Navigating Intel's New 'Road Rules'

In the wake of a landmark legal settlement announced Nov. 12, chipmaker Intel (INTC) agreed to abide by a new set of "rules of the road." The world's largest maker of semiconductors said it would no longer engage in practices that got it sued by rival Advanced Micro Devices (AMD) and regulators around the world. But two weeks after the $1.25 billion agreement was announced, analysts are still scratching their heads over exactly what's likely to change for Intel. Lawsuits by AMD and regulators focused largely on Intel's practice of paying large sums of money to computer makers in exchange for agreements to use its chips exclusively. New York State Attorney General Andrew Cuomo argued in his lawsuit, filed in early November, that Intel used the payments to coerce PC makers into shunning its smaller rival. As part of the settlement, Intel promised it wouldn't give PC makers discounts and marketing money based on how many chips they used from AMD, even though it never admitted to doing so in the first place. Intel has said publicly it won't do away with the payments altogether, but analysts say it will have to pay closer attention to how it administers the program, known as "Intel Inside." Intel has yet to spell out precisely and in public how the use of marketing funds may change postsettlement, but an Intel spokesman gave a basic hypothetical example. Under the program, a PC maker might get money from Intel to pay for the printing and distribution of a marketing catalog displaying all its products. Before the settlement, if the catalog showed any PCs with AMD chips in them, Intel would offer no financial assistance to cover its costs, a company spokesman says. Now such a catalog, even with AMD systems displayed, would be eligible for Intel subsidies, but on a sliding scale based on how many AMD systems appear in it. AMD spokesman Mike Silverman says PC makers will be able to make their own decisions about the chips they'll use without fear of recriminations from Intel. AMD also expects more frequent and better interactions with PC makers. "Intel's Business Model Has Not Changed"As part of the agreement, Intel admitted no wrongdoing. Even as he outlined the settlement, Intel CEO Paul Otellini indicated the two companies are not on the same page over the payments and the impact they have on the market. "People can honestly disagree about business and marketing practices," Otellini said on the Nov. 12 call. He also promised to keep several key discount and marketing programs, including Intel Inside, in place. "It's a mistake to think that signing a civil settlement will create huge changes in Intel's behavior," says Mark Anderson, an analyst and publisher of industry newsletter Strategic News Service. "They are probably assuring people behind the scenes that this will amount to no change. Intel's business model has not changed." Intel had already been ordered by regulators in Japan, South Korea, and the European Union to stop awarding discounts and other financial incentives to PC makers based on how much business they did with AMD. In the case of the EU, which fined Intel $1.45 billion earlier this year, Intel is appealing the ruling. "What this agreement does is formalize some changes that were already coming," says Dean McCarron of chip industry research firm Mercury Research. "I don't imagine it will change the mix of Intel and AMD products the PC companies take." Most of the jockeying for Intel marketing money takes place behind the scenes and, if anything, has helped drive down the price of computers sold to consumers and businesses. McCarron says AMD's most recent market share was 17.8% in the quarter ended September, down from 18.7% in the quarter ended June. Intel's share grew to 81.5% from 80.5% during the same period. Taiwan's VIA Technologies still maintains a tiny market share of less than 1%. One change Intel does hope to achieve through the settlement is in its relationship with regulators still investigating its practices. Aside from Cuomo's lawsuit, Intel may also be the subject of a complaint from the Federal Trade Commission before the end of the year. Since both of those cases are tied closely to the complaints put forth by AMD, the settlement may help Intel head off a fresh lawsuit by the FTC and give it a basis for negotiation of a settlement with Cuomo.

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