FTCs witness criticizes Qualcomms economics experts as sloppy

first_img Comments Now playing: Watch this: Shapiro had testified that Qualcomm is using its market power and its monopoly power over chips to extract an “unusually high amount” for patent royalties. That raises the cost for rivals, weakens them as competitors and fortifies Qualcomm’s monopoly power, Shapiro said.  “Qualcomm should be commended for its technological achievements,” Shapiro added. “But … what’s really important is that companies who aren’t quite as good or who don’t have the scale are not impeded from trying to catch and threaten and challenge the leader.”Losing access to Qualcomm’s modems would impose costs on handset makers, including not being able to supply to consumers. “That’s a very heavy hammer that Qualcomm is bringing down, at least as a threat, in those negotiations,” Shapiro said. Shapiro on Monday said his methodology had two steps: First he assessed evidence into whether Qualcomm used chip leverage to achieve high royalties. Then he traced through the effects of a royalty surcharge on the market and consumers. Shapiro said the first stage “very much focused” on evidence of using elevated royalty rates, while the second stage was “very much rooted in the reality” of how the business works. He testified that nothing Qualcomm’s experts said caused him to change his opinion. Rebutting the expertsNevo on Friday said he used Shapiro’s theory and tested it based on real-world data to see if the theory was true. He looked at rates Qualcomm charged for licensing during its times of alleged market power and at other times. According to the FTC’s theory, rates would be higher during times Qualcomm was strong. But in fact, that’s not what Nevo found based on his tests and the data.Instead, Nevo testified that Qualcomm’s royalty rates are the same no matter which chip a company uses in a mobile device. That’s because licensing terms are set before chip rates and last for 10 to 15 years or longer, while chip prices and contracts are set every year. So the royalty rate doesn’t affect the choice of the chip, he said. Shapiro’s “theory is just not there to support his conclusions,” Nevo says. “It’s not based in market reality. It doesn’t fit how things actually happen in this industry. As a result, the predictions he gave really can’t be trusted.”Nevo also said there were legitimate business reasons for Qualcomm’s licensing policies.  He’s got a completely unjustified assumption that’s the basis for the entire test. Carl Shapiro, professor of economics at University of California, Berkeley • Aug 31 • Your phone screen is gross. Here’s how to clean it Aug 31 • Best places to sell your used electronics in 2019 See All FTC vs. Qualcomm: Why you should care 38 Photos “One is reduction in transaction cost,” he said. “The other is allowing rival chipmakers to operate freely with access to tech without a need for a license.”Shapiro on Monday said some of Nevo’s methodology, conclusions and assumptions were “fabricated,” “outrageous” and “all messed up.” He noted that Nevo’s methodology had “measurement problems.” He also said that Nevo flawed by not doing a test to determine when Qualcomm had market power.”He’s got a completely unjustified assumption that’s the basis for the entire test,” Shapiro said. “That’s why I’m saying it’s not a valid test.”During cross examination Friday, Nevo admitted that he excluded many companies, including Samsung, Sony, BlackBerry and LG, from his analysis because of the nature of their contracts. By excluding them, he removed a large portion of the phone market. And Nevo didn’t consider elements of cross licenses with companies like Motorola, as well as other factors that could impact royalty rates. Shapiro called Nevo’s work “sloppy” in how he chose which handset maker contracts to highlight.But during cross examination Monday, Qualcomm’s attorney pressed Shapiro into admitting that he didn’t use empirical evidence to look at the real effect of the licensing contracts on the industry. Nevo did. “If you mean [did I do an] empirical study and take hundreds [of agreements] and instill them into simple data, I don’t think you can do that,” Shapiro said. “I did not do that.”Rocks in a kayakLast week, Chipty accused Shapiro of taking a “shortcut” when evaluating whether the mobile chip market was competitive. Shapiro looked at what chips were in premium handsets instead of looking at the industry innovation and competition leading up to those design wins, Chipty said. In many cases, Qualcomm won those designs by cutting prices or adding new features.  “Shapiro has overstated Qualcomm’s market power,” Chipty said. She said there’s no “evidence of consistent and unconstrained market power of the type” that would hurt competition or “coerce OEMs [handset makers] into onerous business terms that would rob them of billions of dollars.”She noted that Qualcomm actually lost 50 points of market share in premium handsets from 2014 to 2017, while rivals such as MediaTek, Huawei, Samsung and Intel were gaining. And Qualcomm felt competitive pressure to give price discounts and other concessions to win business, she testified. Shapiro on Monday acknowledged that Qualcomm has lost market share and handset prices have fallen over the years. But he said Chipty “did not engage really with direct evidence of monopoly power.” He noted there was “extensive evidence” that handset makers didn’t have good options for modems besides from Qualcomm, which gave Qualcomm “a great deal of leverage” when threatening to cut off supply. Another Qualcomm expert, Snyder, testified that real-world analysis “does not support the claim that Qualcomm’s alleged contract caused anticompetitive harms in the industry.”  The FTC has argued that phones cost too much because of Qualcomm’s high royalty fees.  Angela Lang/CNET “Outrageous.” “Fabricated.” “All messed up.” “Sloppy.” That’s how the US Federal Trade Commission’s key expert witness on Monday said he viewed testimony given by Qualcomm’s expert economists last week.  Carl Shapiro, a professor of economics at the University of California, Berkeley, on Monday defended his theory that Qualcomm’s high royalty rates hurt competitors, handset makers and consumers and helped it operate a monopoly in the mobile chip market. His rebuttal came after three Qualcomm witnesses last week tore apart his testimony on the stand. “Qualcomm’s strategy has been to keep effective, real royalties paid by [handset makers] from falling, and they’ve used chip tactics and other strategies for doing that,” he testified. Shapiro initially took the stand two weeks ago, where he detailed how Qualcomm continues to hurt the mobile chip market. As part of its defense, Qualcomm last week called three economics experts to rebut Shapiro’s claims. They testified that Shapiro’s methodology was flawed and that he didn’t consider what was happening in the real world.  “We were staring at an increase of over $1 billion per year in licensing, so we had a gun to our head,” Williams said as he explained why Apple signed another licensing agreement in 2013, despite being unhappy with the terms. He added that Apple has wanted to use Qualcomm’s chips for its newer devices, but Qualcomm refused to sell processors for the iPhone. Other companies, like Huawei and Lenovo, made similar comments during their testimony. And during the trial, the FTC has pointed to communication from a former Qualcomm licensing executive, Eric Reifschneider, to mobile chip customers like Motorola and Sony Mobile as evidence of threats to cut off supply. In one instance, Reifschneider wrote in an email to a Sony Mobile executive that “QCT (Qualcomm’s chip business) has been shipping chips to SMC (Sony Mobile) for almost three weeks now without a license in place. It will not be possible for that to continue.” But Qualcomm and executives from some companies have testified that Qualcomm has never cut off chip supply during contract negotiations. Some of those executives have said in live testimony and video depositions presented by Qualcomm that its rivals didn’t have the technology required for their devices. Matthias Sauer, an Apple executive and a witness called by Qualcomm, testified earlier in January that Intel’s modems didn’t meet the technical standards required for the company’s iPhones in 2014. Though Intel also couldn’t meet Apple’s chip requirements for the iPad, it would’ve used them anyway, he said, had Qualcomm not offered incentives to stay with its chips. His remarks echoed comments from colleague Tony Blevins early in the trial.Qualcomm, meanwhile, has said it had legitimate business reasons for having strict contracts with Apple, including how expensive it is to design modems specifically for Apple. Expert witness Chipty last week agreed with that assessment. But Shapiro on Monday said that while Qualcomm does incur “significant” costs for making chips for Apple, it would have made sense for the company to share risk with Apple by having Apple help fund the development. Instead, Qualcomm was making payments to Apple, which he said was “the exact opposite of what you would expect.” During Qualcomm’s cross examination of Shapiro, a lawyer asked Shapiro if there’s any evidence that Apple would have helped Qualcomm defray costs for developing new modems.”I think they did not want to pay money to Qualcomm,” Shapiro said. “They were more interested in getting money from Qualcomm.”Licensing rivals?The FTC has said Qualcomm’s refusal to give licenses to its chip rivals is part of its efforts to maintain its monopoly. Judge Koh in November agreed and ruled that Qualcomm has to license its wireless chip patents to its chip competitors like Intel. But Dirk Weiler, head of standards policy at Nokia, testified last Tuesday that it has long been industry standard to license technology to handset makers, not chipmakers. Along with his role at Nokia, Weiler also serves as chairman of the European Telecommunications Standards Institute. The nonprofit standards body’s Intellectual Property Rights Policy requires companies to give licenses for equipment.   “What is my understanding of the industry practice is in the case of the cellular business, this means these companies license, for example, the handset and not any subpart of the handset,” Weiler said.  And Nevo on Friday said if Qualcomm doesn’t license at the device level anymore, things could get complicated fast. If Qualcomm switched to simply licensing at the chip level, it’d need to offer multiple tiers because some of the technology would apply to an overall phone, not just the processor. “The number of license agreements would be large,” Nevo said. But the real issue “is the fact each negotiation now will become a lot more complex. Parties, chipmakers and OEMs, would have incentives to point to the other party as the one actually practicing on the license.”  See also 3 Apple Share your voice Shapiro on Monday took issue with that testimony and said he carefully considered what handset makers and chip rivals said took place in reality.”I think the person who’s not paying attention to that is Professor Nevo,” he said. Aviv Nevo, a University of Pennsylvania economics and marketing professor, on Friday called into question Shapiro’s use of theory to determine the damage allegedly caused by Qualcomm’s licensing practices. Instead, Nevo said he examined the “real-world” agreements Qualcomm had with companies to determine the rates weren’t excessive. Nevo testified that the FTC’s theory that Qualcomm uses its power in the chip market to charge excessive royalty rates “is just not born out of actual market data.” He noted “there’s no support for the theory in the data.” Nevo also testified that the mobile industry is strong and that Qualcomm had legitimate business reasons for its licensing policies. “At a high level, this is a thriving industry,” Nevo said. “Prices are declining. Quantities are skyrocketing.”Last Tuesday, Edward Snyder, dean of the Yale School of Management and a professor of economics and management, criticized Shapiro’s methodology and said the problems Qualcomm’s rivals had were due to choices they made that had nothing to do with Qualcomm. And Tasneem Chipty, a specialist in competition policy and antitrust economics from consultancy Matrix Economics, attacked Shapiro’s definition of the market and of market power. The FTC’s antitrust case against Qualcomm may come down to which expert Judge Lucy Koh ultimately believes. Qualcomm has been battling the FTC in a San Jose, California, courtroom since Jan. 4. The FTC wrapped up its antitrust case against the company on Jan. 15, and Qualcomm has since presented witnesses, including its head of licensing and its chief technology officer. The FTC has accused Qualcomm of operating a monopoly in wireless chips, forcing customers like Apple to work with Qualcomm exclusively and charging excessive licensing fees for its technology in part by wielding its “no license, no chips” policy.  But Qualcomm says the FTC’s lawsuit is based on “flawed legal theory.” It’s also said customers choose its chips because they’re the best and that it’s never stopped providing processors to customers, even when they’re battling over licenses.Over the past two weeks, Qualcomm called company executives, representatives from handset makers and chip rivals, and industry experts to dispute the FTC’s allegations in the case. The company sought to show that competition is healthy in the mobile chip market and that it hasn’t hampered the industry. The government had time for a rebuttal Monday following Qualcomm’s defense. The chipmaker wrapped up its case Friday. Closing arguments will take place Tuesday afternoon. Monopoly power? Shapiro, during his initial testimony earlier in January, analyzed the impact of its “no license, no chips” policy and Qualcomm’s royalty rates on handset makers, chip rivals and consumers. He concluded that Qualcomm had monopoly power over CDMA modem chips and over premium LTE modem chips through at least 2016. center_img Galaxy Note 9: 16 hidden features on Samsung’s best phone 2:11 reading • FTC’s witness criticizes Qualcomm’s economics experts as ‘sloppy’ Aug 31 • iPhone XR vs. iPhone 8 Plus: