Cuts Both Ways

The Pain (and Gain) of Qualcomm's Market Power

Government watchdogs are troublesome, but they help when it comes to thwarting a takeover.
Photographer: John Thys/AFP/Getty Images
QUALCOMM INC
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Qualcomm Inc. has been stung by governments so often that the fines and scolding barely leave a mark anymore. Now, though, Qualcomm’s government troubles come with a silver lining.

The chipmaker’s latest regulatory run-in was with the European Union’s antitrust body, which fined Qualcomm 997 million euros ($1.2 billion) for paying one of its customers, Apple Inc., to agree to use only Qualcomm’s chips in its iPhones and iPads from 2011 to 2016. The EU antitrust authority said Qualcomm’s arrangement amounted to an improper abuse of market power. Qualcomm said it disagreed with the EU decision and planned to appeal.

It’s a familiar pattern for corporations. Governments tend to wade in when big technology companies become overwhelmingly powerful in their fields. It has happened to Microsoft, Intel and Google to varying degrees. The steely gaze of governments now seems to be turning to Facebook.

The distractions, financial penalties and expensive regulatory and legal skirmishes are the inevitable costs of market power, and Qualcomm knows this well by now. It has clashed with government authorities in South Korea, China, the U.S., and other countries over claims that Qualcomm abuses its dominance in the market for important smartphone components. 

When the Chips Are Down

Qualcomm's stock is trading below Broadcom's takeover offer of $70 a share, indicating doubts Broadcom can pull off the transaction

Source: Bloomberg

Oddly, Qualcomm is now in a position where the government scrutiny helps its cause. Among Qualcomm’s efforts to ward off an unwanted takeover attempt by fellow chipmaker Broadcom Ltd., the company has argued that regulators wouldn’t clear the deal or that regulatory compromises would be too onerous. Yes, on the one hand Qualcomm has been fighting claims that it abuses its market power. And on the other, its size and market power help support Qualcomm's case against a Broadcom takeover.

Qualcomm's concerns are valid. If Broadcom and Qualcomm combine, the company would be the third-largest chipmaker in the world by revenue, behind Intel and Samsung. Broadcom has said that the companies' businesses don't overlap much, but the sheer size would certainly invite regulatory doubts. 

And Broadcom has argued -- without much elaboration-- that it will be able to tackle Qualcomm’s continuing government challenges by overhauling Qualcomm’s contentious business model, which generates most of the company's operating profit from licensing patents. Apple and some of the government authorities have said that business model is a way for Qualcomm to overcharge customers.

Flexing Muscles

If Broadcom acquires Qualcomm, the combined company would be the world's third-largest chipmaker by revenue

Source: Bloomberg

One question is what customers think of the possible creation of an even more hefty chip supplier. The Wall Street Journal reported this month that three leading Chinese smartphone manufacturers are concerned about the Broadcom-Qualcomm deal because they worry a combination would result in higher prices for essential chips. In a rebuttal on Tuesday, Broadcom said that any antitrust concerns could be resolved and that Broadcom’s customers supported an acquisition of Qualcomm.

It can't be fun for Qualcomm (or its stockholders) to see billions of dollars fly out of its coffers to mollify regulators. But Qualcomm must be smiling a little that government watchdogs are also helping the company's case against a takeover. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shira Ovide in New York at sovide@bloomberg.net

    To contact the editor responsible for this story:
    Daniel Niemi at dniemi1@bloomberg.net

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