Intel (INTC) couldn't afford to let it drag on. The world's largest chipmaker announced on Nov. 12 that it would pay $1.25 billion to resolve allegations by Advanced Micro Devices (AMD) that its larger rival competes unfairly in the market for computer chips. On one hand, the agreement lets Intel and AMD move past the conflict that's put the companies at legal loggerheads for years, and it may help Intel resolve ongoing antitrust tussles with U.S. regulators. But a more important benefit of the agreement is that it lets Intel turn attention to what may become an even greater headache in the coming years: the challenge posed by ARM Holdings (ARM.L), maker of the technology used in chips running in a widening array of mobile devices, including the Apple (AAPL) iPhone. Intel "now gets to focus on its real long-term threat," says Jack Gold, founder of Gold Associates, a research firm. "No, it's not AMD—it's ARM Holdings." A host of chipmakers, including Qualcomm (QCOM), Texas Instruments (TXN), Freescale (FSL), and Nvidia (NVDA), license ARM technology to create chips for handhelds, phones, and other mobile devices. ARM-based chips are valued because they consume less power than the x86-based chips, which are made by Intel and AMD and power most of the world's computers and servers, the machines that run corporate networks. PC and server chips make up the majority of industry profits today. Still, demand for server chips may diminish as businesses replace large numbers of aging servers in data centers with a single server powered by fewer, more powerful chips. Meantime, demand is surging for mobile devices, many of which don't require the computing power of relatively pricey x86 chips. Getting past the distraction of the AMD lawsuits helps Intel place greater emphasis on sales in markets now being inundated with ARM technology, says TBR analyst John Spooner. "For some time, Intel has been preparing to reduce its reliance on the PC and server processor market, which now supplies more than 90% of its quarterly revenue," Spooner says. "The chipmaker has been realigning itself to expand its revenue base into graphics, handsets, and consumer electronics." Countering Claims of Monopolist PracticesThe benefits of Intel's agreement don't end there. Through the settlement with AMD, Intel silences the loudest voice accusing it of abusive behavior while at the same time keeping alive one of its most formidable competitors. The settlement in effect subsidizes AMD's plan to reduce debt, spin off cash-intensive manufacturing operations, and boost its research and development on new chips. Over time, that means a stronger AMD and helps Intel counter claims it wields too much power in the industry, says Richard Doherty, a director at market researcher Envisioneering Group. "They can argue it helps the whole league if you have two teams playing well," Doherty says. Historically the companies thrive under pressure from each other, with engineers at one racing to top the archrival's designs. Even now, Intel and AMD are duking it out for the lead in combining computing and graphic-intensive functions onto a single chip. Neither expects to begin selling such a product until late 2010 at the earliest. Intel continues to face litigation and scrutiny from regulatory bodies over allegedly anticompetitive practices. Most recently, New York State Attorney General Andrew Cuomo said Intel illegally used billions of dollars in payments to dissuade computer makers from using AMD chips. AMD and other critics say the largesse limits AMD's market share gains. The Federal Trade Commission and the European Commission are also examining Intel's pricing practices. AMD agreed to drop its own civil lawsuit and said it will stop pushing regulators to closely examine the larger chipmaker's marketing practices. But the smaller chipmaker said it will continue to object to them if asked or subpoenaed by regulators for comment. CEO Paul S. Otellini denies Intel has done anything illegal. "Throughout this process, we have not wavered in our contention that Intel acted within the boundaries of the law," Otellini said during a conference call. Other, Pending LitigationThe FTC, which had been expected to file a lawsuit before yearend, doesn't have the authority to level fines, but can push for changes in corporate behavior. In the agreement announced Nov. 12, Intel agreed to certain practice changes that might mollify the FTC. Under terms of the agreement, Intel must train its sales organization to follow new ground rules of competition with AMD. Those rules bar Intel from placing conditions on sales that would block AMD from the market. The two companies will meet monthly to discuss disputes, and each must abide the ruling of a mediator who would settle irresolvable issues. The outcome of the New York lawsuit, filed on Nov. 4, is more difficult to predict. It was likely to draw on testimony presented in an AMD lawsuit that's now been dropped. As a result, Cuomo could withdraw his lawsuit—or hold out for a cash settlement. Earlier this year, the European Commission fined Intel €1.06 billion ($1.45 billion) related to allegations that the company abused its monopoly position in the European market for computer chips. "Intel has an ongoing obligation to comply with the Commission's May 2009 decision," a European Union spokesman said in a statement. Intel is appealing the decision, though its pricing practices are still being monitored by the EC, says Andy Bryant, Intel's chief administrative officer. AMD Free to Spin Off GlobalFoundriesIn reaching the settlement, AMD gives up the opportunity to collect billions of dollars more in damages had it won a jury trial. But it saves millions of dollars in legal fees. AMD, which has offices in Austin, Tex., and Sunnyvale, Calif., also gets badly needed cash and more room to maneuver as it tries to create more competitive offerings against Intel. The settlement also paves the way for AMD to spin off its chip-manufacturing subsidiary, GlobalFoundries. After AMD moved to become a leaner company that turns to outside parties to manufacture its chips, Intel in March threatened to withdraw a cross-licensing deal that makes it easier for PC makers to build machines based on both companies' processors. AMD now is free to go to an independent GlobalFoundries to have its chips made, saving it from bearing millions in manufacturing costs each year. Intel gets to use that same cross-licensing deal to continue to use AMD chip technology in its products. "It will take time to understand how operating conditions in the processor business have changed," AMD CEO Dirk Meyer said on a conference call. "But make no mistake, they have changed."
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