Intel's $1.5B Loss Is Our Gain

Intel is painting itself as being a victim of its own success, but the giant semiconductor vendor has already victimized the market more than enough. The record $1.5 billion fine -- and changes to its business practices -- imposed by the European Commission's competition committee for abusing its dominant position in the chip market, comes too late to save AMD, which has had to implement the justice of King Solomon and cut itself in half. But it may serve the rest of us by allowing other competitors to challenge Intel's stifling hegemony in the market.

Oddly, Intel seems to have been caught flat-footed by the loss. It hasn't provided for contingencies in the balance sheet included in its most recent 10-K filing -- ostensibly because "the outcomes in these matters are not reasonably estimable." More likely, as with most bullies, in its arrogance it felt entirely justified in its behavior and discounted the possibility that it would lose, not just this case, but the more than 80 other cases across the United States, including several by state attorneys general, that are still pending against it.

But even Intel admitted that, "were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on our business, results of operation, financial position, and overall trends." That means not only gigantic piles of cash, but significant changes to its business practices that will impact margins and future cash flows. Indeed, no longer will Intel be able to throw its weight around to force OEMs to purchase its chips, no longer will it be able to unfairly undercut the competition with rebates, or force vendors to delay shipments of PCs with chips made by AMD. That in itself may be more difficult for the company to digest than the EU fine.

Intel takes "strong exception" to these accusations, but my own experience tells me they're par for Intel's course. Several years ago I had a conversation with Diane Greene, then CEO of VMware, that she asked me to keep off the record; but she's since been thrown under the bus by the VMware board, and the anecdote is revealing of Intel's arrogance. I was attending a VMware conference where both Intel CEO Paul Otellini and former AMD CEO Hector Ruiz were present -- although not on stage at the same time. Still, I told Greene, it was the first time I could even remember seeing both of them at the same event. She rolled her eyes and told me that not only was it exceptionally difficult to get Otellini to agree to share the spotlight, but that Intel had laid out a laundry list of conditions, including the demand that Otellini not even have to be in the Green Room (where presenters wait back stage) at the same time as Ruiz.

That arrogance is reflected throughout Intel's reaction to the EU decision (admirably deconstructed by my colleague Erik Sherman). Its claim that the commissioners don't understand the "highly competitive" nature of the market insinuates that they're a bunch of academic pinheads who don't understand the "real world." But the reality is that these are the same commissioners who ruled against Microsoft -- again, too late to save Netscape and a host of other would-be Microsoft competitors, but not too late for more recent innovators like Mozilla and others in the open source community, not to mention vendors of proprietary systems.

Even Microsoft might one day look back on its losses in the European courts with gratitude, as those decisions and the ensuing competition Microsoft faces every day has forced it go back to the drawing board and use its considerable engineering muscle to start innovating again. It might be a stretch, but the improvements in Windows 7, Windows Mobile 6.5, and new products like Vine, could be a direct result of those losses in litigation.

Otellini also said Intel's business practices have resulted in "absolutely zero harm to consumers," but that's impossible to say. Who knows what AMD could have accomplished if it hadn't had to fight constant rear guard battles against treacherous business practices; who knows what Intel could have done had it been forced to compete fairly with an insurgent rival -- rather than using its head start and muscle to ram it into the wall?

Otellini says that Intel will appeal, but if history is any guide, it has somewhere between a zero and one percent chance of winning. It will be a difficult pill for Intel to swallow, no doubt, but it should follow Microsoft's lead and drop its appeals and settle its other lawsuits. Then it can get back to the business of creating faster, more energy-efficient chips. And it will have to get back to innovation, as it will have Nvidia, Marvell and a host of new competitors nipping at its heels. And that would be better for all of us.