In-depth revelation: Why did Qualcomm accept the 6 billion yuan fine?

Latest update time：2015-03-09

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What made Qualcomm accept the 6 billion yuan fine? Although the penalty result has been announced for several days and Qualcomm has paid the fine on time, the Qualcomm antitrust case is still fermenting.

Before the Spring Festival, mobile phone chip giant Qualcomm announced that it had reached a solution with China's National Development and Reform Commission (NDRC) on the antitrust case. Qualcomm paid a fine of 6.088 billion yuan (about US$975 million based on the current exchange rate) and made business rectifications, ending China's antitrust investigation that had lasted nearly 15 months.

The NDRC stated that after investigation, evidence collection, analysis and demonstration, Qualcomm has a dominant market position in the CDMA, WCDMA, LTE wireless communication standard essential patent licensing market and baseband chip market, and has abused its dominant market position, violating relevant provisions of my country's Anti-Monopoly Law.

It is worth noting that during the antitrust investigation, Qualcomm was able to cooperate with the investigation and proactively proposed a package of rectification measures, including changing the patent fee charged on mobile phones sold in my country from the sales price of the entire device to a patent licensing fee of 65% of the sales price of the entire device, and no longer requiring Chinese mobile phone manufacturers to reverse license their patents free of charge, etc., and obtained the approval of the National Development and Reform Commission.

As we all know, Qualcomm has an absolute advantage in the market share of mid-to-high-end chips. Why is such a global chip giant willing to give in in this antitrust investigation and express happiness about the punishment? Will the punishment of Qualcomm really benefit domestic mobile phone manufacturers such as ZTE and Huawei that hold valuable patents? Will the "patent protection umbrella" of Qualcomm really disappear for manufacturers with fewer patents such as Xiaomi and Meizu?

Why Qualcomm gave in

Despite being found guilty of antitrust violations and being fined the largest fine in Qualcomm's history and the largest antitrust case in China, Qualcomm still expressed its happiness and said it would not challenge the NDRC's decision and actively paid the fine.

In fact, since the NDRC launched an antitrust investigation into Qualcomm in November 2013, Qualcomm has been very cooperative with the NDRC's investigation throughout the entire investigation, except for Qualcomm's denial of the NDRC's allegations in December of the same year and a report submitted to the NDRC in May 2014 that found Qualcomm not guilty.

Why would Qualcomm, which is so powerful, be willing to give in?

Wang Yanhui, secretary general of the China Mobile Alliance, believes that all manufacturers working with Qualcomm are well aware of whether Qualcomm is using its monopoly position to extract monopoly profits. In addition, Qualcomm said it would charge Chinese mobile phone manufacturers patent licensing fees at rates similar to those in other parts of the world, which also acknowledged the existence of previous monopoly behavior.

Judging from the information released by the National Development and Reform Commission, Qualcomm's actions of charging unfairly high patent licensing fees, bundling non-wireless standard essential patent licenses, and attaching unreasonable conditions to the sales of baseband chips have indeed violated the provisions of my country's Anti-Monopoly Law.

Communications expert Yan Yuelong also told Legal Weekly: "First, China's huge market is very important to Qualcomm, and it is unwise for Qualcomm to take a strong stance; second, this punishment will not harm Qualcomm and is acceptable to Qualcomm."

It is understood that Qualcomm is currently the world's largest smartphone chip manufacturer, but patent licensing income is an important source of revenue for Qualcomm. During the investigation, some Chinese mobile phone manufacturers suspended payment of patent fees or paid less patent licensing fees, affecting Qualcomm's patent licensing income.

After the penalty was announced, Qualcomm CEO Steve Mollenkopf also said: "We are pleased that this solution eliminates uncertainty in our business in China."

In addition, according to estimates by the China Mobile Alliance, Qualcomm will lose $200 million to $300 million in patent licensing fees in the Chinese market each year. According to the financial report released by Qualcomm not long ago, Qualcomm's operating income in fiscal year 2014 was $26.49 billion, operating profit was $7.55 billion, and net profit was $7.99 billion. It can be seen that the loss of $200 million to $300 million has little impact on Qualcomm.

Zou Xueyong, secretary-general of the China Virtual Operators Industry Alliance, said in an interview with Legal Weekly that judging from the final penalty imposed by the NDRC on Qualcomm, it was equivalent to Qualcomm defending itself. The nearly $1 billion in economic losses and 65% discounts were only superficial compromises and did not break Qualcomm's monopoly in the chip market. The impact on Qualcomm was very limited.

An industry insider who declined to be named said that the NDRC's final penalty against Qualcomm did not cancel the model of charging based on the price of the entire device as previously rumored in the media, but instead compromised by charging 65% of the price of the entire device. For Qualcomm, this may not only not affect market sales, but may also accelerate market advancement.

Yan Yuelong also believes that the rectification measures, such as offering a 65% discount and canceling free reverse licensing, are equivalent to breaking up the patents. Mobile phone manufacturers can choose patents according to their own needs. In other words, the general direction has not changed, but only some corrections have been made in the details. This is equivalent to affirming Qualcomm's previous business model and will not cause too much damage to Qualcomm.

