Qualcomm Inc. QCOM is in troubled waters again. Recently, the European Union (EU) Competition Commission leveled charges against the company‘s anti-competitive practices in the chip making industry. Following the announcement, the company’s shares plunged as much as 6%.
Notably, the EU had initiated a probe into whether the company has been taking advantage of its dominant position in the industry in July this year.
To start with, Qualcomm has been accused of bribing a major smartphone and tablet manufacturer since 2011, to ascertain the purchase of 4G baseband chipsets exclusively from the chipset maker.
Secondly, the regulator suspects that Qualcomm has practiced predatory pricing in order to eliminate competition. The company has supposedly sold certain baseband chipsets used for mobile connectivity below cost price, between 2009 and 2011, in order to eliminate rival Icera from the market.
According to a report by The Wall Street Journal, Qualcomm might face a fine of up to $2.5 billion or 10% of its global revenues for each of the charges leveled against it. The company might also have to make changes to its business practices, if proven guilty.
Meanwhile, Qualcomm has three months to respond to the exclusivity allegation and four months for the predatory pricing charge.
Other Probes
Regulatory proceedings against Qualcomm are on the rise with the company facing antitrust cases in various countries.
Apart from the EU charges, the Taiwan Fair Trade Commission has launched an investigation to determine whether Qualcomm’s patent licensing arrangements violate the Taiwan Fair Trade Act.
Further, last month, the company disclosed that its patent-licensing practices were questioned by South Korea’s Fair Trade Commission.
Additionally, the company is facing or has faced regulatory investigations in China, Japan and Europe as well as in the U.S. In all the cases, the regulators’ main concern is Qualcomm’s licensing model and misuse of its powerful intellectual property rights (patents) to maintain market dominance. Notably, the European Commission is also investigating rebates and other financial incentives related to the sale of the company’s chips, whereas the U.S. Federal Trade Commission is proceeding with an initial enquiry on Qualcomm’s licensing terms.
In Feb 2015, Qualcomm paid a $975 million fine and also agreed to lower licensing fees in order to settle a 14-month old investigation in China, currently the largest market for the company.
Our Take
Qualcomm is the largest baseband chipset developer for mobile handsets globally. The company’s chipsets are used in Apple Inc.’s AAPL iPhone, Alphabet Inc. GOOGL-developed Android smartphones and Microsoft Corp.’s MSFT Windows handsets.
We believe settlement of several regulatory issues is a major concern for Qualcomm at this juncture because if found guilty, the penalty imposed may hurt the company’s profits considerably.
Qualcomm currently carries a Zacks Rank #5 (Strong Sell).
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