Broadcom Ltd. thinks it’s found another way into the hearts of shareholders. Qualcomm shareholders, that is.
Merge with us, the argument goes, because Qualcomm management isn’t getting the long-term value it could from licensing its patented technology to smartphone makers like Apple Inc. and Samsung Corp. Never mind the antitrust implications, it says. Those patent values are shrinking, it says, Qualcomm’s approach is failing and we can do better.
The argument is part of Broadcom’s tenacious push to take over Qualcomm, a marriage proposal that Qualcomm’s board has rejected several times.
Broadcom says the licenses that Qualcomm sells to smartphone and tablet manufacturers aren’t worth as much as they once were. Broadcom is pitching Qualcomm shareholders a less aggressive way of licensing the technology, which Broadcom claims doesn’t cause so many antitrust problems. It says those technologies shouldn’t be bundled together like a cable bill but sold à la carte. That way, the thinking goes, competition is preserved and the true value of the licenses shows through.
The economic argument against Qualcomm’s aggressive licensing strategy is the logical next step stemming from antitrust complaints by Apple and other smartphone manufacturers that Qualcomm is illegally leveraging its dominance in the chip market to keep out competition. Competition regulators all over the world, including in the U.S., are also either investigating or charging Qualcomm for anticompetitive behavior. The U.S. Federal Trade Commission has sued Qualcomm for refusing to sell its licenses to competitors and marking up licenses for manufacturers that go to Qualcomm rivals for other technologies.
Qualcomm says the multiple claims against it are without merit, but the company has still taken a hit over the litigation. It lost $1.35 billion in revenue in the last two quarters of 2016 just in its dispute with Apple’s contract manufacturers over royalties, according to its year-end financial statement filed with the Securities and Exchange Commission.
In a presentation for Qualcomm shareholders, Broadcom pointed out that Qualcomm lost $3.1 billion in revenue from technology licenses between the second half of 2016 and the second half of 2017. It also questioned whether Qualcomm can make good on its promise to recoup $3.25 billion in licensing revenue in 2019 by resolving the antitrust disputes.
Qualcomm, in its own shareholder presentation, says it can recoup as much as $4 billion by finishing the antitrust fights.
The debate puts a spotlight on the money at stake in the tug-of-war between patent holders and the competitors who are forced, some say illegally, to pay a premium price to use the technology. For the last several years, the courts have been the go-to arbiters of how to strike the right balance between intellectual property and competition. Now it’s the shareholders’ turn.
I asked antitrust lawyer David Balto, a former FTC policy director and frequent critic of Qualcomm’s licensing practices, if the market could stop a behavior that regulators are still battling. Is Qualcomm’s licensing system simply passé? He believed so. “Qualcomm has this short-lived profit maximizing scheme that I think don’t has much of a future to it.”
Qualcomm says those profits are real, even if they exist in future settlements. Its shareholder presentation talks of the “robust licensing revenue opportunity” and says it has a “proven track record of managing disputes and short-term disruptions.”
Qualcomm CEO Steve Mollenkopf was a bit more measured on a recent earnings call when he was asked whether the company was confident that it will resolve its licensing disputes in 2019. “I think there are a number of legal milestones that occur this year that are helpful. Typically, in a licensing dispute, legal milestones provide an opportunity and a forcing function for the parties to sit down and to finally work things out,” he said.
Broadcom is daring Qualcomm shareholders to question that logic. If they decide Qualcomm’s promises are sounding a bit thin, Broadcom says they should oust the current board of directors and install board members friendly to the merger. The shareholder meeting is slated for March 6.
Courts make decisions about patents and competition based on law, which is still fuzzy on this question. The Qualcomm shareholders will make the decision based on their pocketbooks.
Look for Justice Department antitrust chief Makan Delrahim’s speech to the Global Competition Law Center on Wednesday in Brussels.
Look for the DOJ assistant attorney general Roger Alford’s speech on “innovation economics” for antitrust lawyers to the World Conference Center Bonn in London.
"I just can’t see a smoking gun where he’d say, ‘Let’s bring this case, Mr. President, because we want to stick it to CNN.’ I see this as a way of kicking up some dirt."
--Rutgers antitrust law professor Michael Carrier, reacting to reports that the AT&T Inc. lawyers have placed Delrahim on the witness list in the trial over its proposed merger with Time Warner Inc.
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