Huawei hints at legal retaliation to Trump executive order

US President Trump has issued an executive order calling for major restrictions on technology suspected of assisting ‘foreign adversaries’.

In the Executive Order on Securing the Information and Communications Technology and Services Supply Chain Trump states that he reckons “foreign adversaries are increasingly creating and exploiting vulnerabilities in information and communications technology and services.” In response to that perceived threat he is empowering state officials and agencies to take pretty much whatever prohibitive action they deem necessary against any companies they consider to be under the influence of said adversaries.

On one level this is merely an official confirmation of the position the Trump administration has had on this sort of thing for a while. But it’s also a distinct call for escalation and actively encourages state agencies to be more aggressive in their response to these threats and seems to absolve them of any responsibility to present evidence of wrongdoing before acting.

The words ‘China’ or ‘Huawei’ don’t appear anywhere in the executive order, but it’s pretty clear it’s a response to the ongoing issue of Huawei’s suspected ties to the Chinese state. Of course Huawei has spent the past few months repeatedly denying the allegations, but the US position has if anything hardened and there doesn’t seem to be any more the company can do to prove its innocence.

We received the following statement from Huawei in response to the executive order: “‘We are the unparalleled leader in 5G development. We are ready and willing to engage with the US government and come up with effective measures to ensure product security.

“Restricting Huawei from doing business in the US will not make the US more secure or stronger; instead, this will only serve to limit the US to inferior yet more expensive alternatives, leaving the US lagging behind in 5G deployment, and eventually harming the interests of US companies and consumers. In addition, unreasonable restrictions will infringe upon Huawei’s rights and raise other serious legal issues.”

Most of that has been publicly said by Huawei before, but the final sentence definitely hints at a formal legal response. Huawei has already opened one legal front challenging the legality of the sales restrictions already in place. Assuming US state agencies accept Trump’s invitation to act against it, Huawei may move to question the legality of the executive order itself.

US official overseeing country’s frequency strategy has resigned

David Redl, heading National Telecommunications and Information Administration (NTIA), responsible for the US’ strategy on frequency and 5G, abruptly resigned from his post.

The circumstances of his resignation were not disclosed, but the Wall Street Journal reported that Redl has had conflicts with other political appointees at the current administration, including officials at the FCC. Redl, together with the Commerce Secretary, was tasked by President Trump to develop the country’s “National Spectrum Strategy” last October.

A few days before his resignation, Redl used his speech at Satellite Industry Association’s annual dinner to voice his concerns. “We don’t have to choose between making more spectrum available for the private sector and sustaining our critical government systems. We also don’t have to choose between terrestrial 5G and satellite services,” Redl said on that occasion. “To start with, satellite will play an important role in 5G connectivity, but perhaps more to the point these uses are not mutually exclusive; it’s just going to take hard work for them to continue to coexist in a more contentious spectrum environment.”

Meanwhile, FCC would not wait to have the “comprehensive, balanced and forward-looking” spectrum strategy in place before it pressed ahead with the auction of the mmWave frequencies, including the 24GHz and 37GHz bands that are also being coveted by the satellite industry. “I can’t recall ever in the past watching two different arms of an administration get into this kind of public disagreements,” FCC Commissioner Jessica Rosenworcel commented.

In other cases, Redl’s opinions often carried a lot of weight in FCC’s decision making. Before the decision was taken to deny China Mobile the operation licence, Redl’s earlier note had already set the tone. Ajit Pai, the FCC Chairman, in his statement called Redl “a longtime colleague, who served with distinction during his 18 months at NTIA.  He was a vocal advocate within the Department of Commerce for repurposing federal spectrum for commercial use and fostering the private sector’s lead in 5G deployment.  I thank David for his service and wish him all the best in his future endeavors.”

It may or may not be related, but Redl’s resignation also coincided with fresh pressure from the US on the UK to join the alliance to ban Huawei from the country’s 5G networks. The DC-based news outlet The Hill reported that Diane Rinaldo, Redl’s former deputy, would be taking over as acting administrator.

