What Does The KFTC Ruling Imply For Qualcomm?

Leading CDMA chipset maker, Qualcomm (NYSE:QCOM) has been notified by the Korean Fair Trade Commission (KFTC) that it intends to file a written judgement against the company regarding its licensing terms that includes a fine of $854 million.  The KFTC is acting on the company’s alleged abuse of its market dominance. Furthermore, the KFTC has issued a broad set of guidelines that Qualcomm will have to follow while executing licensing contracts in the region subsequent to the formal filing. It should be noted that Qualcomm garners approximately 16% of its global revenue from South Korea. This is because two of the company’s major customers — LG Electronics and Samsung — are based in South Korea, though the commission indicated its intent was not to protect them. In addition, it solicited testimony from industry participants including Apple, Intel, Nvidia, Ericsson, Mediatek and Huawei.

Key to the KFTC’s position is that Qualcomm violates the widely embraced FRAND standard regarding the licensing of Standard Essential Patents (SEP, i.e., patents that are essential to broadly commercialized technologies).  The standard specifies that SEPs be licensed on a Fair, Reasonable and Non-Discriminatory basis.  Within this framework, the company has been primarily charged on three grounds:

1) Refusing to license its technology to competing chipset makers

2) Using chipset supply to handset makers as leverage to impose unfair license agreements

3) Forcing unfairly broad licensing agreements unilaterally and unfairly on handset companies

Though Qualcomm strongly disputes the KFTC’s position and will appeal the decision once filed to the Seoul High Court, there can be significant consequences for the company if its appeal gets rejected.

Altering Qualcomm’s Business Has Far Greater Implications Than The Fine Itself

The charges by KFTC against Qualcomm are only one among the series of charges against the company globally. The company is facing similar anti-trust charges in other regions as well. In 2015, Qualcomm paid a fine of $975 million in order to settle a regulatory investigation in China. Further, the company was required to lower its royalties rates in the market as a result of the investigation. Although Qualcomm managed to settle the dispute in China by paying fines and lowering its royalty rates, compliance issues have since plagued the company.  Not all Chinese OEMs have complied with the new licensing terms set by the NDRC of China. Only recently, the company started to get past its compliance issues in the region by bringing a majority of smartphone makers in the regions in compliance with the new terms.

Thus, the result of these legal battles not only impacts Qualcomm’s cash position – as the company ends up paying significant fines to settle the dispute – but also alters the way the company conducts business. This can have far greater implications for Qualcomm than the fine itself.

Major Chipset Companies Will Stand A Chance To Compete With Qualcomm In The Modem Chipset Market

Consider the charge by the KFTC that Qualcomm refused or restricted the provision of its cellular SEP licenses, which are essential for the manufacturing of chipsets, despite requests from chipset makers. According to the KFTC press release, Samsung, Intel, and Via were some of the companies that were denied license agreements by Qualcomm. Indeed, major former participants including Texas Instruments and Broadcom exited the business. KFTC alleges that Qualcomm did so in order to maintain its licensing model, otherwise it would have been difficult for it to collect royalty revenues from handset companies.

However, the KFTC has now outlined a complete procedure, which Qualcomm will have to obey while negotiating licensing agreements with other chipset manufacturers. Further, Qualcomm will have to follow this negotiation procedure with all “enterprises that supply modem chipsets to a handset company” manufacturing/selling handsets in South Korea. Clearly, this implies that other major chipset companies such as Intel and MediaTek will now stand a chance to compete with Qualcomm in the chipset market. This comes from the fact that Intel and MediaTek might consider supplying modem chipsets to South Korean smartphone makers. According to Strategy Analytics, Qualcomm’s 2015 market shares in the LTE, CDMA and WCDMA modem chipset markets were at 69.4%, 83.1% and 32.3%, respectively. We can expect these figures to decline going forward if Qualcomm were to face higher competition from other players in the modem chipset market, as a result of the ruling.

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