The Qualcomm Case: Why China Uses U.S. Technology Americans Are Locked Out Of

Hi,

Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…

You’ve probably noticed that BIG newsletters have dropped in frequency, that’s because I’m working on a few longer form stories and a new project I’ll announce soon.

Some house-keeping. Apparently I hurt the feelings of DOJ Antitrust chief Makan Delrahim when I pointed out to reporter Nihal Krishan that enforcement actions against Google matter more than speeches about Google. To underscore the point, Google just bought another company, CloudSimple.

Delrahim didn’t like this point. According to Krishan, he said I’m wrong, and that I’m “out there taking unnecessary criticism of the Justice Department's work." Look, I’m driven by outcomes, and we have a concentration crisis that is destroying our society. I’m happy to be wrong about Delrahim, and I’ll happily admit I am wrong if he ends up doing something useful. But I’m seeing a a lot of speechifying about enforcement, even as big tech busts out to acquire as much as possible in this lax enforcement environment. In fact, I’m seeing some actively bad things coming out of DOJ, as I’ll go into below.

Today I’m going to write about the most important monopolization case going on today, which is the Federal Trade Commission case against Qualcomm, the U.S. leader in chipsets for 5G wireless technology. The basic issues in this case involve China, the fusion of our national security apparatus with big business, and whether the U.S. will be a nation of monopolies or a nation of liberty.

But first, a picture of Ashton Kutcher and his business acumen. Yes, it’s 2019, and things are still really dumb.

Qualcomm as John D. Rockefeller or Bill Gates

So let’s start with the background of the case. Qualcomm is a very important corporation, but one you may not have heard of because it doesn’t do consumer oriented work. The company makes critical components for cell phones, the stuff you don’t see but that goes into the guts of telecom systems. Its technology connects phones to cell networks, and it makes its money by selling chips and by licensing its patents to device makers.

The story of how Qualcomm monopolizes is pretty simple. The corporation does what Bill Gates did to computer manufacturers and what John D. Rockefeller did to railroads, as I wrote a few weeks ago. Rockefeller’s oil was critical to railroads, and Gates’s operating system software was critical to computer makers. Both of them thus forced their dependents to give them a fee not just for every Rockefeller barrel of oil or Microsoft OS license, but a fee for every one of their competitors’ as well. They taxed their competition and made it impossible to compete.

Qualcomm does this as well. As its competitor Intel explained, Qualcomm “refuses to sell [phone makers] any chipsets unless those manufacturers also purchase separate patent licenses that require them to pay exorbitant royalties for every handset they sell, regardless of whether the handset contains a Qualcomm chipset.” In other words, it’s the Gates/Rockefeller playbook. Find an essential chokehold, and use it to control the industry.

Qualcomm uses a few other anti-competitive tactics. It refused to license its patents - essentially standard and necessary for the industry - to competitors. And it cut exclusive deal arrangements with customers to box anyone else out of the market. (You can read the rest of Intel’s amicus brief if you want to hear expensive lawyers accurately whine about being treated unfairly.)

Eventually, probably at the behest of Apple, the FTC sued Qualcomm. This suit is the first major monopolization case since Microsoft back in the 1990s. In the district court, Qualcomm lost, and the judge forced the corporation to change its licensing practices to make them what’s called FRAND, or fair, reasonable, and non-discriminatory. Later on, however, in a significant win for Qualcomm, an appeals court put a stay on the judgment.

While the FTC is suing Qualcomm as a monopolist, the Department of Justice Antitrust Division filed a brief on behalf of Qualcomm. The DOJ argument is basically saying, yeah, Qualcomm does all that stuff, but Judge Gorsuch said it’s all legal and efficient, and we don’t want to dissuade the liberty to abuse patents and market power. Two other officials, one at the Department of Defense and another at the Department of Energy, also weighed in. Ellen Lord, a former defense contractor and the Under Secretary of Defense for Acquisition and Sustainment for the DOD, argued that Qualcomm’s position as a monopolist enables it to support national security and help China. A Department of Energy official Max Everett basically said the same thing.

The DOD’s Ellen Lord has what is effectively the antitrust chief position for the Pentagon. Her tenure has been a quiet disaster. She enabled a merger in the rocket industry that allowed a nuclear missile monopoly, and she’s probably going to allow the UT-Raytheon merger. It’s not a surprise she’s stepping out to defend a monopolist, that’s what she does. I’m not impressed with these pro-monopoly arguments. Neither, incidentally, is former DHS cabinet member Michael Chertoff, who wrote an op-ed in the Wall Street Journal pointing out that monopolies are bad for national security.

