EXHIBIT A

Case 5:17-cv-00220-LHK Document 875-5 Filed 09/25/18 Page 1 of 6
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

REBUTTAL REPORT OF CARL SHAPIRO

26 July 2018

Contains Protected Material Designated by Qualcomm and Non-Parties

Pursuant to Protective Order(s) entered in FTC v. Qualcomm Incorporated,

Case No. 17-cv-00220 (N.D. Cal.)

Case 5:17-cv-00220-LHK Document 875-5 Filed 09/25/18 Page 2 of 6
Rebuttal Report of Carl Shapiro

Contains Protected Material Designated by Qualcomm and Non-Parties Page i

Pursuant to Protective Order(s) entered in FTC v. Qualcomm Incorporated,

Case No. 17-cv-00220 (N.D. Cal.)

Table of Contents

I. Qualifications and Assignment.............................................................................................................................1

II. Summary of Opinions .........................................................................................................................................1

II.A. Market Definition and Market Power.........................................................................................................2

II.B. Qualcomm’s No-License/No-Chips Policy ................................................................................................6

II.C. Qualcomm’s Exclusive Agreements with Apple .....................................................................................10

III. Technological Advance and the Growth of Handset Sales ..............................................................................12

IV. Market Definition..............................................................................................................................................17

IV.A. General Principles of Market Definition.................................................................................................17

IV.B. Premium LTE Modem Chips .................................................................................................................19

V. Qualcomm’s Monopoly Power..........................................................................................................................23

V.A. General Principles and Their Application to Qualcomm .........................................................................23

V.B. Premium LTE Modem Chips ..................................................................................................................26

V.B.1. Market Shares in the Market for Premium LTE Modem Chips .....................................................26

V.B.2. My Measurement of Premium LTE Market Shares ......................................................................27

V.C. CDMA Modem Chips .............................................................................................................................27

V.C.1. Dr. Chipty’s Claimed Substitutes for CDMA Modem Chips..........................................................28

V.C.2. CDMA-Enabled Handsets and Market Share ..............................................................................30

V.C.3. Barriers to Entry in the Market for CDMA Modem Chips are Material..........................................34

V.D. Qualcomm’s Large Customers ..............................................................................................................36

V.E. Accounting for Recent Developments ....................................................................................................38

VI. Qualcomm’s No-License/No-Chips Policy .......................................................................................................40

VI.A. Real-World Negotiations Are Complex..................................................................................................42

VI.B. Qualcomm’s Licensing Practices are Long-Running and Well Known..................................................46

VI.C. Royalties for Qualcomm’s SEPs Related to the UMTS standard..........................................................52

VI.C.1. Qualcomm Applied CDMA Leverage to UMTS Licensing Negotiations ......................................53

VI.C.2. Professor Nevo’s Analysis of Qualcomm’s CDMA Leverage is Flawed......................................54

VI.D. Professor Nevo’s Proposed Empirical Tests.........................................................................................59

VI.D.1. Test One Applied to CDMA.........................................................................................................65

VI.D.2. Test One Applied to UMTS.........................................................................................................66

VI.D.3. Test Four Applied to CDMA........................................................................................................71

VI.D.4. Test Four Applied to UMTS ........................................................................................................73

VI.E. Qualcomm’s Strategic and Marketing Funds ........................................................................................75

VI.F. Professor Nevo Dismisses Key Documentary Evidence .......................................................................77

VI.F.1. Evidence from Qualcomm Documents........................................................................................79

VI.F.2. Evidence Relating to Qualcomm’s Negotiations with OEMs .......................................................80

VI.G. My Limited Reliance on the Lasinski Report.........................................................................................90

VI.H. Supra-FRAND Royalties Harm Competition .........................................................................................91

VI.H.1. One Cannot Infer a Lack of Anti-Competitive Effects from Evidence of Output Growth and 

Innovation........................................................................................................................................92

VI.H.2. Professor Nevo Commits A Major Error in Attacking My Conclusion That a Higher Royalty 

Rate Results in Higher All-In Prices.................................................................................................93

VI.H.3. Professor Nevo’s One-Monopoly-Profit Argument......................................................................98

VI.H.4. Other Arguments Made by Professor Nevo ..............................................................................100

Case 5:17-cv-00220-LHK Document 875-5 Filed 09/25/18 Page 3 of 6
Rebuttal Report of Carl Shapiro

Contains Protected Material Designated by Qualcomm and Non-Parties Page ii

Pursuant to Protective Order(s) entered in FTC v. Qualcomm Incorporated,

Case No. 17-cv-00220 (N.D. Cal.)

