On 18 July 2019, the European Commission fined Qualcomm €242 million for abusing its dominant position in the 3G baseband chipset market between 2009 and 2011. Baseband chipsets enable smartphones and tablets to connect to cellular networks.
The Commission considered that Qualcomm abused its dominant position by engaging in predatory pricing, whereby it sold certain chipsets below cost to two key clients. The Commission also considered that Qualcomm intended to eliminate its main rival, Icera, which posed a growing threat to its chipset business. While the Commission’s full decision is yet to be published, the Commission’s press release shines some light on the reasons behind the fine which we outline below.
Under EU competition law, a firm is considered dominant if it enjoys a position of economic strength that enables it to behave independently of its competitors, customers and suppliers. Various factors are considered when assessing whether a firm is dominant including market shares, barriers to entry and buyer power. The Commission considered that Qualcomm held a dominant position, in particular, because it held a share of approximately 60% in the global market for 3G baseband chipsets (almost three times the market share of its largest competitor) and there were high barriers to entry.
Abuse. When is pricing predatory?
Dominance is not itself illegal under EU competition law, rather it is the abuse of that dominant position which constitutes an infringement under Article 102 of the Treaty on the Functioning of the European Union. To that effect, dominant firms have a special responsibility by virtue of their position in the market not to restrict competition.
The Commission considered that Qualcomm sold certain quantities of three types of chipsets below cost to two strategically important customers, Huawei and ZTE, with the intention of eliminating Icera, which had entered the market in 2006 and was Qualcomm’s main competitor at the time in the market segment offering advanced data rate performance.
According to the Commission’s guidance, predatory conduct can arise where a firm deliberately incurs losses or foregoes profits in the short term (‘sacrifice’) so as to foreclose one or more actual or potential competitors with a view to strengthening or maintaining market power. While this requires extensive economic assessment, as a starting point, sacrifice may be shown:
- Where the pricing falls below the product’s average avoidable cost i.e. the cost that could have been avoided by not producing the units in question; or
- Through evidence that the firm had an intention to foreclose a competitor with a strategy to sacrifice revenues. The European courts have taken the view in previous cases that the intention to foreclose is only a necessary prerequisite to show predation when the dominant firm has sold the product below the average total cost but above its average variable cost. In any event, such evidence, whether a prerequisite or not can be a corroborating factor to showing a predatory pricing abuse.
In this case, the Commission considered the following factors when assessing Qualcomm’s pricing:
- A price-cost test for the three Qualcomm chipsets concerned; and
- A broad range of qualitative evidence demonstrating the anti-competitive rationale behind Qualcomm's conduct, which showed that Qualcomm intended to prevent Icera from expanding and building market presence.
The European courts have held in the past that the Commission must be afforded a broad discretion when assessing costs in this context. Therefore, it remains to be seen what benchmark the Commission used for the price-cost test in its decision. The Commission did however conclude that Qualcomm’s conduct had a significant detrimental impact on competition. It prevented Icera from competing in the market, stifled innovation and reduced choice for consumers, with no evidence of efficiencies that could excuse Qualcomm’s conduct.
Predatory pricing cases are relatively rare and this is the Commission’s first predatory pricing decision in 16 years. The fine imposed on Qualcomm represented 1.27% of its turnover in 2018 and was also aimed at deterring market players from engaging in such anti-competitive practices in the future. It is also the second fine imposed by the European Commission on Qualcomm in the last two years. In January 2018, Qualcomm was fined €997 million for abusing its dominant position in LTE baseband chipsets by making significant payments to a key customer on condition that it would not buy from rivals.