In the technology race against China, the U.S. should prefer to let competition drive innovation rather than support exclusive national champions. Apart from the economic inefficiency, a single-source national champion creates an unacceptable risk to American security—artificially concentrating vulnerability in a single point. The government’s argument in support of Qualcomm isn’t prudent, and if courts accept it, the result would be a self-inflicted wound to U.S. national interests. We need competition and multiple providers, not a potentially vulnerable technological monoculture.

While Chertoff is working for corporate clients who are opposed to Qualcomm, he’s not wrong on the merits. We need look no further than Boeing, which is a “national champion” in aerospace. That’s not working out so well for us, is it?

There’s one other argument that I think matters on the monopolization and security front, especially as it relates to intellectual property like patents and copyrights. And this has to do with the innovation ecosystem, and how strict IP laws that promote concentration in the West actively contribute to Chinese technological dominance.

It starts with some history.

China Is Living in 1950s America

From the 1950s to the 1970s, the U.S. had a fairly open patent regime, spurred not so much by changes to patent law as antitrust suits. Lawsuits against RCA, IBM, Dupont, AT&T, and others forced large dominant firms to license their technology to domestic firms.

In my book - Goliath: The 100-Year War Between Monopoly Power and Democracy - which is by the way a tremendous Christmas gift for all your politically interested friends and families - I go over how this regime worked. The short story is that the scientists at those giants developed great stuff, but the suits in those corporations didn’t get it. It took innovative small businesses to deploy what monopolists wouldn’t.

This open regime, along with government spending, is the origin of Silicon Valley, because small firms ended up commercializing the technology. But from the 1980s onward, we closed off innovation by tightening IP laws and enabling monopoly. This older regime disappeared, and even its memory evaporated. Open IP regimes and markets are now alien to American lawyers. I found a law review article written by a former FTC lawyer in the early 2000s on a suit antitrust suits with Xerox involving patent divestment. It was, he wrote, like finding a “previously undiscovered ancient culture.” He also found the suit unsettling, he argued, because the FTC’s remedy “seems to have done a world of good.”

Today, American intellectual property is locked into dominant firms, who spend large amounts of money making sure no one else can use it. Apple for instance spends $1 billion a year on its legal division, and Disney is right now suing people online for using Baby Yoda memes. China, however, has a way around our IP laws; it just hacks our corporations or legally forces technology transfer, and then moves this knowledge throughout its technology sector. Thus American know-how floods into China, while Americans are locked out of the wisdom we developed and paid for.

More than just the transfer is the ecosystem of business development and investment. China is innovating on top of our knowledge, which the America government has legally blocked Americans from using. Our venture capitalists and entrepreneurs shy away from competing with giants or accidentally stepping on patents. In other words, China is de facto living in the incredibly productive legal environment America had for our own technology sector from the 1950s to the 1970s. Their ability to innovate on top of our technology, combined with our inability to deploy that same technology, is now a huge national security vulnerability.

There are two ways to address this problem. The first is to try and stop Chinese tech development. The Commerce Department is rolling out new rules to engage in far more granular examination of supply chains, which is probably good. But U.S. tech giants are already moving key facilities to Switzerland so they can evade American jurisdiction. The reality is that our strategy of blocking the diffusion of knowledge will require a large number of policy choices, from finance to trade, for which we are unprepared. We’ll have to take those steps, but it’ll take a lot of time and political battling to do so. It’s also not clear that we can stop the development of Chinese technology, nor is it necessarily desirable to do so. If the Chinese come up with a cure for cancer, that’s a good thing for humanity.

The second strategy is to encourage more innovation here. And that means addressing extreme financialization of our intellectual sector that has locked Americans out while allowing the Chinese to innovate on our own knowledge and know-how. That’s what the FTC did when it sued Qualcomm, but we’ll need a much more aggressive attack on concentration in American markets. The idea is that if our markets are flexible enough and we have enough government financing of basic research, we can unlock the remarkable wisdom in our corporations and deploy and development technology much faster than we do today, and faster than China does with its autocratic state capital framework.

This strikes me as a much more fruitful path. After all, putting our brilliant engineers at Google and demanding they spend their time finding out how to get us to click on more ads seems quite wasteful, especially as China is using all the cool technology in American firms that our engineers can’t deploy to develop ways to undermine democracy.

That’s the theory, anyway.

Thanks for reading. And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you want to really understand the secret history of monopoly power, buy my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller

P.S. I’m going over little shitty software monopolies (LSSM). For some reason people keep complaining about a yoga studio software called MindBody. If you’ve had experience with it, let me know.

Also, the key elements of LSSM’s seem to be locking in users and then abusing them with random fees and an increasingly bad user experience. I’ve been doing research, but I don’t have totally solid public policy ideas on how to attack this problem. I’m thinking that enforced compatibility with competitors, openly listed pricing with no secret rebates, and perhaps a dominance standard on monopolization would help. I don’t know how open source fits in here. If you have better ideas, let me know.