Broadcom Settles U.S. Monopoly Case Over Chip Contracts

(Bloomberg) -- Broadcom Inc. settled a U.S. antitrust complaint that it illegally monopolized markets for chips used in set-top boxes and broadband internet devices.

The Federal Trade Commission said in a statement Friday that under the settlement, Broadcom must stop requiring customers to buy components from the chipmaker on an exclusive basis.

“America has a monopoly problem,” said Holly Vedova, the acting head of the FTC's Bureau of Competition, in a statement. “Today's action is a step toward addressing that problem by pushing back against strong-arm tactics by a monopolist in important markets for key broadband components.”

Broadcom shares were down less than 1% at $465.89 at 2:56 p.m. in New York trading after earlier falling as much as 3%. The stock had gained 7.3% this year through Thursday, lagging overall gains by chip stocks.

Broadcom is one of the main providers of chips that are at the heart of set-top boxes provided by cable and satellite TV companies and home networking routers and gateways. Its strength in that area is one of the main pillars of its semiconductor business, from which the company derives about two-thirds of its revenue.

The settlement comes as the FTC under new Chair Lina Khan is moving to step up antitrust enforcement of anticompetitive conduct by dominant companies. On Thursday, Khan led her two fellow Democrats on the commission in rescinding a 2015 competition policy that she blamed for curtailing the agency's authority. They also authorized staff to conduct investigations in priority areas, including technology and health care.

The FTC's commissioners voted 4-0 to approve the Broadcom settlement. Khan, who started in the job June 15, didn't participate in the vote. The FTC didn't explain why in its statement.

Khan is taking the reins at the agency as it faces a series of setbacks in monopoly cases against companies. Last year, a federal appeals court ruled against the agency in a lawsuit that accused Broadcom rival Qualcomm Inc. of illegally maintaining a monopoly for semiconductors used in mobile phones. Then on Monday, a federal judge in Washington threw out the FTC's monopoly case against Facebook Inc. The agency has until the end of the month to fix its complaint and refile.

Broadcom said in a statement it was pleased to move forward with the settlement along the lines of an earlier accord with the European Union.

“While we disagree that our actions violated the law and disagree with the FTC's characterizations of our business, we look forward to putting this matter behind us,” the company said.

The company has already been operating under the same terms of the FTC agreement and sees no material impact on its business as a result of the FTC's order, wrote Sanford C. Bernstein analyst Stacy Rasgon in a Friday note.

The FTC said Broadcom illegally maintained its power in chip markets by entering into long-term agreements with equipment manufacturers that prevented those companies from purchasing semiconductors from Broadcom's competitors. The agreements created “insurmountable barriers” for competitors, the FTC said.

Broadcom was able to secure restrictive contract terms by threatening to retaliate against customers in various ways, including by withholding products and by charging higher prices for them, according to the agency.

The settlement with Broadcom comes amid wide-spread shortages in the semiconductor industry that are hurting production of everything from pickup trucks to consumer electronics. Chief Executive Officer Hock Tan has said demand is strong and he has already received non-refundable orders for almost all of the chips he can supply this year.

Demand surged during the coronavirus lockdowns for the kind of networking and home entertainment gear that are powered by Broadcom's chips.

Semiconductor shortages have given chipmakers more power in negotiations with their customers. Many, including Broadcom, have specified that orders must be final, breaking with a long-held industry practice. They've done that, they say, to make sure that double-ordering -- the practice of asking for more than needed to guarantee enough supply then returning the surplus -- doesn't distort their picture of what is real demand.

The FTC's investigation of Broadcom, which the company disclosed in 2018, predates the current shortage.

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