Qualcomm vs. FTC, Apple and Intel: Deceptions and Misdirection

    The Qualcomm/FTC trial is pulling a lot of interest because the outcome could shift mobile technology leadership from the U.S. to China, which sadly isn’t an uncommon result of trials like this. I’ve been involved in litigation myself for nearly a decade, or all told, on and off since the early 1980s. Over the years, I’ve been pulled into litigation discussions by clients, observed trials, and had the privilege to serve as a foreman on several juries and an expert witness in several trials. What you come to realize is that a trial isn’t a search for truth, but performance art where the best performance in a less than open-and-shut case (most fall into this category) wins.

    This is one of the reasons good litigators are paid, and are worth, their weight in gold. They are expert at this performance art and, if used properly, can improve the odds of winning significantly. You can often tell who knows they are in the wrong by the class of attorney they hire. Someone sure of a win will typically scrimp on attorney’s fees while someone who has severe doubts will generally pay whatever it takes to get top talent.

    What makes the Qualcomm vs. FTC (with Apple and Intel in the wings) litigation very interesting is that Qualcomm, because it is a licensing company, has an unusual number of attorneys working at the firm, and its licensing practice is specifically designed to avoid litigation. Apple has Intel’s old top attorney, who was uniquely famous for using litigation as a weapon, and Intel is famous for losing lawsuits in such a way that the result defined Pyrrhic victory. That is a victory in which the costs are so high that the result for the winner isn’t significantly better than if they had lost. But Apple and Intel are working through the FTC, which is missioned to help the consumer, offsetting what otherwise would likely be an unbeatable advantage.

    Pages of Testimony

    I’ve been reading through the hundreds of pages of testimony on the Qualcomm vs. FTC case for the last week and much of it appears designed to confuse the judge, Lucy Koh, who seems to be rightfully getting kind of annoyed with these efforts. Judges aren’t engineers or licensing specialists, and given how unique Qualcomm is, there isn’t a ton of case law on this subject. Qualcomm is at a disadvantage because it is far smaller than either Intel or Apple and because its licensing model is relatively unique in the market. Courts have trouble with unique concepts, largely because of that lack of case law, and that means they must rely on the experts put forth by the various parties, who lose credibility due to the fact that they are paid selectively by each side. In some cases, the court can appoint something like a Special Master, a type of in-house expert, to help with their understanding but that hasn’t happened in this instance.

    It is clear that the FTC got involved in this at Apple and Intel’s request, which could backfire on them. This risk is largely since FTC, or any government agency, doesn’t work for anyone but the government. The reason that this could backfire is that Apple and Intel behave like monopolies themselves. Apple maintains margins that are around three times industry average and employs a lock-in strategy, which has allowed it to increase revenues during times of reduced sales by simply raising prices that their locked-in customers must then pay. Intel has repeatedly been caught locking out competitors like AMD from key markets using anti-competitive practices, which the FTC has sued it for. (Intel has been repeatedly hit for this, as has Apple.)

    The irony is that this is very much like the two biggest bullies in school dragging a smaller kid to the principal, complaining about being bullied. Even if true, you’d think it would still end badly for the bullies because, well, they are more obviously bullies. Maybe it is to shift interest from their own anti-trust exposures, but it seems incredibly risky given that we are only talking something like $1.50 per $1,000 phone. But we aren’t. The end goal appears to be the destruction of Qualcomm, with the eventual dominance by Apple of the smartphone market, where it is currently having serious problems because there are far better smartphones for far less money and Qualcomm is enabling them.

    Deceptions and Misdirection

    So, the FTC, backed by Apple and Intel, is the plaintiff and Qualcomm, largely standing alone, is the defendant. If it wasn’t for the fact that the FTC really doesn’t work for Apple or Intel, Qualcomm would be totally outmatched regardless of its defense. This is particularly true given that Apple sought to cripple Qualcomm by unilaterally cutting its contractually obligated payments to the firm, allegedly backing an unsuccessful hostile takeover by Broadcom (which failed), and allegedly supplying Qualcomm’s intellectual property to Intel so that Intel could close what has been a huge technology gap between Qualcomm and Intel’s modem offerings.

