EXHIBIT 4

Case 5:17-cv-00220-LHK Document 1042-2 Filed 12/21/18 Page 1 of 7
IN THE UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

FEDERAL TRADE COMMISSION,

Plaintiff,

v.

QUALCOMM INCORPORATED, a 

Delaware Corporation, 

Defendant.

Case No. 17-CV-00220-LHK

EXPERT REPORT OF CARL SHAPIRO

24 May 2018

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(5) I have considerable experience with the application of economics for the purpose of enforcing the

antitrust laws. I served during 1995–1996 and again during 2009–2011 as the Deputy Assistant

Attorney General for Economics in the Antitrust Division of the U.S. Department of Justice. I have

also served on several occasions as an expert witness or consultant to the Antitrust Division or the

U.S. Federal Trade Commission. I have also consulted or served as an expert witness on numerous

antitrust matters for private companies in the technology sector, as well as many other industries. A

list of cases in which I have testified during the past four years is attached as Appendix B.

(6) I am being compensated for my work on this case at a rate of $880 per hour. This compensation is

unrelated to the outcome of this matter. My work in this case has been supported by Bates White,

LLC, an economic consulting firm. I also receive compensation from Bates White based on Bates

White’s staff billings on this case.

I.B. Assignment

(7) I have been asked by the Federal Trade Commission (FTC) to provide an economic analysis of the

likely competitive effects of Qualcomm’s commercial practices that are the subject of the FTC’s

complaint in this case. The FTC also asked me to define the relevant markets applicable to the

analysis of this conduct and to assess whether Qualcomm possesses monopoly power in any of these

markets.

(8) A list of the materials that my staff and I relied upon in preparing this report is provided in Appendix

C. Discovery in this matter is ongoing. I may amend and update my analysis and my opinions based

on information that becomes available too late for inclusion in this report or in the future, and based

on the reports submitted by Qualcomm’s experts.

E. Kwoka, Jr. and Lawrence J. White eds. (Oxford University Press, 2003); Shapiro, Carl, “Navigating the Patent

Thicket: Cross Licenses, Patent Pools, and Standard Setting,” Innovation Policy and the Economy 1 (2000): 119–150;

Carl Shapiro, “Setting Compatibility Standards: Cooperation or Collusion,” Expanding the Boundaries of Intellectual

Property 81 (2001): 97–101; Richard Gilbert, Carl Shapiro, Louis Kaplow, and Robert Gertner, “Antitrust Issues in the

Licensing of Intellectual Property: The Nine No-No’s Meet the Nineties,” Brookings Papers on Economic Activity:

Microeconomics (1997): 283–349; Richard J. Gilbert and Carl Shapiro, “An Economic Analysis of Unilateral Refusals

to License Intellectual Property,” Proceedings of the National Academy of Sciences 93, no. 23 (1996): 12749–12755.

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II. Summary of Conclusions

(9) At this time, I have reached the following conclusions:

 There is a relevant antitrust product market for “CDMA Modem Chips.” These are modem chips

that comply with CDMA standards, that is, with CDMA 2G or 3G capabilities. From the

perspective of a manufacturer of handsets purchasing modem chips, a modem chip that does not

comply with CDMA standards is not a good substitute for a CDMA Modem Chip. My conclusion

that CDMA Modem Chips are a relevant market is based in part on my implementation of the

Hypothetical Monopolist Test, the standard method employed by antitrust economists for over 35

years to define relevant antitrust markets. The geographic scope of this product market is

worldwide.

 Qualcomm had monopoly power in the market for CDMA Modem Chips from 2006 through at

least 2016. 

 There is a relevant antitrust market for “Premium LTE Modem Chips.” These are modem chips

that comply with the LTE standard and are used in premium handsets, as that term is used by

Qualcomm. From the perspective of a manufacturer of handsets purchasing modem chips, other

modem chips are not good substitutes for Premium LTE Modem Chips. In particular, modem

chips with fewer capabilities that are not used in premium handsets are not a good substitute for

Premium LTE Modem Chips. My conclusion that Premium LTE Modem Chips are a relevant

market is in part based on my implementation of the Hypothetical Monopolist Test. The

geographic scope of this product market is worldwide.

 Qualcomm had monopoly power in the market for Premium LTE Modem Chips from the launch

of LTE handsets in 2011 through at least 2016.

 Qualcomm has employed a “no-license/no-chips” policy for many years. Under this policy,

Qualcomm will not supply its modem chips to a handset manufacturer that has not signed a patent

license with Qualcomm covering Qualcomm’s cellular standard-essential patents (SEPs).

Through use of this policy, Qualcomm has brought its bargaining leverage based on its monopoly

power over modem chips to bear on its patent licensing negotiations with handset manufacturers.

 As a result of Qualcomm’s no-license/no-chips policy, Qualcomm has been able to obtain

unreasonably high royalties for its cellular SEPs, notwithstanding Qualcomm’s commitment to

license its cellular SEPs on fair, reasonable, and non-discriminatory (FRAND) terms.