Vodafone Germany tries to placate regulators via wholesale cable deal with Telefónica

Telefónica Deutschland will be able to sell services that run on the combined Vodafone and Unitymedia cable network in Germany, as a remedy measure taken by Vodafone to satisfy EU’s competition concern over its proposed acquisition of Liberty Global.

The two companies announced that they have entered into a definite “cable wholesale agreement” in Germany, whereby Telefónica Deutschland will offer its customers broadband services that use both the Vodafone fixed network and that of Unitymedia. The combined networks cover 23.7 million households and represent a significant upgrade to whatever Telefónica Deutschland customers are currently getting.

“The cable agreement will enable us to connect millions of additional households in Germany with high-speed internet in the future,” said Markus Haas, CEO of Telefónica Deutschland. “By adding fast cable connections, we now have access to an extensive infrastructure portfolio and can offer to even more O2 customers attractive broadband products – including internet-based TV with O2 TV – for better value for money.”

Vodafone’s plan to acquire Liberty Global in Germany (where it trades under the brand Unitymedia), the Czech Republic, Hungary, and Romania, has run into difficulty at the European Union, which raised competition concerns at the end of last year. The Commission was particularly worried that the combined business would deprive the consumers in Germany of access to high speed internet access, and the OTT services carried over it. Vodafone expressed its confidence that it would be able to satisfy the Commission’s demand. Opening its fixed internet access to its competitor is clearly one of the remedies. Also included in the remedy package Vodafone submitted to the Commission was its commitment to ensure sufficient capacity is available for OTT TV distribution.

“Our deal with Liberty Global is transformational in many ways. It is a significant step towards a Gigabit society, which will enable consumers & businesses to access the world of content & digital services at high speeds. It also creates a converged national challenger in four important European countries, bringing innovation & greater choice,” said Nick Read, CEO of Vodafone Group. “We are very pleased to announce today our cable wholesale access agreement with Telefonica DE, enabling them to bring faster broadband speeds to their customers and further enhancing infrastructure competition across Germany.”

Vodafone believed the remedial measures it put in place should sufficiently reassure the Commission that competitions will not suffer after its acquisition of Liberty Global. The company now expects the Commission to undertake market testing of the remedy package it submitted, and to give the greenlight to the acquisition deal covering the four countries by July 2019. It plans to complete the transaction by the end of July. The merger between Vodafone’s and Liberty Global’s operation in The Netherlands was approved by the EU in 2016.

Qualcomm banks almost $5 billion from Apple and that’s just the start

In its latest quarterly earnings announcement Qualcomm revealed just some of the cash it’s trousering from Apple after winning their legal fight.

“On April 16, 2019, we entered into settlement agreements with Apple and its contract manufacturers to dismiss all outstanding litigation between the parties,” said the relevant bit of the report. “We also entered into a six-year global patent license agreement with Apple, effective as of April 1, 2019, which includes an option for Apple to extend for an additional two years, and a multi-year chipset supply agreement with Apple.

“While we continue to assess the accounting impacts of the agreements, our financial guidance for the third quarter of fiscal 2019 includes estimated revenues of $4.5 billion to $4.7 billion resulting from the settlement (which will be excluded from our Non-GAAP results), consisting of a payment from Apple and the release of our obligations to pay or refund Apple and the contract manufacturers certain customer-related liabilities.

“In addition, our financial guidance for the third quarter of fiscal 2019 includes estimated QTL revenues for royalties due from Apple and its contract manufacturers for sales made in the June 2019 quarter.”

Fiscal Q3 for Qualcomm is equivalent to financial Q2, so it covers all the initial payments Apple will make to Qualcomm as a result of their settlement. If you factor in the June quarter sales royalties that wouldn’t otherwise have been paid that should mean Qualcomm’s current account will be around $5 billion better off by the Summer.

There didn’t seem to be any details revealed about the new patent licence agreement, but the two-year backlog points to a historical rate of around $200 million per month. Given the apparently dominant negotiating position Qualcomm will have been in regarding access to its 5G products it’s easy to believe Apple will be handing over a fair bit more than that for the foreseeable future.

