European Commission hits Qualcomm with €242 million fine for predatory pricing

The European Commission has imposed a fine of €242 million on Qualcomm for abusing its dominant position in 3G baseband chipsets through predatory pricing. The EC found that between 2009 and 2011 Qualcomm sold its baseband chipsets below cost to two strategic customers in order to exclude Icera, a new entrant, from the market and further entrench its dominance.

This marks the second time that the EC has fined Qualcomm in two years. Last year, the EC fined Qualcomm €997 million for making payments to Apple to exclusively use Qualcomm’s 4G baseband chipsets between 2011 and 2016 (see our previous Insight).

More broadly, it is the fifth fine that the EC has imposed for exclusionary practices in the tech sector during Vestager’s mandate. Predatory pricing cases, in particular, are complex and hard to prove. This decision shows that complexity will not stand in the way of the EC’s enforcement.

Background

Article 102 of the Treaty on the Functioning of the European Union prohibits dominant firms from selling below cost. The underlying economic rationale is that even if consumers benefit from lower prices in the short term, the resulting exclusion of competitors will enable the dominant firm to raise prices again, at the expense of consumers. Predatory pricing cases are rare and complex and this is the EC’s first in sixteen years, since the Wanadoo (France Telecom) decision in 2003.

A targeted hit?

Icera was a British start-up which introduced its first chipset in 2006 and attracted a series of venture capital investments, before being sold to Nvidia in May 2011 for $367 million. Icera’s CEO had targeted a $1bn IPO and said at the time of the sale “It is hard to be a small company innovating in the mobile space because it is a big boys’ game”. Nvidia itself abandoned the baseband chipset market only a few years later.

During the abuse period of 2009-2011, Icera was a new entrant in 3G baseband chipsets, focusing on high speed data cards, and one of the very few companies capable of challenging Qualcomm. Qualcomm was the dominant player with a reported market share of 60%.

The EC heavily relied on Qualcomm’s internal documents to establish that in the period in question Qualcomm had identified Icera as a “critical” threat for Qualcomm’s 3G baseband chipset business. To address this threat, Qualcomm took what its internal documents described as “preventive actions.” These were essentially targeted price concessions to Huawei and ZTE, two strategic customers of Icera. The EC found that these targeted below-cost price cuts prevented Icera from gaining scale and reputation, and ultimately becoming a more effective competitor to Qualcomm.

Price cost test

The price/cost test was a necessary component for the EC’s case, and it demands swathes of financial data. Commissioner Vestager acknowledged that this resulted in quite an extensive investigation. The complexities of applying the test itself led to two Statements of Objections and required two oral hearings, prolonging the investigation.

The EC eventually found that the prices that Qualcomm offered to Huawei and ZTE during the 2009-2011 period were below cost, as they did not allow Qualcomm to cover its cost for developing and producing these chipsets.

Qualcomm’s view

Qualcomm has taken a confrontational approach in all EC cases so far, with two appeals already pending against decisions by the EC: It appealed last year’s exclusivity rebates decision and also has an appeal pending before the European Court of Justice against an EC information request (having lost the lower court appeal).

In addition, Qualcomm announced that it will also appeal against the present decision, which it labels as “novel” and inconsistent”. Qualcomm commented that ZTE and Huawei had said they favoured Qualcomm chips“not because of price but because rival chipsets were technologically inferior”.

Next steps

We are still many years away from the final judicial resolution of this case, as we can expect that it will be appealed all the way to the European Court of Justice. The Courts will have to engage with economic arguments to assess the soundness of a contentious price cost test, which already required a second oral hearing.

Perhaps more importantly, this case is another clear reminder for companies that internal documents play a crucial role in EC proceedings. The EC has developed significant capabilities to analyse large amounts of internal documents to obtain “smoking gun” evidence that forms the cornerstone of its cases.