Digital Vs. Intel: Is The Pentium In Peril?

Not likely. After the hoopla, Digital's lawsuit may mean little

It was a bold stroke. Not only was Digital Equipment Corp. taking on chip giant Intel Corp. in a patent-infringement suit, it was doing it in a way to gain maximum publicity. Instead of notifying Intel directly, Digital Chairman Robert B. Palmer sprang the news at a press conference where he intimated that the vast market power--and billions in profits--that Intel derives from Pentium chips is based on purloined Digital technology. Moreover, he asserted, with its suit Digital would change the course of the industry. The next day, full-page newspaper ads spelled out Palmer's position.

But Palmer says the exchange was "very professional" when he phoned Intel CEO Andrew S. Grove on May 13. Grove acknowledged he had received Digital's suit, and the two had a brief, cordial chat, says Palmer. "Andy said, `It looks like one for the lawyers,"' he recalls.

In the end, this could be how the Digital-Intel battle shakes out: A lot of public flash and a businesslike approach in private. Not that Digital isn't going to vigorously pursue its claim--or that it doesn't have a substantial case to make. It's just that such suits rarely end with the kind of bang this started with.

For now, the experts are scrambling to understand Digital's charges. "We haven't found any smoking guns," says Linley Gwennap, editor of Microprocessor Report, who has made a preliminary review of the claims. "But some things are close to what Intel's doing." Investors were worried enough to knock Intel shares down 6 3/4, to 152 3/8.

Digital's lawsuit hinges on 10 patents related to its Alpha microprocessors that cover how data is queued up for faster processing on a chip. Specifically, it cites how Intel chips gain speed by storing and moving data in ways that Alphas do.

Such claims have in the past been difficult to prove. And even if Digital prevails in the end, Intel's juggernaut isn't about to be derailed. The courts are highly unlikely to grant Digital's demand that Intel "stop using our technology." Rather, Palmer's best shot may be a settlement that induces Intel to pay royalties. "It'll be hard for Digital to establish the validity of the claims," says Nathan Brookwood, a microprocessor analyst with Dataquest Inc. "The legal process is very tricky in this area."

Brookwood figures if Digital and Intel agree to royalties of 1% to 2% on each Pentium, Digital could get some $500 million a year. In the meantime, however, analysts say Intel is likely to countersue Digital for infringing its patents.

For now, Palmer brims with bravado. "I'm certain we'll prevail, he says." In fact, the lawsuit may be his only way to improve the payback on Alpha, which has consumed billions, but has never succeeded in the market against Intel chips. In the meantime, Digital could invest millions in legal expenses only to come up empty. And then there's the risk of strained relations with Intel, which supplies the chips for computers that account for one-quarter of Digital's product sales. Palmer may want to keep his phone line open.

— With assistance by Andy Reinhardt

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