There was one other comment of interest in Qualcomm’s outlook. “Our financial guidance for the third quarter of fiscal 2019 also includes $150 million of QTL revenues from Huawei, which represents a minimum, non-refundable amount for royalties due by Huawei while negotiations continue. This payment does not reflect the full amount of royalties due under the underlying license agreement.”

While this is essentially a restatement of the announcement Qualcomm made a quarter ago, it implies the dispute still isn’t resolved. Aside from all this Qualcomm’s Q1 revenues were roughly in line with expectations but a relatively downbeat general outlook drove its shares down a couple of percent.

The UK may allow Huawei to get involved in its 5G after all

The UK government is said to have agreed to let Chinese telecom kit maker Huawei join the building of non-core parts of the country’s 5G network.

The Telegraph reported that the country’s highest security decision-making body, the National Security Council, chaired by the Prime Minister, has agreed to open the “non-core” parts of 5G to Huawei’s equipment, for example antennae. The report said the Prime Minister was in favour of the decision, despite concerns raised by her Home, Foreign, Defence, International Trade, and International Development secretaries.

The government replied to media queries by claiming “we have conducted an evidence-based review of the supply chain to ensure a diverse and secure supply base, now and into the future. This is a thorough review into a complex area and will report with its conclusions in due course,” reported Reuters. The spokesperson also insisted that decisions by the National Security Council were confidential.

Huawei, while waiting for a formal announcement, looked to be confident that the decision would go its way. It told that media that it was “pleased that the UK is continuing to take an evidence-based approach to its work, and we will continue to work cooperatively with the government, and the industry,” quoted by the BBC. Earlier the media reported a decision on Huawei would be made in the spring, and the company’s market share would capped at 50%.

Views from the country’s other related offices are split. Earlier the National Cyber Security Centre (NCSC), which oversees Huawei’s work in the UK, was said to believe the risks posed Huawei could be managed. When questioned on the new rumoured decision, Ciaran Martin, the chief executive of NCSC, told the media that he was “confident ministers will reach a decision that will provide for the safer 5G networks that we need.” He also highlighted the “more fundamental risks” from sovereign states like Russia and North Korea as well as the sophisticated attacks by cyber criminals.

Tom Tugenthat MP, chairman of the Commons’ Foreign Affairs Committee, on the other hand, was not so sure. He tweeted “There’s a reason others have said no” referring to the US, Australia, and New Zealand. The other two countries of the “Five Eye” intelligence alliance, Canada and the UK are yet to make decision on whether Huawei will be allowed to build their 5G networks. “It is unwise to co-operate in an area of critical national infrastructure with a state can at best be described as not always friendly,” Tugenthat said. The alliance will hold a meeting on security in Glasgow, Scotland.

One point Tugenthat highlighted but has evaded the others is the virtualisation nature of 5G. He stressed it by pointing out that 5G is highly software defined (in his words, “internet system that can genuinely connect everything”), and it will be very hard to insulate the non-core from the core.

 

AT&T will stick with 5GE after settling with Sprint

US operator Sprint has settled the case it brought against AT&T for unfair competition with the 5GE marketing gimmick with apparently little to show for it.

The legal trade publication Law360 reported that Sprint and AT&T have reached a settlement of the case Sprint brought to a federal court in New York in February. A short statement was mailed to the media, “The parties have amicably resolved this matter,” it said. A source told Law360 that AT&T will continue to use “5G Evolution” or 5GE in its marketing and ads materials. No details on the terms of settlement have been disclosed.

In the court case, Sprint complained that AT&T was conducting false advertising, therefore misleading consumers, and in turn, directly harming Sprint’s business interest. In addition to the law suit, Sprint also took out a full-page ad in the New York Times in March to warn consumers “Don’t be fooled. 5G Evolution isn’t new or true 5G. It is fake 5G.”