VI.I. Professor Nevo’s Asserted Business Justifications for Qualcomm’s No-License/No-Chips policy .......103

VI.I.1. Qualcomm’s No-License/No-Chips Policy is Not Necessary For Earning a Reasonable 

Royalty ..........................................................................................................................................104

VI.I.2. Invalid Business Justifications Offered by Professor Nevo.........................................................105

VI.I.3. Qualcomm’s Use of Marketing and Strategic Funds ..................................................................107

VII. Qualcomm’s Refusal to License Modem-Chip Rivals ...................................................................................108

VII.A. The Value to Qualcomm’s Rivals of an Exhaustive License ..............................................................108

VII.B. Transaction Costs ..............................................................................................................................111

VII.C. Arguments Made in the Snyder Report..............................................................................................112

VIII. Qualcomm’s Exclusive Agreements with Apple...........................................................................................114

VIII.A. The Structure and Terms of the Qualcomm-Apple Agreements .......................................................114

VIII.A.1. The Transition Agreements are De Facto Exclusive Dealing Agreements..............................115

VIII.A.2. Dr. Chipty Offers No Defense of the Exclusivity Incentives in the Transition Agreements ......116

VIII.A.3. Qualcomm’s Strategic Benefits of Locking Up Apple’s Business ............................................118

VIII.A.4. Qualcomm’s Development of Thin Modems ...........................................................................118

VIII.A.5. Qualcomm’s Substantial Benefits from Winning Apple’s Business .........................................125

VIII.B. Dr. Chipty’s Analysis of Profit Sacrifice is Badly Flawed ...................................................................125

VIII.B.1. Qualcomm Believed it was Sacrificing Profits by Signing the FATA .......................................125

VIII.B.2. Dr. Chipty Misunderstands the Concept of “Contestable Units”..............................................126

VIII.B.3. Dr. Chipty’s Analysis of the Contestability of the iPhone 6S/6S Plus ......................................129

VIII.B.4. Dr. Chipty’s “Equally Efficient Rival” Test................................................................................137

VIII.C. Effects of Qualcomm’s Exclusive Dealing with Apple .......................................................................138

VIII.C.1. Competition and Innovation in the Counterfactual ..................................................................138

VIII.C.2. Dr. Chipty is Inconsistent Regarding Qualcomm’s Modem-Chip Rivals..................................140

VIII.C.3. Apple’s Views Regarding the Competitive Alternatives to Qualcomm ....................................142

VIII.C.4. The Viability of Other Suppliers for Apple’s Business .............................................................148

Appendix A. Testimony of Carl Shapiro during the Past Four Years................................................................... A-1

Appendix B. Materials Relied Upon .................................................................................................................... B-3

Appendix C. Premium LTE Modem Chips and Market Shares ........................................................................... C-7

Appendix D. CDMA Was and Remains an Important Market............................................................................ D-13

Appendix E. Details of Qualcomm’s Licensing Negotiations ............................................................................. E-18

Appendix F. “No Deal” Scenarios Analyzed by Qualcomm............................................................................... F-36

Appendix G. Professor Nevo’s Test Four Applied to CDMA .............................................................................G-39

Appendix H. Professor Nevo’s Test Four Applied to UMTS.............................................................................. H-40

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Rebuttal Report of Carl Shapiro

Contains Protected Material Designated by Qualcomm and Non-Parties Page iii

Pursuant to Protective Order(s) entered in FTC v. Qualcomm Incorporated,

Case No. 17-cv-00220 (N.D. Cal.)