"For Qualcomm, it paid a certain price to retain its original business model, and its gains outweigh its losses. Qualcomm is also satisfied with the penalty result," Yan Yuelong further explained.

Is it good for ZTE, Huawei, etc.?

After the penalty results for Qualcomm were announced, the outside world generally believed that it was a major benefit to companies such as ZTE and Huawei that hold a large number of patents.

Wang Yanhui believes that in recent years, as domestic mobile phone companies have gradually improved their core technologies, manufacturers such as Coolpad, Huawei, ZTE, Lenovo, etc. have accumulated a considerable number of core patents. However, according to the previous licensing agreement with Qualcomm, these manufacturers have reverse-licensed their patents to Qualcomm for free, while manufacturers such as Xiaomi automatically obtain patent licenses from other competitors for free by using Qualcomm chips, which undoubtedly makes the patent value of other manufacturers zero. Now, with the decline in patent rates and the cancellation of free reverse licensing, manufacturers such as ZTE and Huawei can obtain greater discounts in cross-licensing with Qualcomm, thereby reducing their costs and further stimulating the research and development motivation of enterprises.

Xiang Ligang, a well-known observer of the communications industry, agreed with this. He said that for domestic manufacturers such as ZTE and Huawei, which have a large number of patents, getting rid of Qualcomm's free reverse licensing terms means that they may be able to charge patent licensing fees or initiate patent lawsuits against other manufacturers in China.

After the penalty results were announced, Huawei and ZTE responded immediately. ZTE said it recognized the NDRC's decision on Qualcomm, and Huawei welcomed the decision.

However, Yan Yuelong believes that it is too early to predict the impact of Qualcomm's huge fine on China's mobile phone industry. The NDRC's rectification measures for Qualcomm are very specific, but they are only guidelines. For specific mobile phone manufacturers, how to proceed is still the choice of the enterprise itself.

Yan Yuelong told Legal Weekly: "For mobile phones sold in China, the NDRC and Qualcomm have agreed on a 65% discount, which means that this discount only applies to the domestic market. If Chinese mobile phone manufacturers want to expand overseas, they will almost certainly have to choose the original patent licensing method in the face of complex patent barriers, because only in this way can they use Qualcomm to resolve possible patent disputes."

"For manufacturers like Huawei and ZTE that have invested in technology research and development and accumulated intellectual property rights, as long as they paid patent fees to Qualcomm, Qualcomm would resolve all patent disputes. Huawei and ZTE were under the patent protection umbrella of Qualcomm. Now, although the patent fee rate will indeed be reduced in the short term, in the long run, it is equivalent to letting them swim naked. They need to negotiate and compete with other giants on patents. This mainly depends on the company's own strength." Yan Yuelong further stated.

In Yan Yuelong's view, the patent market is a jungle where the strong prey on the weak, and the quality of patents is much more important than the quantity. According to statistics, in the total number of patent authorizations in the first eight months of 2014, ZTE ranked first with 222, Huawei ranked third with 131, and Qualcomm ranked fifth with 94. The total number of patents of ZTE and Huawei is three times that of Qualcomm, but the core patents are still controlled by international giants such as Qualcomm.

Sheng Linghai, research director of Gartner China, said that due to the lack of patent protection environment in the current domestic market, it is still possible that large manufacturers such as Huawei and ZTE will continue to license Qualcomm.

Will protective umbrellas such as Xiaomi disappear?

What impact will the decline in patent fees and the cancellation of free reverse licensing have on manufacturers such as Xiaomi whose patent strength is temporarily weak? Will the patent protection umbrella over Xiaomi and other manufacturers disappear?

Xiang Ligang believes that according to the free reverse license, any mobile phone company that uses Qualcomm chips must license its patents to Qualcomm and cannot charge patent fees to any Qualcomm customer for the patents. In the past, everyone had this umbrella because of Qualcomm's policies. This has brought benefits to emerging mobile phone manufacturers such as Xiaomi that lack patents. But now, because of Qualcomm's change in strategy, manufacturers have a choice, and Xiaomi will also lose this umbrella.

Zou Xueyong agreed with this. He said: "Thanks to Qualcomm's reverse licensing in the past, some domestic mobile phone companies that lack patents have saved a lot of patent fees under the protection of Qualcomm. In the future, companies such as Xiaomi may have to pay more patent fees, either to Qualcomm or to other patent owners."

According to media reports, a considerable part of Xiaomi's cost advantage comes from low patent fee expenditures. When patent expenditures become an indispensable cost, Xiaomi spends more on patent fees than Huawei under the same configuration and cost structure, then Xiaomi's cost advantage will be greatly reduced, which will have an impact on Xiaomi's business model.

Yan Yuelong disagrees. He said: "In order to compete in the international market, domestic mobile phone manufacturers are likely to continue to choose the old patent licensing model. If so, Xiaomi and others will still be protected by Qualcomm's patent umbrella, and problems such as 'Xiaomi and others will face more patent disputes' and 'Xiaomi will have a hard time in internationalization' will not occur."

"Companies have their own choices and weigh their own interests, and it is entirely possible that they will continue to choose Qualcomm's patent protection umbrella." Yan Yuelong further stated.

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