The other big US operators were not holding back from attacking AT&T’s antics either. Verizon’s CTO wrote an open letter calling on the industry “to commit to labeling something 5G only if new device hardware is connecting to the network using new radio technology to deliver new capabilities,” as well as promised that Verizon “won’t take an old phone and just change the software to turn the 4 in the status bar into a 5.” T-Mobile, on the other hand, in keeping with its CEO’s maverick spirit, uploaded a video showing someone taping over the LTE indicator on the phone with a sticker labelled “9G”.

Even the OEMs would not let go the chance to mock AT&T’s shenanigans. Xiaomi, when launching its 5G smartphone before MWC in Barcelona, pointedly highlighted the 5G network by Orange it used for the demo was real 5G, “not fake 5G”.

A few days before the announcement of settlement AT&T defended itself at the court that consumers were not fooled into believing the 5GE is actually 5G. On the other hand, for the purists like the EU-backed 5G Infrastructure Association or Qualcomm, none of the 5G networks launched so far in Korea and the US can be called “real 5G”.

Europe approves new internet rules designed to rein in Amazon and co

As part of the overall Digital Single Market programme, the European Parliament has voted to approve new regulations claiming to protect European businesses and consumers when using online platforms to trade.

The “Regulation on platform-to-business trading practices” has been almost two years in the making since the publication of a document titled “Online Platforms and the Digital Single Market: Opportunities and Challenges for Europe” by the European Commission in May 2016.

The EU executives were understandably happy with the passing of the new rules. “We are delighted by the overwhelming support to the new rules on online platforms’ trading practices among the members of the European Parliament. As the first-ever regulation in the world that addresses the challenges of business relations within the online platform economy, it is an important milestone of the Digital Single Market and lays the ground for future developments. Not only will it improve trust, predictability and legal certainty, it will also offer new and accessible options for redress and resolution of disputes between businesses and platforms,” said the official statement, jointly signed off by Andrus Ansip, the Commission’s Vice-President for the Digital Single Market, Elżbieta Bieńkowska, Commissioner for Internal Market, Industry, Entrepreneurship and SMEs, and Mariya Gabriel, Commissioner for Digital Economy and Society.

What drove the Commission to undertake such an initiative two years ago was the understanding that there is a lack of a redress mechanism when the European SMEs encounter problems when trading on the global platforms (companies singled out include Booking.com, Facebook, eBay, and Amazon), for example, “delisting without statement of reasons or sudden changes of Terms and Conditions”. The Commission has also assessed the effectiveness of legislative vs. non-legislative measures, but believed an EU-wide legislation is necessary.

The Regulation is aimed to achieve three main objectives as are outlined in the Impact Assessment Summary published a year ago:

  1. To ensure a fair, transparent and predictable treatment of business users by online platforms
  2. To provide business users with more effective options for redress when they face problems
  3. To create a predictable and innovation-friendly regulatory environment for online platforms within the EU

Although it has been approved by the European Parliament, the regulation still needs to be formally passed by the Council of the European Union, which represents the governments of the member states and can be roughly seen as another “chamber” of the union’s legislature. There is no definite timeline on when the Council will make the decision. However, by the reading of the press statement where the Commissioners thanked the member states “for their great efforts to reach a good compromise in a very short period of time. This is yet another positive development ahead of the upcoming European elections,” the Council may not be able to vote on it before the European Parliamentary election in May. After the final approval, the regulation will enter into force 12 months after it is published in the Official Journal.

This is the latest internet-related legislation the EU has made recently. On 15 April the Council passed the updated Copyright Directive “fit for the digital age”, which has proved controversial.  There are also legislation and regulation updates in member states. France has started levying 3% income tax on digital companies with sales in excess of €25 million in France and €750 million globally, without waiting for an EU-wide tax regime as part of the Digital Single Market. The UK, still an EU member state at the time of writing, has not only considered setting up a new regulator to oversee the digital world and started the consultation process of a “code of practice for online services” to protect children, but will also formally introduce the “porn block” on 15 July, which has been called “One of the Worst Ideas Ever” by some critics.

Apple capitulates to end war with Qualcomm

Qualcomm and Apple agreed to settle all the ongoing litigations with the iPhone maker paying the chipset maker an undisclosed amount and signing a six-year licensing agreement.

