Qualcomm: Chinese antitrust probe likely will result in 'some loss'

China's antitrust regulator has concluded that Qualcomm (NASDAQ:QCOM) commands a monopoly in the Chinese chipset market, according to a report from the state-run Securities Times newspaper that cited unnamed sources close to China's antitrust regulator. However, it's unclear whether the country's regulator has decided that Qualcomm has abused that position for its own gain.

The report on the regulator's ongoing investigation could complicate business for the chipset giant in China, the world's largest smartphone market and an area where the company is hoping for strong growth to offset slowdowns in Western markets. China accounts for nearly half of Qualcomm's revenue.

The regulator, the National Development and Reform Commission (NDRC), has been investigating Qualcomm's local subsidiary for months now after it said in February there were suspicions that the company was overcharging and abusing its market position in wireless. The allegations could eventually lead to record fines of more than $1 billion. Qualcomm said it expects to take some financial loss as a result of the probe.

Qualcomm CEO Steven Mollenkopf declined to take questions from reporters on the issue, according to Reuters. The NDRC declined to provide immediate comment, Reuters said.

In a filing with the Securities and Exchange Commission that accompanied its most recent quarterly earnings report, Qualcomm noted that the investigation is primarily focused on its licensing business and interactions between its licensing business and its chipset business. The NDRC is looking into how royalties are calculated in Qualcomm's patent licenses; the value exchanged for cross-licenses to patents of the company's licensees; whether Qualcomm will offer license agreements limited to patents essential to certain wireless standards; and the company's policy of selling chipsets only to its patent licensees.

Qualcomm said it continues to cooperate with the NDRC and "will continue to vigorously defend itself in the foregoing matters." However, Qualcomm said it can't predict the outcome of the investigation and that it "believes that a loss is probable but that any possible range of loss cannot be reasonably estimated at this time. The unfavorable resolution of one or more of these matters could have a material adverse effect on the company's business, results of operations, financial condition or cash flows."

Qualcomm's sales largely come from selling new chipsets, but most of its profit comes from licensing patents.

Qualcomm President David Aberle said "some loss would be probable" from the probe. "We are really not in a position to be able to estimate what that might look like, we just believe whatever the resolution may be, will likely include some form of payment," he added, according to Reuters.

Aberle said the investigation is making it harder to negotiate new LTE licenses with device makers in China.

Interestingly, the report came as Qualcomm unveiled a commitment to invest up to $150 million in Chinese startups. Qualcomm said it will invest in Chinese companies that further the development of mobile technologies in the Internet; e-commerce; semi-conductor; education and health sectors. Qualcomm said Cambridge Wowoa mobile education start-up, and Boohee, a mobile healthcare company, were recently funded.

According to Reuters, Mollenkopf defended the company's licensing program in discussing the new fund. He said the $30 billion the firm has spent on research and development over the company's lifetime had allowed it to spread its technology in China. "It's really why anybody that signs up on a license, actually does it voluntarily--because it is a way of leveraging all of that R&D," he said.

In its most recent quarter, its fiscal third quarter, Qualcomm said revenue came in at $6.81 billion, up 9 percent year-over-year, and net income was $2.24 billion, up 42 percent from the year-ago period.

For more:
- see this Qualcomm earnings release
- see this Qualcomm China release
- see this Qualcomm SEC filing
- see this Securities Times article (translated via Google Translate)
- see this Reuters article 
- see this WSJ article (sub. req.)
- see this Bloomberg article

Special Report: Wireless in the second quarter of 2014

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