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this reallocation weakens and excludes Qualcomm’s rivals by reducing the demand for their modem 

chips.578

(298) The central competition problem is that Qualcomm is using the market power associated with its

modem chips to induce OEMs to agree to pay a per-handset royalty in excess of a reasonable level

when purchasing modem chips from any of Qualcomm’s rivals. This excess per-handset royalty

charge (x in my notation) has the effect of raising the cost to the OEM of purchasing a modem chip

from Qualcomm’s rivals, by exactly the amount of Qualcomm’s excess royalties, x. This higher cost

in turn depresses the demand for modem chips sold by Qualcomm’s rivals. Put simply, an OEM’s

demand for a rival modem chip is reduced if the OEM must pay the excess royalty x when it uses a

rival modem chip.

(299) Equivalently, one can think of the excess royalty x as an extra cost that Qualcomm imposes on its

rivals when they sell modem chips. This would literally be true if the rival were the entity paying the

SEP royalties directly to Qualcomm. However, the underlying economics are identical, whether the

OEM pays an extra amount x to Qualcomm when using a rival chip, or whether the rival pays that

extra amount directly to Qualcomm. In the first case, the license fee is a strict complement to the

rival’s modem chip. In the second case, the license fee is an unavoidable cost borne by the rival.

These are economically equivalent.579 Qualcomm’s no-license/no-chips policy is an example of how a

monopolist can use its monopoly power to raise the costs incurred by its rivals, which weakens or

excludes them, and thereby fortifies its monopoly position.580

(300) This excess royalty is economically equivalent to a “tax” imposed by Qualcomm on the OEM’s use

of rival modem chips. By raising the cost on rival modem chips, this excess royalty inevitably and

predictably raises the all-in price of rival chipsets and reduces the quantity of those chipsets sold, for

578 See, for example, Philippe Aghion and Patrick Bolton, “Contracts as a Barrier to Entry,” American Economic Review 77, 

no. 3 (1987): 388–401; Kathryn E. Spier and Michael D. Whinston, “On the Efficiency of Privately Stipulated Damages

for Breach of Contract: Entry Barriers, Reliance, and Renegotiation,” RAND Journal of Economics 26, no. 2 (1995): 

180–202; Eric B. Rasmusen, J. Mark Ramseyer, and John S. Wiley Jr., “Naked Exclusion,” American Economic Review

81, no. 5 (1991): 1137–1145; Ilya R. Segal and Michael D. Whinston, “Naked Exclusion: Comment,” American 

Economic Review 90, no. 1 (2000): 296–309; John Asker and Heski Bar-Isaac, “Raising Retailers’ Profits: On Vertical

Practices and the Exclusion of Rivals,” American Economic Review 104, no. 2 (2014): 672–86.

579 The economic impact of the excess royalty is the same as that of a sales tax. It is a well-established economic principle 

that the effect of a tax is identical regardless of whether the consumer or producer of a good pays that tax: see, e.g.,

Robert S. Pindyck and Daniel L. Rubinfeld, Microeconomics, 7th ed., 335–336 (Upper Saddle River, NJ: Pearson 

Prentice Hall, 2007).

580 There is an extensive economics literature on “Raising Rivals’ Costs,” which addresses business practices that weaken

or exclude rivals by raising their costs. See, e.g., Steven C. Salop and David T. Scheffman, “Raising Rivals’ costs,”

American Economic Review 73, no. 2 (1983): 267–271; Elizabeth Granitz and Benjamin Klein, “Monopolization by 

‘Raising Rivals’ Costs’: The Standard Oil Case,” Journal of Law and Economics 39, no. 1 (1996): 1–47; Nicholas 

Economides, “The Incentive for Non-Price Discrimination by an Input Monopolist,” International Journal of Industrial 

Organization 16, no. 3 (1998): 271–284; Justine S. Hastings and Richard J. Gilbert, “Market Power, Vertical Integration 

and the Wholesale Price of Gasoline,” Journal of Industrial Economics 53, no. 4 (2005): 469–492; Hans-Theo 

Normann, “Vertical Integration, Raising Rivals’ Costs and Upstream Collusion,” European Economic Review 53, no. 4 

(2009): 461–480.

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a given all-in price charged by Qualcomm. This excess royalty also inevitably and predictably 

reduces the operating income that any rivals can earn from selling chipsets, which can be expected to 

reduce the investments these rivals make in modem chips. This is turn leads to longer-term anticompetitive effects on innovation.

(301) For all of these reasons, this excess royalty excludes rival modem-chip suppliers. In the short run, that

exclusion takes the form of reducing the competitive constraint that the rivals impose on Qualcomm,

which leads to reduced output of rival modem chips and a higher all-in price for rival modem chips.

This is an example of the general economic principle that when a good is taxed, its price goes up and

the quantity of that good sold goes down. In the long run, that exclusion also takes the form of

reduced investments by rival modem chip suppliers, leading those rivals to offer lower quality modem

chips and/or to have reduced capacity. In time, the excess royalty can induce exit from the market

altogether.