On Monday, Qualcomm and Apple went to court over the allegation that Qualcomm has been abusing its monopoly position to over-charge for its chips. The stakes could have run up to tens of billions of dollars, with the OEMs Foxconn and Pegatron already demanding compensation of $9 billion dating back to 2013. The case at the Southern District Court of California in San Diego was meant to last for five weeks.

On Tuesday, the two companies released a brief statement to announce a settlement. “Qualcomm and Apple today announced an agreement to dismiss all litigation between the two companies worldwide. The settlement includes a payment from Apple to Qualcomm. The companies also have reached a six-year license agreement, effective as of April 1, 2019, including a two-year option to extend, and a multiyear chipset supply agreement.”

This is definitely good news for the two companies especially for Qualcomm, and good for the industry and consumers. Specifically, for Qualcomm it means its business model will remain intact and the company can put an end to a multi-year legal saga; for Apple, in addition to avoiding the punitive $31 billion penalty, this settlement will be able to quicken its steps to launch a 5G iPhone, making up the gap already expanding between itself and the leading pack.

A few hours later, Intel announced that it intends “to exit the 5G smartphone modem business and complete an assessment of the opportunities for 4G and 5G modems in PCs, internet of things devices and other data-centric devices. Intel will also continue to invest in its 5G network infrastructure business. The company will continue to meet current customer commitments for its existing 4G smartphone modem product line, but does not expect to launch 5G modem products in the smartphone space, including those originally planned for launches in 2020.”

It must have been a blow to Intel’s mobile ambition, especially after it announced only late last year that it would bring the launch of its first 5G modem forward by half a year to the second half of this year, an act to prove the doubters wrong. That originally planned 5G modem to be launched in 2020 referred to in the announcement, presumably a second generation, was supposed to power the first 5G iPhone, after Apple all but officially declared that it would enter into an exclusive relationship with Intel.

Putting the two things together it may be reasonable to infer that Apple agreed to settle after it had realised that it does not have other options than coming back to Qualcomm for the supply of 5G modems (assuming Intel had updated Apple about its imminent decision to withdraw from the market).

In addition to leaning in on Intel, Apple has also been reported to be strengthening its in-house modem development capability, ultimately aiming to rid itself of reliance on external suppliers. Based on the terse announcement released together with Qualcomm, it looks Apple does not believe the home-grown modems will be good enough to compete with Qualcomm in the next few years. Huawei is another supplier that has launched its own 5G modem, but it may be safe to estimate that the chance of Apple going for Huawei chips is slim.

In keeping with the normal practice of settlement cases like this, the companies did not disclose the amount Apple will pay. However, Qualcomm updated the SEC shortly after the settlement announcement was made, as the settlement would have material impact on the earnings. The company expected an EPS incremental of about $2 “as product shipments ramp” without giving a specific timespan. As a reference, in the quarter ending 30 December 2018, Qualcomm delivered an EPS of $0.87 on the back of a total revenue of $4.8 billion. Therefore, assuming Qualcomm’s operational efficiency remains largely constant, the payment Apple will make could run into the $10 billion range.

Payment aside, there must be some soul-searching going on inside Apple, including by Tim Cook, the CEO, who came from a supply chain management background: how could Apple have let itself be cornered so badly in the first place? It’s hard to view this as anything other than complete humiliation for Apple, especially when you consider how aggressively it pursued this case.

On top of the millions it will have paid to lawyers Apple’s negotiating position in arriving at this settlement, considering what was widely assumed about its 5G modem situation, must have been very weak. So it’s quite possible Apple has ended up paying considerably more for Qualcomm’s chips than it would have if it had never initiated this war. Having said that, Apple’s share price seems completely unaffected by the news, probably indicating offsetting relief that it’s back in the 5G game. Qualcomm’s share’s however, surged 23% on the news.

New research claims employees do not own Huawei

Two academics researched the ownership and control structure of Huawei and concluded the company is not owned by employees, contrary to what the company has officially claimed.

