Intel's in Hot Water in Europe

The European Commission's ruling against Microsoftas well as other recent antitrust casesput the chipmaker in a vulnerable position

The repercussions from the Sept. 17 ruling by Europe's second highest court affirming a landmark 2004 antitrust order against Microsoft (MSFT) are only just starting to be felt. But of all the technology companies facing scrutiny by the European Commission, perhaps none has more to worry about than semiconductor giant Intel (INTC), which became the subject of a formal proceeding in July.

The EC cases against Microsoft and Intel are based on different kinds of alleged market abuse and draw on separate legal precedents. But both reflect a widening gap in how the U.S. and Europe view the legality of hardball business tactics by dominant companies. While regulators in both regions look for signs of harm to consumers from monopoly behavior, Europe gives as much or more weight to the impact on competitors.

That distinction played a critical role in the Microsoft ruling. On the face of it, Microsoft's free inclusion of Media Player in Windows was a boon to consumers. But the EC was able to show that the software bundling harmed rivals such as Real Networks (RNWK) and Apple (AAPL) and reduced competition in the media player market—thus potentially hurting customers in the long run by leading to less choice in digital content formats. A similar argument held that by limiting the information it gave out about Windows networking standards, Microsoft had foreclosed competition in desktop and server operating systems, to the detriment of consumer choice.

Crossing the Line?

The same kind of thinking is at the core of the commission's case against Intel. Prompted by complaints from rival chipmaker AMD (AMD) dating back to 2000, the EC has charged Intel with illegal use of sales tactics such as rebates and incentives to maintain or increase its market share in microprocessors. Such programs are normally permissible but can cross the line into abuse when practiced by companies with monopoly market share.

Intel strongly denies any wrongdoing and says it has acted within the law with its market incentive programs. It also argues that the programs have led to lower chip prices for consumers.

That may not be enough of a defense in Europe—especially now that the commission's hand has been strengthened in the wake of the Microsoft defeat. "European authorities and courts put a higher duty on dominant firms to deal fairly with their competitors," says Philip Marsden, a senior research fellow at the British Institute of International & Comparative Law. "They want to foster gentlemanly competition, a premise that is foreign to American antitrust thinking."

A recent ruling from Europe's highest court, the European Court of Justice, could make matters even tougher for Intel. In March, the court upheld a case against British Airways (BAY.L) in which the carrier was found guilty of harming competition though the use of loyalty rebates and discounts for travel agents. Also on the books is an earlier case against French tiremaker Michelin (ML.PA) that found its retail incentive program illegal. "If you apply the law as it is, Intel is in a very difficult position," says Simon Bishop, a co-founder of RBB Economics, a European firm specializing in antitrust economics.

Dawn Raids

AMD has been pressing the European Commission for years to take antitrust action against its larger rival. After on-and-off investigations, the commission and national regulatory officials carried out a series of coordinated dawn raids (BusinessWeek, 7/14/05) of Intel's European offices in July, 2005. But it wasn't until two years later that the EC finally brought charges (BusinessWeek, 7/27/07) alleging that Intel engaged in three categories of abuse of its dominant market position. "The three types of conduct reinforce each other and are part of a single overall anticompetitive strategy," said the Commission in a press release about its confidential Statement of Objections, a legal step roughly equivalent to an indictment.

The commission alleges that Intel used loyalty rebates to entice computer makers to limit their use of AMD chips, and also used threats or payments to dissuade computer makers from promoting AMD's product launches. The commission further charges that Intel occasionally offered its products below cost—a major antitrust no-no—when trying to help computer makers win bids against AMD-based systems in the strategically important server market.

The upshot, argues the commission, is that consumer choice was limited by an abuse of a dominant position, the same broad-brush argument used successfully in the Microsoft case.

"There is no question that our market share today would have been significantly higher if we had not been held back by these practices," AMD Chief Executive Hector Ruiz told BusinessWeek in an interview (BusinessWeek, 9/21/07).

Intel insists that its customers aren't complaining about its business practices. What's more, it says, the fiercely competitive market for x86 microprocessors, which are used in virtually all desktop PCs and most servers, is functioning properly to the benefit of consumers. The company has until mid-October to respond to the European Commission, though it is likely to file for an extension. Chuck Mulloy, Intel's legal affairs spokesman in Santa Clara, Calif., declined to comment on what impact the Microsoft ruling might have on the European Commission's case against Intel.

Bonus Schemes

The EC's victory against Microsoft clearly provided a confidence boost to competition authorities in Brussels and strongly affirmed the fundamental principles of Article 82 of the European Treaty—the Continental equivalent of the Sherman Antitrust Act in the U.S. But perhaps even more relevant for Intel is the 1999 suit brought by Virgin Atlantic Airways against British Airways in both the U.S. and Europe, which charged that BA abused its dominant market position through bonus schemes for air travel agency services.

A U.S. court threw the case out. But in March, after a series of appeals, Europe's highest court upheld the commission's ruling on abusive conduct and a fine of €6.8 million ($9.5 million). The decision creates important precedents that could affect the Intel case.

Among other things, the court ruled that bonuses granted by dominant companies can be abusive if they are likely to reduce market competition. This applies if the bonuses make it difficult or impossible for competitors of a dominant company to enter the market, or if the existence of the bonuses distorts the ability of customers to pick freely among various suppliers or partners. More generally, the court noted that the examples of abusive conduct listed in Article 82 are not exhaustive but merely illustrative. In theory, this gives the commission leeway to expand the definition of market abuse.

The 2002 decision against Michelin also makes life tricky for Intel. The tiremaker was found to have abused its market dominance by offering rebates and incentives to dealers that had the effect of excluding competitors. The comparisons to the Intel-AMD situation are striking because much of AMD's argument is built on the allegedly predatory impact of Intel's "market development" rebates to PC makers, also known as the Intel Inside program, which include payments to offset the cost of advertising. Intel responds that consumers have benefited from these rebates through lower prices.

No Guarantee

Despite the precedents set by the Microsoft, British Airways, and Michelin cases, there's no guarantee the commission will rule against Intel in the end. The chipmaker assiduously polices its own behavior in light of local competition laws and has avoided any unfavorable antitrust rulings in the U.S. But some other jurisdictions are taking a more Europe-like approach in cases against Intel—and occasionally landing blows.

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 and agreed to alter its business practices but did not acknowledge any wrongdoing. Another antitrust investigation in South Korea—with data seizures similar to those in Japan and Europe—led to charges on Sept. 11 of this year by the Korean Fair Trade Commission that Intel violated that country's antitrust laws. No date has been set for a ruling.

AMD has also brought a civil antitrust action against Intel in the U.S. As part of the discovery process, Intel says it has so far handed over more than 40 million pages of documents. The case is expected to be decided in 2009.

No question, the EU's powerful win against Microsoft has raised its stature among global antitrust cops. The moves against Intel in Korea and Japan also add momentum. But the EU hasn't been given a prosecutorial carte blanche: It still has to prove every case on the facts. Intel will put up a tough fight, so this story is far from over.

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