(302) While it is difficult to isolate the effect of Qualcomm’s conduct on its modem chip rivals, we do

know, as discussed above in Section VIII.C, that Texas Instruments, Broadcom, Marvell, Nvidia, and

ST-Ericsson all stopped selling modem chips between 2012 and 2015.581 These companies were

unable to make sufficient sales at margins that would justify continuing to make the substantial R&D

investments needed to remain competitive in the sale of Premium LTE Modem Chips.

(303) There is evidence from the exited rivals that depressed margins in the sale of modem chips

contributed to their exit. Broadcom’s Rango described the margins that Broadcom’s modem chip

business earned as “not attractive” and below Broadcom’s gross margin target of 50%.582 A

Broadcom Board of Directors presentation from 2011 identified the “[a]bility to resource the

opportunities” as a key “Risk/Challenge” in the sales of modem chips.583 With respect to Marvell,

former Marvell Vice President Vivek Chhabra testified that Marvell’s gross margins were 14% prior

to exiting the modem chip business, much lower than Marvell’s 40% to 50% gross margin targets.584

Nvidia likewise earned lower margins on its modem chips than it did on other chips it sold, and the

poor return on investment was a factor in Nvidia’s decision to wind down its business.585

(304) Additionally, as MediaTek has attempted to move from lower tiers to the premium tier, it has found

that the margins it earns on its more premium products are unsustainable. MediaTek’s Moynihan

581 See ¶ (251) and note 525.

582 Deposition of Robert Rango (Broadcom), 249:2–252:20, Feb. 13, 2018 (discussing Broadcom, “Mobile and Wireless”

(presentation, Nov. 12, 2013), 14–15 (BRCM000173 at -186–187).

583 Broadcom, “3YP Phase V: Mobile and Wireless Group: BOD Presentation” (presentation, 2011), 2 (BRCM000026, -

028).

584 Deposition of Vivek Chhabra (Marvell), 174:21–179:2, Mar. 9, 2018.

585 Deposition of Deepu Talla (Nvidia), 117:14–118:2, Mar. 23, 2018; see also Deposition of Deepu Talla (Nvidia), 206:6–

206:22, Mar. 23, 2018 (“W]e felt that the return on investment—we could invest our resources in other markets where 

the growth opportunity is better . . . .”).

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directly harms those rivals and weakens them as competitors to Qualcomm by eliminating a valuable 

option that would otherwise be available to them.

(327) Qualcomm’s refusal to license its modem chip rivals further harms competition to the extent that

rivals’ inability to obtain a license from Qualcomm on reasonable terms discourages investment. For

example, in 2011, Samsung and several other companies negotiated to form a joint venture called

“Dragonfly” that would have developed and sold modem chips to third parties. One of the key

conditions for that joint venture was that it obtain a license from Qualcomm to sell modem chips.

.

607

(328) Beyond these harms, the exclusionary effect of Qualcomm’s refusal to license rival modem-chip

makers depends on the per-handset royalties that OEMs pay for Qualcomm’s SEPs. If OEMs were

able to enter into SEP licenses with Qualcomm at the same per-handset royalty of ݎҧthat rivals could

obtain in the counterfactual, then the effects of Qualcomm’s refusal to license to its modem-chip

rivals might be relatively minor. However, as shown above, that is not the case: due to Qualcomm’s

no-license/no-chips policy, OEMs pay royalties for Qualcomm’s SEPs that the exceed the reasonable

per handset royalties of ݎҧ.

(329) Qualcomm’s practices have limited the ability and incentives of its modem-chip rivals to counter

these harms. I understand that in 2015 the Ninth Circuit held that a manufacturer of standardcompliant products could file a breach-of-contract action to enforce a SEP holder’s FRAND

commitments, whereas the ability to bring such an action had previously been unclear.608

(330) Since 2015, although Qualcomm’s modem-chip rivals may now have the ability to file actions to

compel Qualcomm to comply with its FRAND commitments, Qualcomm’s practices have reduced

those rivals’ incentive to file such actions.

(331) First, a modem-chip rival may reasonably fear that Qualcomm would retaliate if it took legal action to

enforce Qualcomm’s obligation to license its SEPs on reasonable terms. As noted above, Qualcomm

has informed modem-chip rivals that have sought exhaustive licenses that it does not grant exhaustive

licenses to modem-chip suppliers.609 Qualcomm has informed some rivals that granting an exhaustive

607 See Deposition of Andrew Hong (Samsung), 169:4–176:16, 139:23–140:5, Mar. 7, 2018; CX2628 (SFT-0036382); 

Yiwan Wong (Samsung), memo, “S.LSI Strategy Growth Development (SGD) Weekly Highlights,” Mar. 24, 2012, 2 

(SFT-0036334 at -335) (

 Email from Yiwan Wong, Samsung, to Samsung executives, Mar. 26, 2012, 2 (SFT-0908806 at - 807).

608 Microsoft Corp. v. Motorola, Inc., 795 F.3d 1024, 1056–57 (9th Cir. 2015) (affirming judgment in breach of contract 

action brought by Microsoft to enforce Motorola’s FRAND commitments).

609 See Section V.D above. 

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