List of Figures

Figure 1. Apple’s Revenue from Handsets, CDMA-Enabled vs. Not CDMA-Enabled...........................................30

Figure 2. Modem Chips Used in CDMA-Enabled Handsets, By Supplier: 2006–2016..........................................32

Figure 3. BCG Presentation Showing Qualcomm’s Declining Share of Cellular Communication Standard 

SEPs.....................................................................................................................................................................49

Figure 4. Professor Nevo’s Exhibit 6 after Correcting for VIA and Dropping Very Old Licenses ...........................73

Figure 5. Fraction of Apple’s Business Required to Produce a Payback Ratio of Three.....................................121

Figure 6. CDMA-Enabled Handsets as a Share of Total Handsets Sold Worldwide, 2004–2017.....................D-14

Figure 7. CDMA-Enabled Handsets as a Share of Total Handset Revenue Worldwide, 2007–2017................D-15

Figure 8. CDMA-Enabled Handsets as a Share of Total “High-End” and “Ultra High-End” Smartphones Sold 

Worldwide, 2004–2017 .....................................................................................................................................D-16

Figure 9. Unlicensed OEMs and CMS with Estimated Annual Production Volumes .........................................E-33

Figure 10. Professor Nevo’s Updated UMTS-Only LTE Reliance Regressions ................................................H-41

Case 5:17-cv-00220-LHK Document 875-5 Filed 09/25/18 Page 5 of 6
Rebuttal Report of Carl Shapiro

Contains Protected Material Designated by Qualcomm and Non-Parties Page 138

Pursuant to Protective Order(s) entered in FTC v. Qualcomm Incorporated,

Case No. 17-cv-00220 (N.D. Cal.)

VIII.C. Effects of Qualcomm’s Exclusive Dealing with Apple

(398) The Chipty Report claims that Qualcomm’s 2011 and 2013 agreements with Apple had no 

anti-competitive effects. Central to this claim is Dr. Chipty’s assertion that none of 

Qualcomm’s rivals could have won Apple’s 2011–2015 awards due to “engineering or 

scheduling deficiencies” in their product offerings.436 I now address this assertion.

VIII.C.1. Competition and Innovation in the Counterfactual 

(399) Any retrospective evaluation of the economic effects of a challenged business practice 

necessarily requires some comparison of how the market actually evolved with how the 

market would have evolved if not for the challenged conduct. I believe that Dr. Chipty agrees 

with me about this general conceptual point.437 The “counterfactual” refers to the market 

outcome that would have arisen in the absence of the challenged conduct. For present 

purposes, the counterfactual refers to the situation that would have arisen had Qualcomm not 

entered into de facto exclusive dealing agreements with Apple in 2011 and 2013. Of course, 

it is never possible to know with certainty just what the counterfactual market outcome 

would have been, but one can make reasonable projections by applying economic principles 

and economic reasoning to the available evidence. 

(400) In the current context, all of the evidence that Dr. Chipty cites from 2011 onwards necessarily 

arose in a market in which competition and innovation were influenced by Qualcomm’s 

exclusive dealing agreements with Apple. As a general principle, it is reasonable to expect 

that, in the absence of Qualcomm’s exclusive dealing agreements with Apple, some of 

Qualcomm’s rivals would have invested more, or accelerated their development efforts, at 

least if they perceived having a better chance of securing some of Apple’s business. Certainly 

Qualcomm perceived strategic benefits of securing all of Apple’s business, as discussed 

above, which supports this conclusion. Therefore, in assessing whether Qualcomm’s 

agreements with Apple had anti-competitive effects, it would be a mistake to assume that 

“engineering and scheduling deficiencies” of Qualcomm’s rivals cited by Dr. Chipty would 

necessarily have occurred in the absence of Qualcomm’s challenged conduct. 

(401) The Shapiro Report makes certain statements about the counterfactual. For example, I state: 

“Apple subsequently launched iPad models in 2014, 2015, and 2016 using Premium LTE 

Modem Chips only from Qualcomm. Some of these models most likely would have used 

 

436 Chipty Report, Section VII.C.1.

437 See, e.g., Chipty Report, ¶ 280.

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