Christopher Balding, an Associate Professor of Economics at Fulbright University Vietnam, and Donald Clarke, a Professor of Law at George Washington University’s Law School, published a preprint paper titled “Who Owns Huawei?” on SSRN, the online sharing platform for scholars. The scholars combed the publicly available information, from both China and overseas, and pieced together a picture of Huawei’s ownership and control structure.

Huawei has repeatedly stated that the company is jointly owned by Ren Zhengfei, the founder, who has 1.14% of the share, and the 100,000 or so employees who own the rest. “Huawei is a private company wholly owned by its employees”, says the company’s annual report. The company “involves 96,768 employee shareholders”. The founder repeated the message at his interview with a group of journalists from the global media earlier this year. The scholars dug into the opacity and found the reality is more complex and less clear.

They started with distinguishing the different entities enshrined in the name. Huawei Technologies is the company that produces and sells products and services, and employs around 188,000 people (according to Huawei’s 2018 Annual Report). This entity is 100% owned by a holding company called Huawei Investment & Holding Co., Ltd., which employs no more than a couple of hundred people. Ren Zhengfei owns 1.14% of the holding company, the rest is owned by an organisation called Huawei Investment & Holding Company Trade Union Committee (the scholars abbreviated the name to “Huawei Holding TUC”).

Huawei ownership

There is no information on how Huawei Holding TUC is constituted or what the governance model or decision-making process is. Probably more importantly, the TUC is associated with the holding company (which employs a couple of hundred people), not with Huawei Technologies (which employs 188,000 people). Even if all the employees under Huawei Technologies are represented by the TUC, according to the labour law in China, “trade union officials are appointed by management or by the administratively superior trade union organization, not chosen by the members.” (P.9) In other words, the employees cannot decide who can sit on the committee, less how they make decisions.

The authors of the paper also attempted to separate ownership from control, or in a hypothetical case of insolvency, right to claim to company’s residual assets. Again, according to the law in China, “residual assets of a trade union go up, not down, to the trade union organization at the next highest administrative level” (P.9), theoretically all the up to the “All-China Federation of Trade Unions at the central level. The Communist Party controls the ACFTU, with the head of the ACFTU sitting on the Politburo.” (P.10)

There is further opacity related to how the boards are created. In the official transcript of the founder’s interview distributed afterwards, one can read that recently Huawei underwent a year-long voting process among the “96,768 shareholding employees” to select the 115 members to the Representatives’ Commission, which, according to the owner, “is the highest decision-making authority in Huawei”. This Commission then would select Huawei Holding’s Board of Directors and Board of Supervisors. But here is another ambiguity, as the authors of the paper pointed out: if the shareholding employees vote as shareholders, then their votes should be weighted; if they vote as employees, then all employees shareholding (about 100,000) or not (about 90,000) should have the chance to vote.

This points to the true nature of the “shares” the 100,000 or so employees own. The scholars found that, after a few stages of historical morphing, the shares are no more than stock options public listed companies incentivise their employees with. In other words, the employees do not own a part of the company through their “shares”. Instead, the “virtual stock is a contract right, not a property right; it gives the holder no voting power in either Huawei Tech or Huawei Holding, cannot be transferred, and is cancelled when the employee leaves the firm, subject to a redemption payment from Huawei Holding TUC at a low fixed price.” (P.5). The owner said in his interview that shareholding employees also include “retired former employees who have worked at Huawei for years.”

The two factors put together, the opaque governance model of Huawei Holdings and the lack of ownership associated with the shares half of the employees own, led the scholars to the key conclusions. First, though they could not be sure who actually owns Huawei, they are pretty sure the employees do not. Second, the lack of transparency of the governance model of Huawei Holdings looks to put Huawei between a rock and hard place.

On one side, the authors commented, “if Huawei Holding is in fact controlled by a trade union committee, then given the way such bodies are supposed to operate in China, it makes sense to think of it as state-controlled and even state-owned.” (P.12). Otherwise, if Huawei Holding is not actually owned and controlled by the trade union or its committee, Huawei has not been telling the truth. Then it is up to Huawei to make its case. “The information necessary to do so is in Huawei’s control,” the scholars said. (P.11)