Which iPhone should you buy? iPhone XS, Pixel 3, OnePlus 6T and 20 other phones without headphone jacks Qualcomm-FTC lawsuit: Everything you need to know Apple: Qualcomm’s hardball tactics squeezed Intel chips out of iPad Mini 2 Qualcomm CEO defends chip-licensing business in FTC trial Apple’s 5G iPhone shift bogged down by Qualcomm chip battle FTC rests case against Qualcomm, arguing it’s a monopoly in mobile chips He noted that three factors explain a company’s success or failure: foresight, investment and execution. Snyder evaluated Intel, MediaTek, Broadcom and others to examine their position in the market and how they performed based on those three factors. Intel, for one, “exhibited … poor foresight about the industry. They invested inefficiently, and they encountered execution problems,” said Snyder, who at one time worked for the Justice Department’s antitrust division. MediaTek had good foresight and investment, but it had some execution problems, Snyder said. It has now resolved those, helping it become the No. 2 modem supplier in the world. Broadcom, for its part, failed on all three, Snyder said, causing it to leave the modem industry.  These companies all succeeded or failed because of independent industry factors, not Qualcomm’s business practices, he testified. Shapiro on Monday took issue with Snyder’s methodology, saying that looking at foresight, investment and execution almost always finds in favor of the defendant. He used the analogy of a kayak race down a river. Snyder’s methodology is simply looking at how kayaks navigated the river and what choices they made to get them to the end, Shapiro said. But Shapiro said that fails to take into account whether one of the teams cheated at the beginning by putting rocks in rivals’ boats. Still, Shapiro admitted that he didn’t conduct a thorough study of Qualcomm’s rivals and why they failed, similar to the analysis by Snyder.  No license, no chipsThe FTC, aided by chipmaker Intel and iPhone vendor Apple, filed suit against Qualcomm two years ago. The US says Qualcomm has a monopoly on modem chips and harmed competition by trying to maintain its power. Qualcomm’s “excessive” royalty rates prevented rivals from entering the market, drove up the cost of phones and in turn hurt consumers, who faced higher handset prices, the FTC said. The FTC in the trial called witnesses from companies like Apple, Samsung, Intel and Huawei and called experts to testify about the alleged harm Qualcomm’s licensing practices have caused the mobile industry. The trial has revealed the inner workings of tech’s most important business, smartphones, showing how suppliers wrestle for dominance and profit.Qualcomm has argued that its broad patent portfolio and innovations justify its fees. CEO Steve Mollenkopf, who took the stand two weeks ago, defended the company’s licensing practices, saying the way his company sells chips to smartphone makers is best for everybody involved and is the simplest way to license the technology. The heart of the FTC’s case against Qualcomm is a so-called “no license, no chips policy.” Qualcomm sells processors that connect phones to cellular networks, but it also licenses its broad portfolio as a group. For a set fee — based on the selling price of the end device, typically a phone — the manufacturer gets to use all of Qualcomm’s technology. It’s phone makers that pay the licensing fee, not chipmakers. To get access to Qualcomm’s chips, which are broadly considered to be on the bleeding edge of wireless innovation, a phone maker first has to sign a patent licensing contract with Qualcomm. Qualcomm has long been the leader in 4G LTE, and it’s ahead of rivals in the nascent 5G market. The highest-end phones, like those from Samsung, have tended to use its modems. But the FTC argues such a requirement hurts competition and cements Qualcomm’s monopoly power.Apple Chief Operating Officer Jeff Williams last week testified that his company felt it had to sign contracts for amounts it thought too high — a royalty of $7.50 per iPhone — to maintain access to Qualcomm’s chips.  Qualcomm didn’t have all the license negotiating power, exec testifies Qualcomm didn’t have enough power to hurt chip competition, expert testifies Qualcomm wraps up defense after expert rebuts FTC witness Qualcomm wouldn’t release modems as often without Apple’s business Qualcomm kicks off defense in FTC trial by showing its mobile chip prowess 24 Photos Tags NASA turns 60: The space agency has taken humanity farther than anyone else, and it has plans to go further.Taking It to Extremes: Mix insane situations — erupting volcanoes, nuclear meltdowns, 30-foot waves — with everyday tech. Here’s what happens. 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