Broadcom is under investigation again for suspected chip monopoly
Latest update time：2022-04-25 11:30
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Less than six months after Broadcom and the Federal Trade Commission formally resolved an antitrust investigation into the chip giant, the company has become a target of the FTC again after complaints that it was once again forcing exclusive agreements with customers, according to people familiar with the matter. In documents seen by The Information, Broadcom blamed a supply chain crisis to justify its customers’ demands.
The FTC is in the early stages of collecting information from the company, a major supplier of chips for products such as routers and data center equipment, the people said. Similar allegations were at the heart of an earlier, multi-year FTC investigation into Broadcom that ended in a settlement last year in which the company agreed to stop forcing exclusive purchasing agreements for chips used in routers and cable boxes.
The current regulatory focus is being driven by companies that have complained about Broadcom’s conduct, but the FTC is following up on those discussions and requesting documents and testimony from the complaining companies, according to people familiar with the matter, a sign that it is taking the issue seriously.
Broadcom, why is it always the defendant?
Broadcom was sued by the Federal Trade Commission in recent years for monopoly charges and agreed to a settlement promising to change its sales strategy. What did Broadcom do to make the FTC upset? Why are chip industry giants often in the spotlight for some form of corruption or bad practices, and are fabless companies challenging their IP model?
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Broadcom sued by Federal Trade Commission
Broadcom is arguably one of the biggest names in the semiconductor industry. It develops many communications solutions such as Wi-Fi controllers, modems, and smart TV solutions. Of course, one of their most notable product examples is the SoC family that powers the Raspberry Pi line of single-board computers, which integrate a CPU, memory controller, and GPU into a single package.
However, Broadcom has recently come under fire from the Federal Trade Commission (FTC) in the United States for its monopoly over key products, including Wi-Fi and TV controllers. According to the FTC, Broadcom has engaged in unfair business practices that exclude competitors' products from OEM devices and penalize companies that are not fully loyal to Broadcom. As a result, Broadcom decided that it would be simpler to settle the case out of court, rather than engage in a tough battle with the FTC, and will now cease its current business practices.
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But what exactly did Broadcom do?
Attempting to research the topic online returns many news reports offering a similar story; Broadcom punishes disloyal customers and has created an effective monopoly through OEM equipment. However, further reading of the official FTC report provides a clearer picture of the situation.
In short, Broadcom has been doing deals in a similar way to Qualcomm and getting into trouble because of it. First, Broadcom will make agreements with OEMs and suppliers that Broadcom should be exclusive to them. This means that the supplier must only buy and use Broadcom parts whenever possible. If the OEM decides to mix Broadcom with other products, then Broadcom will raise prices for that customer and limit customer support for previously purchased products.
However, Broadcom also went too far by limiting technology access to OEMs that were deemed disloyal. This would give the OEMs’ competitor products a technological advantage over the OEMs, which would be completely orchestrated by Broadcom. As a result, OEMs would only be able to maximize their profits and product capabilities by using Broadcom exclusively. Furthermore, the FTC report mentions coercive tactics, meaning that Broadcom would threaten the OEMs with such actions if they showed signs of disloyalty. Broadcom also threatened to increase ESS service charges for devices that use Broadcom products.
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Why do chip companies frequently appear in trade cases?
It seems like large semiconductor companies are in the news almost every week for violating trade regulations. One example is Qualcomm, which is being investigated by the Federal Trade Commission for its unethical practices. While Broadcom forces OEMs to use only Broadcom products, Qualcomm has been pushing customers to buy their IP licenses and pay royalties for each Qualcomm device. Otherwise, Qualcomm will not supply chips. Furthermore, the IP licenses that customers pay for often include patents that are not even in the purchased Qualcomm device.
However, Qualcomm was able to confront the FTC and win, likely due to the desperate situation the West was (and still is) in the aftermath of banning Huawei and other Chinese products from cellular networks. But this victory for Qualcomm did not stop others from launching complaints and filing motions against the communications giant.
Infineon Technologies has also been in the FTC’s crosshairs recently. Chip cartels made up of multiple companies colluded to fix the prices of semiconductors used in smart cards (i.e. SIM cards, debit cards, etc.). But this isn’t even the first time Infineon has been caught fixing prices. In 2002, they came under fire for fixing prices on DRAM, causing losses to computer OEMs (like Dell).
The exact reason why semiconductor companies are often involved in antitrust scandals is unclear, but these companies seem to have a habit of fixing prices and part restrictions. This may be due to the sensitive profit margins of semiconductor companies, or it may be to prevent competitors' products from entering the market.
The semiconductor industry is highly profitable and nearly impossible to enter as a competitor (it is much simpler to develop a unique product). For example, it will be easy to get funding to create a new AI company that will create a new type of neural network, but it is unlikely that a company creating an alternative to Broadcom will be approved. It is important to note that many semiconductor companies can trace their origins to large companies from the 1960s, such as IBM, Intel, and Samsung, which have decades of profits, experience, and market presence.
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Are fabless companies’ business practices partly to blame?
While some chipmakers have engaged in price fixing, it seems that more and more fabless companies are making headlines for violating certain trade regulations. Qualcomm is a prime example of a fabless company whose trade practices have landed Qualcomm in trouble, but they are not the only example.
ARM is another example of a fabless company, and they are currently under investigation for acquisition by Nvidia. While ARM and Nvidia have done nothing technically wrong, this is a preemptive move, as Nvidia’s acquisition of ARM could lead to a dangerous monopoly for Nvidia. In short, ARM serves thousands of companies equally and treats all customers the same (i.e. the Switzerland of the semiconductor industry). However, an acquisition by Nvidia could jeopardize that position and see Nvidia limit the use of ARM technology on competitors, while customizing ARM products to work better with Nvidia products.
Caltech is a university that has sued multiple companies, including Microsoft, that have infringed on their wireless communications patents. While Caltech is not in the semiconductor industry, there are similar priorities where companies with intellectual property want to maximize profits from the protection that the intellectual property provides. In Caltech's case, they looked at silicon suppliers that infringed on their patent protections and then proceeded to find customers for those products and then sued them.
Overall, there seem to be issues surrounding IP and the way fabless companies operate. Since fabless companies must outsource their manufacturing, their profit margins will be smaller than companies that produce their own equipment (such as Intel). This may lead to more sensitive profit margins, and therefore, fabless companies may be encouraged to try to lock in customers for all of their products.
In Broadcom's case, customers agree that they will only use Broadcom products when possible, which allows Broadcom to increase profits by selling a variety of different devices. This can also lead to attempts to force customers to buy licenses and provide royalties that Qualcomm continues to provide.
It seems that fabless companies offer the advantage of not needing expensive semiconductor foundries, but this comes at the cost of smaller profit margins, which may be more sensitive to other fabless competitors that can easily design their own silicon devices. Assuming semiconductor manufacturing technology becomes cheaper and more accessible, the future may see fabless companies producing their own devices.
*Disclaimer: This article is originally written by the author. The content of the article is the author's personal opinion. Semiconductor Industry Observer reprints it only to convey a different point of view. It does not mean that Semiconductor Industry Observer agrees or supports this point of view. If you have any objections, please contact Semiconductor Industry Observer.
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