US Could Follow EU’s Lead on Intel

The European Commission’s $1.45 billion (£950m) fine against Intel for violating antitrust regulations is sparking a debate over what constitutes illegal practices and how U.S. regulators should proceed against the giant chip maker.

The reaction to the record fine, announced by the Commission 13 May, echoes the arguments following European regulators’ multimillion-dollar fine five years ago, and the Clinton administration’s pursuit of Microsoft in the 1990s.

It also comes at a time of change at the federal level, with the Obama administration continuing to reverse orders from the Bush years on everything from torture to the environment.

On 12 May, the Obama administration revoked a Bush antitrust policy that regulators said hindered the government’s ability to fight anti-competitive behavior by companies that dominate their markets, which could describe Intel’s situation in the x86 marketplace.

Christine Varney, an assistant attorney general and top antitrust official at the Department of Justice, said the rules under the Bush administration were contributors to the current global economic woes.

“The recent developments in the marketplace should make it clear that we can no longer rely upon the marketplace alone to ensure that competition and consumers will be protected,” Varney said, according to news reports.

That might not be good news for Intel—which is being investigated not only by regulators at the Federal Trade Commission, but also by the N.Y. Attorney General’s Office—or other technology giants, such as Google, which is being investigated by the FTC for ties between its board of directors and that at Apple.

Varney’s statements put federal antitrust regulators more in sync with their European counterparts, according to the Computer and Communications Industry Association.

“U.S. regulatory agencies have indicated this week they will once again be watchdogs on antitrust enforcement under the new [Obama] aministration,” said Ed Black, president and CEO of the association. “Since the evidence has been compelling to all those who so far reviewed it, a vigorous U.S. investigation focused on the evidence in the case leaves us believing Intel will have its day of reckoning in the U.S. as well.”

Black said that while innovation and competition are needed, companies that get too big and use anti-competitive methods hurt the industry. He also criticised Intel’s methods, calling them a “misuse of its market power.”

Not everyone agreed with Black. Ken Ferree, president of the Progress and Freedom Foundation, cautioned U.S. regulators from following in the European Commission’s footsteps.

“If you love jobs and economic growth, you have to love the companies that drive the economy and create employment demand,” Ferree said. “As U.S. policymakers review the EC decision, they should think carefully before adopting a competition policy that handicaps the very companies that are the key to sustaining this country’s long-term economic health. Decisions like this do nothing to illuminate the path to a vibrant and growing economy, but rather obscure it.”

Officials at the Competitive Enterprise Institute agreed, saying the microprocessor business has been a shining example of vibrant competition.

“The EU should not rejoice at this seeming triumph over American big business,” said Wayne Crews, vice president for policy at the Institute. “Instead, it should ponder if its policies actually make Europe hospitable for innovation. Reforms are needed if Europe really wants to sustain a competitive, knowledge-based economy, and not merely the most regulated one. Imposing billions of dollars of fines on the most conspicuous wealth creators is not the way to go.”

Crews dismissed regulator claims. “Predatory pricing is an old scarecrow of antitrust enforcement,” he said.

The European Commission found that Intel offered rebates to OEMs, including Acer, Dell, Hewlett-Packard and NEC, to buy only or mostly Intel processors. European regulators also said the chip maker—which holds more than 70 percent of the global x86 processor market—made direct payments to OEMs who either stopped or delayed plans to roll out products powered by processors from Intel’s smaller rival, Advanced Micro Devices.

The Commission said such moves illegally stifled innovation and hurt consumers as well as competitors.

Intel officials disagreed, and said that the company will appeal the decision. In a press conference 13 May, President and CEO Paul Otellini denied the allegations and said that European regulators either ignored or discounted exculpatory evidence.

“There were a number of documents from OEMs, or between Intel and OEMs involved in the allegations, that refute what was claimed here,” Otellini said.

He said that there were no conditional rebates given, but that Intel did discount prices for bigger customers. “The more you buy, the less you pay,” Otellini said. “No harm, no foul there.”

He said it was difficult to see how consumers were hurt by a competition between Intel and AMD that drove down the price of technology, and noted that AMD officials have claimed that their company is a vibrant one.

Otellini also disputed the claim that Intel could unduly influence the largest OEMs.

“It’s absurd to think that we would not sell product to someone who happened [to] not like a comment or term [of a deal],” he said. “These are very competitive businesses who are, in most cases, larger than Intel, and are excellent negotiators.”

Otellini’s counterpart at AMD was pleased with the European Commission’s ruling.

“Today’s ruling is an important step toward establishing a truly competitive market,” AMD President and CEO Dirk Meyer said in a statement. “AMD has consistently been a technology innovation leader and we are looking forward to the move from a world in which Intel ruled to one which is ruled by customers.”

Nigel Dussau, chief marketing officer for AMD, said the ruling and fine was a win more for consumers than for AMD.

“Consumers have the right to choose based on who has the better technology, not just who controls the market,” Dussau said in an interview.

However, AMD has been denied the chance to compete fairly in the market for those customers because of Intel’s behavior, he said. In a free market, Dussau said AMD would be able to grow is presence and give consumers the choice they deserve.

Intel’s business practices have been under scrutiny for years. In 2005, the Fair Trade Commission in Japan found that Intel violated anti-monopoly laws though full or partial exclusivity deals with five Japanese PC makers. Three years later, South Korean antitrust regulators fined Intel $25 million for abusing its dominant position in the chip space and ordered Intel to stop what they said were illegal rebates to PC makers.

Intel is also being investigated by the U.S. FTC in an antitrust case that could go to trial early next year. The federal investigation began in 2007. In 2008, N.Y. authorities began an investigation to see whether Intel punished OEMs for using technologies from AMD and other competitors.

Some analysts say the ruling will have little impact on the competitive landscape.

“The decision is unlikely to make any significant change in market conditions,” Gartner analyst Martin Reynolds said. “The Intel-AMD market share is likely to remain roughly aligned with manufacturing capacity, adjusted for technology capabilities. … And Intel’s greatest challenge will remain market growth, not market share. However, the decision paves the way for civil cases against Intel, with the main case due to go to trial in Delaware in 2010.”

Charles King, an analyst with Pund-IT Research, said industry shouldn’t expect the European Commission’s ruling to suddenly give AMD’s business wings.

“AMD has proven that it can compete effectively enough with Intel when it innovatively pursues new or untapped markets—the company’s success with its Opteron and Athlon 64 processors is proof of that,” King wrote in a report. “But AMD has also been a less than stellar steward of its success. For nearly half a decade, the company has been plagued by ill-advised acquisitions and missed market opportunities, problems that no amount of Intel fines can or will correct.”