It was just over two years ago, at dawn on July 12, 2005, that antitrust investigators from the European Commission and officials from at least four European countries raided the European offices of chipmaking powerhouse Intel (INTC). The officials sought evidence that Intel abused its dominant market share in microprocessors to force customers into exclusive contracts that shut out rival chipmaker Advanced Micro Devices (AMD).
The European officials believe they've built their case. Europe's competition directorate on July 27 issued a "statement of objections" that alleges Intel broke European Union law "with the aim of excluding its main rival, AMD," from the market for the widely used x86 computer chip.
Unfair Tactics Alleged
The landmark findings in a long-standing battle between the world's top two computer chipmakers reflect AMD's allegations that Intel used unfair practices to persuade computer makers to choose its chips. The charges allege three types of antitrust violations: 1) offering substantial rebates to computer makers as long as they agreed to obtain most of their CPU chips from Intel, 2) making payments to induce computer makers "to either delay or cancel the launch" of products that used AMD chips, and 3) providing strategic customers below-cost CPU chips in an attempt to outbid AMD.
Intel, which denies its actions were illegal or anticompetitive, has 10 weeks to reply and then will have the right to an oral hearing. If Intel fails to sway antitrust officials, Neelie Kroes, Europe's tough chief competition cop, can impose fines of up to 10% of the company's total annual sales, which in 2006 was $35.4 billion. "In the short-, medium-, and long-term, we think that the actions of Intel are bad news for competition and consumers," said Ton Van Lierop, a spokesman for the European Commission's competition directorate, at a July 27 press conference.
Customer Impact Disputed
To prevail, the commission must prove not only that Intel's business practices were illegal but also that they hurt consumers. It won't be an open-and-shut case, some analysts argue. "Prices are going down, both companies continue to innovate, and consumers are getting more for their money," says Chris Ingle, a consulting and research director at technology consultancy Interactive Data (IDC). "It is difficult to see where consumers are losing out."
Ashok Kumar, an analyst at CRT Capital Group San Francisco, concurs that the EU will have an uphill battle. "All industries use rebates and incentives to lock in customers," Kumar says. "You could argue that price competition has more than benefited end users." Indeed, Kumar adds, "Intel's market share and pricing power has eroded over the last few years."
Both analysts contrast the charges against Intel with the European Commission's case against Microsoft (MSFT). In that case, the impact on consumers was more clear-cut, Kumar and Ingle say. The commission said Microsoft illegally used Windows, which runs on the majority of the world's PCs, to crush competition from rival makers of server software and media players. In 2004, the European Commission fined Microsoft $685 million for abuse of its dominant market position, ordering Microsoft to sell a version of Windows without Media Player software. The commission later fined Microsoft for failing to fully respect the antitrust ruling. Microsoft has challenged the antitrust decision.
No "Smoking Gun"
Bruce Sewell, Intel's in-house lawyer, denies AMD's allegations and says Intel has not broken any European laws. The discounts were lawful and were not conditioned on promises of exclusivity, he says. "I don't believe there is any kind of smoking gun," Sewell adds.
And the way the commission calculated costs is based on "factual errors and errors of assumption," according to Sewell.
He notes that the complaint that prompted the commission investigation was raised by Intel's principal competitor, not by customers or consumers. "The basis of the complaint is that we are providing discounts, enabling our customers to produce their products more cheaply, and pass savings on to consumers," says Sewell. "Competition is working; the only issue is whether AMD can make the margins it would like."
Scrutiny from Around the Globe
AMD has a different view of a competitive landscape where Intel commands about 80% of the market for chips, compared with AMD's 20%. "If we had a chance to compete on a level playing field, it is safe to say the industry would look different today," says Jens Drews, AMD's director of government relations in the European region. "Intel, through its elaborate system of carrots and sticks, financial rewards, and punishments of computer makers, ensures that consumers around the world are denied access to a new technology."
AMD got a sympathetic hearing amid European competition authorities, which have proved more willing to pursue such cases than the Justice Dept. under the Bush Administration. AMD first filed complaints about Intel in the EU as far back as 2000.
The EU case is just one in a series of global investigations into Intel's business practices. In March, 2005, Japan's Fair Trade Commission ruled that Intel had violated that country's antimonopoly laws by illegally forcing full or partial exclusivity with five Japanese PC makers. Intel paid a fine but did not acknowledge any wrongdoing. An active antitrust investigation—with data seizures similar to those in Japan and Europe—continues in South Korea. AMD has separately brought antitrust civil actions in Japan and the U.S. And, a U.S. class action filed by Dell (DELL) shareholders in January, 2007, claims that Intel illegally paid Dell in excess of $1 billion a year to not purchase microprocessors from its competitors.
However strong the EU's case against Intel for practices in years past, competition between the companies is robust now, with consumers benefiting as PC prices drop, says Douglas Freedman, an analyst at American Technology Research in San Francisco, who has buy ratings on both companies. Further, "on the consumer side we're seeing both companies accelerate their product road maps and technology introductions."
The same European Commission unit going after Intel is handling the Microsoft case and another against Qualcomm (QCOM). But the EU Microsoft case has dragged on for years. The same could happen with the Intel case, so in the short term it's unlikely to have much impact on the company or the market, says Steve Kleynhans, a vice-president at technology consultancy Gartner (IT). "These things take time to wind their way through court," he says. "Until that happens it will be business as usual."