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Broadcom Ordered by EU to Stop Enforcing Unfair Contracts

Nov. 1, 2019
Broadcom Ordered by EU to Stop Enforcing Unfair Contracts

The European Union ordered Broadcom to stop demanding that some of its customers agree to allegedly anticompetitive contract terms, brightening the spotlight on its core chip business. The European Commission imposed the interim measures last month as part of an investigation into whether Broadcom wielded its dominance in the market for chips used in modems and television set-top boxes to discourage customers from going to rivals.

The commission said that Broadcom’s business of selling chips used in television and broadband could lead to “serious and irreparable harm to competition.” The agency accused the San Diego, California-based company has hammered out contracts with six main customers that hindered them from buying products from Broadcom's rivals. Other vendors could be forced out of business if the company's business conduct was not halted, the EU said.

The clampdown on Broadcom's conduct comes after the agency opened an investigation in June looking into whether it curbed competition in the market for chips used in modems and set-top boxes, where it holds more than 50% market share. Margrethe Vestager, the EU's competition chief, said the agency has "strong indications" that Broadcom is running afoul of local rules. She said the commission is aiming to protect competition while it finishes the investigation.

"Broadcom's behavior is likely, in the absence of intervention, to create serious and irreversible harm to competition," Vestarger said in a statement. "We cannot let this happen, or else European customers and consumers would face higher prices and less choice and innovation.” Broadcom, which also sells components to Apple, has been under fire in recent months from international regulators, which together are targeting most of its core chip product portfolio.

Broadcom is also facing a probe by the US Federal Trade Commission, which is reportedly trying to figure out whether it forced customers to buy Broadcom's WiFi and Ethernet chips exclusively. The company is one of the largest players in the market for WiFi ICs used in smartphones, routers and gateways. It is also the global leader in chips used in networking switches sold by Cisco Systems, Arista Networks and others to move data around data centers.

The European Commission in June said it planned to impose the interim measures instead of ordering Broadcom to overhaul its business once the investigation ends and the damage done. The commission said Broadcom has added contract provisions that grant rebates and other key benefits to customers as long as they only buy Broadcom products or meet minimum purchase requirements. That has made it much harder for other companies to compete, the EU said. 

Broadcom has waved off the allegations. The commission is also looking into other questionable practices, such as product bundling and deliberately making it difficult for Broadcom's products to function with rival chips. The agency's conclusions could lead to hefty fines. The EU can impose fines up to 10% of the company's annual sales for violating antitrust rules. Broadcom forecasts sales of $22.5 billion in 2019 and chips account for almost 80% of its sales.

"Broadcom believes it complies with European competition rules and that the commission’s concerns are without merit," the company said in a statement informing shareholders in June. "The interim measures, if adopted, will not preclude the continued sale by Broadcom of any products. Broadcom’s contracts with these customers would remain in force, other than the provisions at issue, and it intends to continue to support these customers going forward."

Broadcom, which the Trump administration also stopped from buying rival Qualcomm last year, said it will follow the commission's orders but plans challenge the ruling in court. The company said the restrictions, which could last for up to three years, will not stop it from supplying chips to any of its affected customers. "Broadcom believes that this action will not have a material impact on its set-top box or broadband modem businesses," it said back in June.

The EU has been trying to address abuses in the US semiconductor industry in recent years. Last year, the agency fined Qualcomm $1.2 billion for abusing its market dominance in smartphones, bribing Apple with billions of dollars of rebates over the years to only buy Qualcomm modems chips. The regulator fined the San Diego, California-based firm another $270 million in July for using predatory prices to undercut rivals, forcing at least one out of business.

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