Possible EU Investigation Add To Qualcomm’s Regulatory Problems

Qualcomm (NASDAQ:QCOM) occupies the top slot in the global mobile chipset market, which makes the company vulnerable to a rising number of allegations against it for abusing its market dominance and indulging in monopolistic practices. It is already facing the wrath of Chinese antitrust agencies and, if sources are to be believed, it may also face a European investigation related to a complaint filed by Icera in 2010. Icera, acquired by Nvidia (NASDAQ:NVDA) in 2011, filed a report with the European Commission (EU) in June 2010, accusing Qualcomm of  using patent-related incentives and exclusionary pricing of chipsets to discourage customers from doing business with Icera. ^[1] If found guilty of breaching EU rules, Qualcomm could face a fine of up to $2.5 billion. ^[2]

Recently, EU upheld a record 1.1 billion euro fine against Intel (NASDAQ:INTC) for abuse of its dominant market position.

Our price estimate of $74 for Qualcomm is almost in line with the current market price.

See our complete analysis for Qualcomm stock here

History of Complaints Against Qualcomm

In 2006, Ericsson and Texas Instruments made a complaint against Qualcomm for misusing its leadership in mobile CDMA technology, but the companies dropped the complaint in 2010. In 2009, Qualcomm paid a fine of $268.6 million to South Korea’s Fair Trade Commission, the agency’s biggest ever penalty against a single company, for abusing its dominant position in CDMA modem chips which were then used in handsets made by Samsung Electronics and LG Electronics. Qualcomm accounted for 99.4% of the CDMA chip market in the country. ^[2]

In November last year, the Chinese regulatory authority, National Development and Reform Commission (NDRC), initiated a probe against Qualcomm related to its monopolistic practice. Last week, Chinese regulators announced that Qualcomm is willing to make efforts to resolve the investigation and it met a delegation from the company in an effort to reach a comprehensive resolution. ^[3] Qualcomm faces a hefty fine and a possible cut in royalty rates as the antitrust probe reaches its final stage. ^[4]

The Regulatory Trouble in China can Limit Qualcomm’s 4G Opportunity

The Chinese allegations came at a time when the country prepares for a big push into 4G in the coming months, after the government handed out TD-LTE licenses in December 2013. The country is seeing strong adoption of 3G data services and the LTE rollout is expected to provide the local smartphone industry with a significant boost. As 4G LTE adoption ramps, the Chinese government seems intent on obtaining lower royalty rates to keep costs low and protect the interests of local players.

If found guilty, Qualcomm could face fines of anywhere between 1 and 10% of its annual revenues in the country. While the company earns almost half its revenues from China (over $12 billion in FY 2013), a bulk of those come from licensing patents and selling chipsets to foreign players such as Apple that have their supply chain in the country. It is therefore unlikely that such a large portion of Qualcomm’s revenues are at risk of incurring a fine. However, the regulatory moves do put a lot of Qualcomm’s future revenue growth in jeopardy, given that China and its local players are likely to be the company’s biggest revenue driver in the coming years. NDRC’s aggressive posturing as an anti-monopoly watchdog could curtail Qualcomm’s ability to impose licensing rates and limit its upside from China Mobile’s 4G transition. (Read: Qualcomm’s Regulatory Troubles In China Cast A Shadow Over 4G Opportunity)

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1. Qualcomm in Hot Water? May Face EU Antitrust Regulator, Yahoo Finance, August 28, 2014 [↩]
2. Chipmaker Qualcomm may face EU antitrust probe: Report, Tech 2, August 27, 2014 [↩] [↩]
3. China says Qualcomm is willing to resolve dispute, The Australian, August 25, 2014 [↩]
4. Qualcomm Looks to Soften China Antitrust Blow, Light Reading, July 25, 2014 [↩]