The International Trade Commission Could Make Popular Smartphones Even MORE Expensive. Here’s How

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Steve Pociask President, American Consumer Institute
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Qualcomm has asked the International Trade Commission (ITC) to halt the importation of some Apple smartphones that use the chips of its competitors. The issue stems from a patent dispute between Qualcomm, a maker of baseband processor chipsets used in many popular electronic devices, and Apple, a manufacturer of these devices. Now, a new report by the American Consumer Institute (ACI) finds that an importation ban would lead to shortages and drive up consumer prices — costing consumers $9.9 billion.

Qualcomm has amassed a near monopoly in the baseband processor chipset market. These cellular patents are essential to the technology standard, which requires that they be licensed under fair, reasonable and nondiscriminatory terms (FRAND). However, many antitrust regulators and electronics manufacturers have argued that Qualcomm is simply attempting to protect its monopoly by shutting out the competition and overcharging smartphone and tablet manufacturers through sky-high royalty rates, violating their obligations under FRAND.

Qualcomm’s complaint is intriguing because it has amassed a long list of allegations from antitrust regulators around the world. Earlier this year, the U.S. Federal Trade Commission (FTC) filed a complaint with the U.S. District Court in the Northern District of California, citing Qualcomm’s refusal to license its competitors (“no license – no chips“), excessive royalties demands and exclusivity deals that give rebates to manufacturers who refuse to buy chipsets from Qualcomm’s competitors.

In addition, late last year, the South Korean Fair Trade Commission (KFTC) fined Qualcomm $865 million for licensing abuses. And earlier, the Chinese antitrust regulator had fined Qualcomm $975 million and required the San Diego-based company to lower its royalty fees. Just last month, the Taiwan Fair Trade Commission levied a $774 million fine on Qualcomm for antitrust violations. In addition, competition authorities in Japan and Europe appear to be taking a closer look at Qualcomm’s business practices.

Qualcomm’s decision to seek relief before the International Trade Commission is particularly unusual. Qualcomm selectively asserts patents that are not central to the iPhone’s innovation or demand, yet it seeks to exclude them entirely from the U.S. market based on these patents. Also, Qualcomm only targets certain Apple iPhones – those that contain Intel Chipsets, despite the fact that Qualcomm’s infringement assertions appear to apply equally to iPhones that contain Qualcomm chipsets.

Regarding the mounting evidence and allegations of anticompetitive practices, Qualcomm’s ITC complaint of patent infringement may simply be a distractive ploy to further its market power, or it may be a retaliatory reaction against a series of allegations, lawsuits and regulatory investigations into its licensing practices. In fact, some analysts have recognized that Apple is likely to move away from Qualcomm’s baseband processor chipsets. Therefore, targeting only those devices that use its competitor’s devices is a not-so-subtle attempt by Qualcomm to bring Apple back into the fold.

An exclusion order could block the importation of these popular devices, unless the ITC finds that such an exclusion order is not in the public interest. Like some regulators across the globe, others are taking aim at Qualcomm’s questionable business practices. The Computer & Communications Industry Association (CCIA), Intel, the App Association and others have all filed public interest statements before the ITC arguing that Qualcomm overcharges its customers. Separately, last January, Apple filed a $1 billion lawsuit against Qualcomm, claiming that it engages in anticompetitive tactics, refuses to pay rebates, and overcharges for use of its patents.

Empirical evidence also suggests that blocking Apple devices would not be in the public’s interest. Any time market supply is reduced, prices will always rise. In this case, even if smartphone substitutes eventually come onboard, these devices will have just Qualcomm chips. The impact of an exclusion order on consumers is estimated to be a whopping $9.9 billion consumer welfare loss, according to ACI’s report. Not only will consumers pay more for their smartphones, but the ban would reduce consumer choice and likely preserve Qualcomm’s monopoly over the long term.

The ITC provides no leeway between two polar outcomes. If the International Trade Commission finds that Apple has not infringed, it dismisses the complaint. On the other hand, if the ITC finds an infringement, it could immediately block these devices from importation. The evidence shows that this second option would lead to adverse consequences by limiting the availability of smartphones, as well as what consumers pay for them. Most importantly, it will lead to a dramatic loss in consumer welfare.

The lack of leeway is good reason for the International Trade Commission to walk away and let the Federal Trade Commission and courts settle these disputes. Whatever the outcome, considering a pattern of questionable business practices and fines, regulators need to focus on what is best for consumers.

Steve Pociask is president of the American Consumer Institute, a nonprofit educational and research organization.  For more information about the Institute, visit www.theAmericanConsumer.Org or follow Steve on Twitter @ConsumerPal.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.