Broadcom has recently been sued by the FTC over monopoly charges and agreed to a settlement promising to change its sales tactics. What exactly did Broadcom do that upset the FTC? Why are silicon giants often in the spotlight for some form of corruption or bad practice, and do fabless companies present challenges with their IP model?

Broadcom was sued by the FTC

Broadcom is arguably one of the biggest names in the semiconductor industry. It has developed many communication solutions such as Wi-Fi controllers, modems, and smart TV solutions. Of course, one of their most famous product examples would be their range of SoCs that power the Raspberry Pi range of single board computers, which integrated a CPU, memory controllers, and GPU into a single package.

However, Broadcom has recently come under fire from the Federal Trade Commission (FTC) in the US for its monopoly on key products, including Wi-Fi and TV controllers. According to the FTC, Broadcom has engaged in unfair business practices which keep out competitor products in OEM equipment and punishes companies that do not remain wholly loyal to Broadcom. As a result, Broadcom decided that it would be simpler to settle the case outside of court instead of fighting an uphill battle against the FTC and will now cease from its current business practices.

But what exactly did Broadcom do?

Trying to research the topic online returns many news reports that provide a similar story; Broadcom punishes non-loyal customers and has created an effective monopoly with OEM equipment. However, further reading into the official FTC report sheds more light on the situation.

Simply put, Broadcom has been doing deals in a somewhat similar fashion to what Qualcomm did and got in trouble for. To start, Broadcom would make deals with OEMs and suppliers that Broadcom should be exclusive to them. This means that a supplier would have to purchase and use only Broadcom parts wherever possible. If an OEM decided to mix Broadcom with other products, then Broadcom would hike up prices for that customer and limit customer support on products previously purchased.

However, Broadcom also took this a step too far by limiting technological access to OEMs considered disloyal. This would give competitor products to the OEM a technological advantage over the OEM, and this would be orchestrated entirely by Broadcom. Thus, OEMs can only maximize their profits and product capabilities by using Broadcom exclusively. Furthermore, the FTC report mentions coercion tactics which imply that Broadcom would threaten OEMs with such action if they were to show signs of loyalty. Broadcom would also threaten to increase the fees charged for ESS services on devices that used Broadcom products.

Why are silicon companies repeatedly showing up in trade cases?

It seems that large semiconductor companies appear almost weekly in the news for some violation of trade regulation. Qualcomm is an example of a company whose immoral practices got it investigated by the FTC. While Broadcom was forcing OEMs to use Broadcom products only, Qualcomm has been pushing customers to purchase their IP licenses and pay royalties for each Qualcomm device. Otherwise, Qualcomm will not supply chips. Furthermore, the IP licenses paid by customers would often include patents that were not even in the Qualcomm device being purchased.

However, Qualcomm was able to fight the FTC and win, which was most likely due to the desperate situation that the west was (and still is) in after the ban of Huawei and other Chinese products in cellular networks. But this victory for Qualcomm hasn’t stopped others from launching complaints and filing motions against the communication giant.

Infineon is another example of a company that has also been recently targeted by the FTC over antitrust rules. In the case of Infineon, a chip cartel consisting of multiple companies all colluded together to fix the price of semiconductors used in smart cards (i.e. sim cards, debit cards etc.). But this wasn’t even the first time Infineon had been caught price-fixing; they had already been under fire for price-fixing of DRAM in 2002, resulting in OEMs of computers (such as Dell) losing on profit.

The exact reason why semiconductor companies often find themselves at the centre of antitrust scandals is unclear, but it would seem that such companies have a habit of price-fixing and part restricting. This might result from sensitive profit margins from semiconductor companies, or it may be an attempt to prevent competitor products from entering the market.

The semiconductor industry is highly lucrative, and it is almost impossible to enter as a competitor (developing unique products is far more straightforward). For example, creating a new AI company that will create a new type of neural network would find funding easy to get, but a company that will create Broadcom alternatives would unlikely ever get the green light. It should be noted that many semiconductor companies all date their origins to major corporations from the 1960s, such as IBM, Intel, and Samsung, who have had decades of profits, experience, and market hold.

Are the business practices of fabless companies partly at fault?

While some chip manufacturers have been involved with price-fixing, there appears to be an increasing number of fabless companies making the news headlines for violating some trade regulations. Qualcomm is a prime example of a fabless company whose trade practices have landed Qualcomm in hot water, but they are not the only example.

ARM is an example of another fabless company that is currently under investigation for its takeover by Nvidia. While ARM and Nvidia have technically done nothing wrong, it is a pre-emptive move as the acquisition of ARM by Nvidia could result in a dangerous monopoly by Nvidia. Simply put, ARM serves many thousands of companies equally and provides all customers with the same treatment (i.e. the Switzerland of the semiconductor industry). However, the takeover of Nvidia could jeopardize this status and see Nvidia restrict ARM technologies to competitors while tailoring ARM products to function better with Nvidia products.

Caltech is a University that has attacked multiple companies, including Microsoft, for violating their patents surrounding wireless communication. While Caltech is not a semiconductor industry, there is similar precedence whereby a company that owns intellectual property looks to maximize the profit from the protection offered by IP. In the case of Caltech, they have looked at silicon suppliers that violated their patent protection, then went on to find customers of those products and then file lawsuits against them.

Overall, there seem to be issues surrounding IP and how fabless companies operate. Since fabless companies have to outsource their manufacturing, their profit margins will be smaller than companies that produce their own devices (such as Intel). This may result in more sensitive profit margins, and as such, might encourage fabless companies to try and lock in customers to all their products.

In the case of Broadcom, customers agree that they will only use Broadcom products wherever possible, and this enables Broadcom to bolster their profits by selling a wide range of different devices. This can also lead to trying to force customers to purchase licenses and provide royalties that Qualcomm continues to do.

It would seem that fabless companies offer the advantage of not requiring expensive semiconductor foundries, but this comes at the cost of smaller profit margins that may be more sensitive to other fabless competitors who can just as easily design their own silicon devices. The future may see fabless companies producing their own devices, assuming that semiconductor manufacturing techniques become cheaper and more accessible.