Qualcomm fined $1.2B as Apple loyalty comes at a price

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(Bloomberg) -- Qualcomm Inc. spent billions of dollars buying Apple Inc.’s loyalty.

It must now shell out 997 million euros ($1.2 billion) in fines after the European Union’s antitrust arm said the payments were an illegal ploy to ensure only its chips were used in iPhones and iPads.

Apple was cornered by Qualcomm with a 2011 deal that offered "significant" sums and rebates if it only bought the company’s chips, the European Commission said in an emailed statement.

“Apple was seriously thinking of switching” from Qualcomm to Intel chips “which would have made a big difference to Intel" but couldn’t do so until its Qualcomm pact was about to expire in September 2016, EU Competition Commissioner Margrethe Vestager told reporters at a Brussels press conference.

“This meant that no rival could effectively challenge Qualcomm in this market, no matter how good their products were," Vestager said. "We’re talking about one of the biggest and most important customers in this market."

The antitrust fine, the EU’s third highest, comes as Qualcomm tries to fend off a $105 billion hostile takeover by rival Broadcom Ltd. and wages war with Apple in numerous court cases around the world over patent licensing. Qualcomm’s management is under pressure to show shareholders it can manage the Apple dispute and battles with regulators that have already led to fines in China and South Korea.

Qualcomm Appeal

"Qualcomm strongly disagrees with the decision and will immediately appeal it to the General Court of the European Union," the company said in a statement. The EU decision "does not relate to Qualcomm’s licensing business and has no impact on ongoing operations."

Shares in Qualcomm fell 1.2 percent in pre-market trading in New York.

“This is a huge fine by any standards and shows that Commissioner Vestager is starting 2018 very aggressively," said Assimakis Komninos, a lawyer at White & Case in Brussels.

4G Phones

The case focuses on LTE baseband chipsets used in the 4G mobile phone standard. Qualcomm warned Apple that it would cease payments if it sold products using other chips. Vestager said this threat was a key factor for Apple refusing to source from Intel. "It would have cost Apple a lot of money" to quit Qualcomm and it "would have made a big difference to Intel."

“The outcome is that rivals are prevented from challenging dominant companies with more innovative products," Vestager said. The fine represents 4.9 percent of Qualcomm’s revenue in 2017, the EU said.

Vestager said the decision sends a warning to other companies that would contemplate using similar practices: “Don’t go there."

Apple declined to immediately comment. Intel declined to comment.

Qualcomm faces a threat of further fines from a second EU investigation into allegations it deliberately sold internet modem chips below cost from 2009 to 2011 to knock out a rival. EU officials "are still at it with a priority," Vestager said of that case. The EU alleges that Qualcomm aimed to hinder competitor Icera, now owned by Nvidia Inc. That case has escalated with a court dispute over information the EU sought from the company. Qualcomm was threatened with additional daily fines for not quickly supplying data the EU wanted.

Apple in Clear

There are "no repercussions" for Apple for accepting the deal with Qualcomm and no evidence of wrongdoing by the Cupertino, California-based company, Vestager said.

Wednesday’s decision has parallels with the EU’s 2009 finding that Intel’s rebates to computer manufacturers and payments to a retailer were aimed at squeezing out a smaller chipmaker.

It’s the first time the EU has landed a blow on Qualcomm, nearly a decade after officials dropped a four-year probe in 2009 into how it licensed patents used in the 3G phone standard. There was no fine or any finding that Qualcomm violated antitrust rules in that case.

Apple and Qualcomm have been waging legal battles over the world about the fees Qualcomm charges for its chip designs. Apple says Qualcomm charges too much and is leveraging its strong market position in chips illegally. Qualcomm counters that Apple, one of its largest customers, has lied to regulators in an unfair attempt to bully it into charging less.

--With assistance from Nikos Chrysoloras Christopher Elser and Giles Turner

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