    In reading through the testimony, it appears clear that even the basis of this case is in question. It is presented as a pricing dispute over a $7.50 licensing charge Qualcomm levies on iPhones, which they argue should be closer to $6 (most pay $13 and get less service, by the way). This disputed amount is about .15 percent of the cost of a $1,000 iPhone. Even if Apple passed the saving through to consumers, which it likely would never do, given its focus on increasing margins, this would save you $1.50 on your next iPhone purchase. The seeming misdirection is that while this would result in billions to Apple, it likely should be paying a premium over the $13 other firms pay because it requires a massive amount of special services also identified in the trial. So, ironically, Qualcomm shouldn’t have given the firm a discount and likely wouldn’t be in this position if it hadn’t. (Typically, Qualcomm licenses the manufacturers of the phones, not the brand owner, but made a regrettable exception for Apple.)

    What became clear in testimony this week was that Apple just wants Qualcomm’s IP, but doesn’t want to pay for it. An Apple executive witness testified that Qualcomm refused to sell Apple modems to support the FTC contention that Qualcomm punitively punished firms that didn’t license its technology. While true, this was an interesting deception that avoided the nuance. What happened was that Apple wanted access to source code as part of the deal, but since it had been allegedly providing this source code to Intel to help it catch Qualcomm, Qualcomm demurred and provided three choices.

    Apple could get the modems without the source code (since Qualcomm does much of the integration work, Apple doesn’t really need it); it could get the last generation of Qualcomm modems, which it had the source code for and had been crippling to cover up the fact that the Intel modems weren’t competitive; or it could get the new modems and the source code if Apple committed to using them for at least 50 percent of its phones. On this last, Qualcomm wanted to make sure it didn’t provide Intel the source code through Apple and then not actually sell any of its own modems.

    This reminds me a bit of an experience I had with Microsoft a decade or so ago. The company was briefing me on Office pricing changes and indicated it had killed a program that allowed employees whose companies provided them with Office to get a free copy at home. It was a very popular feature of the Microsoft license, so I asked why this change was done. They said that companies asked for this popular feature to be dropped. They then explained that this happened after they told the companies that if the employees provided illegal copies to their families or friends, the company, not the employee, would be sued. You see, it wasn’t that the firms didn’t want the free copies, they didn’t want to be sued. In the Qualcomm case, it wasn’t that the company didn’t want to sell Apple modems, it just wanted to be paid and not ripped off. Which, to me, seems rather reasonable.

    Wrapping Up: Looking Toward the Results of This Important Case

    It is worth looking at this case because it is a showcase of how strong litigation teams perform and how twisted the truth can become in the process. Clearly, if the court realizes that this is just a complex strategy to remove Qualcomm from the board, initially replacing it with Intel and eventually allowing Apple to again dominate the smartphone market, it will go in Qualcomm’s favor. If the court doesn’t realize that and is instead focused on this being about Qualcomm overcharging, then the result could be very different even though, and this is ironic, Apple appears to get more benefit for less cost than any other smartphone vendor.

    From the outside, this is kind of like looking into an abusive relationship where the abused spouse is protecting the abuser. Qualcomm still hasn’t really taken the gloves off and seems to believe that reconciliation is a viable outcome, even though it is clear Apple and Intel’s goal is to drain and then kill Qualcomm. Adding to this is that it appears likely that Apple plans to do the same thing to Intel. And as people in Qualcomm early on were pointing out that Apple was being disingenuous and planned to hurt that company, I expect people in Intel who are also not being seriously considered are anticipating Apple will do the same to that firm. Intel doesn’t really like dissention in the ranks so, I expect, those folks are being managed out of the company as we speak.

    Both Apple and Intel are having serious issues that have nothing to do with Qualcomm. Apple hasn’t had a true hit product since the iPad, largely because Tim Cook has no clue how Steve Jobs turned Apple around and made it successful again. Intel doesn’t even have a CEO. Its last one was terminated for cause and under a cloud of insider trading. Litigation can be, and in this case is, a massive distraction that won’t fix either critical problem, though it does take attention away from them. I just don’t see that shifting attention is what either firm needs now.

    In the end, this is relatively simple. Apple created the current smartphone market and wants to own it. It can’t with Qualcomm providing technology to rivals so it has convinced Intel and the FTC to help it get rid of Qualcomm with the eventual plan to render Intel redundant as well, thus assuring it can again own the market. Of course, if it is successful, the FTC will likely break it up, but not before the existing executive team retires with massive financial gains.

    That is what really makes this fascinating to watch.

    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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