm to provide a more robust defense than she initially signaled she would allow.)

    Let me walk you through my concern.

    First, a Correction

    Last week, I also wrote about the FTC trial as well, given that I was observing it in person. I gave a representation of how much Apple wanted discounted on its license from Qualcomm. I said the company should be paying around $13, it was discounted to $7.50, and wanted $6. I can see my mistake was in thinking that Apple was being somewhat reasonable. But, in fact, now that I’ve reread the testimony, the company wanted to initially drop its cost to $1, which was revised upward to $1.50. So instead of wanting a $1.50 additional discount, which is how I initially read this, Apple actually wanted a $1.50 price on a license that sold for $13. If that doesn’t demonstrate the potential for excessive market power, but by Apple, not Qualcomm, I don’t know what does.

    Let’s say you were selling something for $13 and you offered a discount of about half off for volume and got agreement. Then the buyer came back later, after they got the product, and said, you know what, I only want to pay $1.50 and I’m not going to give you any of your money until you agree. I can think of a lot of responses, none of which would be “gosh, that’d be great!” If you had to agree, that should indicate that the other party had excessive power. Apple’s position is that Qualcomm had to agree and didn’t. Why wasn’t Apple on trial instead of Qualcomm?

    Who Has Excessive Market Power?

    In the close, one FTC presentation had me almost yelling. They argued that one of their proof points that Qualcomm was abusing monopoly power was that every time Apple asked for a concession, Qualcomm wanted one back. In short, Apple would ask for a deeper discount and Qualcomm had the nerve to ask for more volume or some other Apple concession. It seemed like the FTC was saying Qualcomm’s ability to counter-offer the massively powerful Apple indicated that Qualcomm had excessive market power.

    But, if you think about it, any firm that can dictate prices to a supplier unilaterally would by definition have excessive market power. That would be Apple, not Qualcomm. It looked like the FTC, which is staffed by capable attorneys, was intentionally highlighting bad Apple behavior but, instead of flagging Apple, was showing Qualcomm as the bad actor.

    The FTC Case Was a Mess

    I should add to this that the FTC case largely pivoted on the testimony of one expert who presented a theory that, if accurate, clearly showed Qualcomm’s guilt. The issue with this expert and theory was that in a prior case between the DOJ and AT&T just a year earlier, the judge in that case threw the same expert’s testimony out because it was pure BS (what the judge said, and it was a lengthy comment, went far beyond BS, implying the guy was a complete whack job). Now, the FTC had to know about this, as the case, an attempt to stop the merger between AT&T and Time Warner, was very high profile and should have been part of their due diligence when selecting him as their expert.

    I should add that I watched this expert testify and he was one of those guys who is a legend in his own mind. You know the type, a self-described genius who isn’t understood by peers whom he thinks are idiots, along with anyone who disagrees with him. The guy must be a huge pleasure to work with but clearly not a reliable expert witness because his brain and his mouth have only a distant relationship.

    If they used the expert and his failed approach, he would certainly be impeached based on that prior trial, yet they used him anyway. One other observation: While there were some very strong litigators on the FTC’s side, the attorney who did the close was arguably the weakest presenter they had, once again suggesting they were intentionally throwing the case. This felt like they were rebelling against directions they didn’t agree with. Now, it could have just been inexperience, but this was a large team that appeared to have experienced litigators on it, but they stayed away from the podium on the final day.

    Wrapping Up: A Troubling Trial

    A lot of things really troubled me about the trial. All the anti-trust cases I’ve covered had the defendant as a large dominant company easily eclipsing the smaller companies that were allegedly damaged, making the monopoly claim relatively easy to establish. In this case, Intel is three to four times larger than Qualcomm, and Apple is over 10x larger (and had reserves larger than Qualcomm’s entire worth), and both firms have a history of bad competitive behavior. Apple, in particular, is known for abusive supplier behavior, excessive margins, and lock-in (anti-competitive) behavior suggesting that it, not Qualcomm, should have been the defendant. Yet Apple was constantly shown as the poor damaged party that couldn’t compete.

    Intel has been a massive thorn in AMD’s side and crossed anti-competitive lines so much that there is a book on its behavior, yet it too were presented as if it were a small company, unable to compete. This was even after substantial testimony that its problems were caused by its own especially horrid execution.

    I left feeling that something was seriously wrong with the FTC. That doesn’t bode well for competition in the United States.

    Rob Enderle is President and Principal Analyst of the Enderle Group, a forward-looking emerging technology advisory firm.  With over 30 years’ experience in emerging technologies, he has provided regional and global companies with guidance in how to better target customer needs; create new business opportunities; anticipate technology changes; select vendors and products; and present their products in the best possible light. Rob covers the technology industry broadly. Before founding the Enderle Group, Rob was the Senior Research Fellow for Forrester Research and the Giga Information Group, and held senior positions at IBM and ROLM. Follow Rob on Twitter @enderle, on Facebook and on Google+

    Rob Enderle
    Rob Enderle
    As President and Principal Analyst of the Enderle Group, Rob provides regional and global companies with guidance in how to create credible dialogue with the market, target customer needs, create new business opportunities, anticipate technology changes, select vendors and products, and practice zero dollar marketing. For over 20 years Rob has worked for and with companies like Microsoft, HP, IBM, Dell, Toshiba, Gateway, Sony, USAA, Texas Instruments, AMD, Intel, Credit Suisse First Boston, ROLM, and Siemens.
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