Record EU Fine for Intel, Deconstructing Intel Response
It seems like only yesterday that I was writing about the danger of antitrust actions in high tech. In fact, it was, and at the time I mentioned the speculation that Intel would face a walloping antitrust fine from the EU today. And so it does: €1.06 billion, or about $1.44 billion. When you read the statement from the body, you start to understand the perception of predatory monopolistic practices. And when you read Intel's answer, you might get the sense that the company is trying to spin its way out of controversy.
let's start with the situation as it appears in the EU's view, as explained in the EU press release:
Throughout the period October 2002-December 2007, Intel had a dominant position in the worldwide x86 CPU market (at least 70% market share). The Commission found that Intel engaged in two specific forms of illegal practice. First, Intel gave wholly or partially hidden rebates to computer manufacturers on condition that they bought all, or almost all, their x86 CPUs from Intel. Intel also made direct payments to a major retailer on condition it stock only computers with Intel x86 CPUs. Such rebates and payments effectively prevented customers - and ultimately consumers - from choosing alternative products. Second, Intel made direct payments to computer manufacturers to halt or delay the launch of specific products containing competitors' x86 CPUs and to limit the sales channels available to these products. The Commission found that these practices constituted abuses of Intel's dominant position on the x86 CPU market that harmed consumers throughout the EEA. By undermining its competitors' ability to compete on the merits of their products, Intel's actions undermined competition and innovation. The Commission will actively monitor Intel's compliance with this decision. The world market for x86 CPUs is currently worth approximately €22 billion (US$ 30 billion) per year, with Europe accounting for approximately 30% of that.If the EU's multi-year investigation is correct, Intel partly gained market dominance by paying off trading partners. Here are some of the EU's specific claims:
- "Intel gave rebates to computer manufacturer A from December 2002 to December 2005 conditional on this manufacturer purchasing exclusively Intel CPUs"
- "Intel gave rebates to computer manufacturer B from November 2002 to May 2005 conditional on this manufacturer purchasing no less than 95% of its CPU needs for its business desktop computers from Intel (the remaining 5% that computer manufacturer B could purchase from rival chip maker AMD was then subject to further restrictive conditions set out below)
- Intel gave rebates to computer manufacturer C from October 2002 to November 2005 conditional on this manufacturer purchasing no less than 80% of its CPU needs for its desktop and notebook computers from Intel
- Intel gave rebates to computer manufacturer D in 2007 conditional on this manufacturer purchasing its CPU needs for its notebook computers exclusively from Intel.
"Intel takes strong exception to this decision. We believe the decision is wrong and ignores the reality of a highly competitive microprocessor marketplace - characterized by constant innovation, improved product performance and lower prices. There has been absolutely zero harm to consumers. Intel will appeal."Given the size of the fine, little wonder that the company will appeal. Much of this is positioning, and while Intel claims "zero harm to consumers," the EU says that harm to consumers is intrinsic to Intel's "deliberately acting to keep competitors out of the market for computer chips for many years." Back to Intel:
"We do not believe our practices violated European law. The natural result of a competitive market with only two major suppliers is that when one company wins sales, the other does not. The Directorate General for Competition of the Commission ignored or refused to obtain significant evidence that contradicts the assertions in this decision. We believe this evidence shows that when companies perform well the market rewards them, when they don't perform the market acts accordingly."Things start to get interesting here. Of course Intel says that it didn't violate law â€" if it did, how would it appeal? But according to the EU release, Intel violated "EC Treaty antitrust rules." A treaty is an agreement or contract. Does that make it a law, or is there semantic wiggle room? And is Intel saying that it did not offer rebates conditional on customers freezing out AMD or make payment to keep products including AMD chips from getting to the market? Intel doesn't actually say that the specific EU charges are false. Or is Intel saying that the charges are true but that they aren't violations of either EU law or EC Treaty antitrust rules?
Next, Intel says that the Directorate General "ignored or refused to obtain significant evidence that contradicts the assertions in this decision," and that the evidence shows that markets punish those that perform well and punishes those that don't. But that is effectively saying that market success should justify Intel business practices. In other words, Intel is focusing on whether evidence would show that what it does improves competition, not whether the EU correctly identified some of its actions and whether such actions were not legal in the EU. Next up from Intel:
"Intel never sells products below cost. We have however, consistently invested in innovation, in manufacturing and in developing leadership technology. The result is that we can discount our products to compete in a highly competitive marketplace, passing along to consumers everywhere the efficiencies of being the world's leading volume manufacturer of microprocessors."There's another bit of finessing here. I've just reread the EU statement and see no point at which it explicitly says that Intel was selling products below its costs. On the contrary, the EU suggests that AMD would have had to sell below its cost to compete. Back to the EU for a moment:
Intel structured its pricing policy to ensure that a computer manufacturer which opted to buy AMD CPUs for that part of its needs that was open to competition would consequently lose the rebate (or a large part of it) that Intel provided for the much greater part of its needs for which the computer manufacturer had no choice but to buy from Intel. The computer manufacturer would therefore have to pay Intel a higher price for each of the units supplied for which the computer manufacturer had no alternative but to buy from Intel. In other words, should a computer manufacturer fail to purchase virtually all its x86 CPU requirements from Intel, it would forego the possibility of obtaining a significant rebate on any of its very high volumes of Intel purchases.For example, rival chip manufacturer AMD offered one million free CPUs to one particular computer manufacturer. If the computer manufacturer had accepted all of these, it would have lost Intel's rebate on its many millions of remaining CPU purchases, and would have been worse off overall simply for having accepted this highly competitive offer. In the end, the computer manufacturer took only 160,000 CPUs for free.Moreover, in order to be able to compete with the Intel rebates, for the part of the computer manufacturers' supplies that was up for grabs, a competitor that was just as efficient as Intel would have had to offer a price for its CPUs lower than its costs of producing those CPUs, even if the average price of its CPUs was lower than that of Intel.
According to the EU, Intel was telling at least some customers that if they bought any significant amount of chips from AMD, Intel would not give them rebates on the much higher volume of x86 chips they bought from Intel. So Intel is setting up a straw man, rhetorically. Intel then ends as follows:
"Despite our strongly held views, as we go through the appeals process we plan to work with the Commission to ensure we're in compliance with their decision. Finally, there should be no doubt whatsoever that Intel will continue to invest in the products and technologies that provide Europe and the rest of the world the industry's best performing processors at lower prices."More marketing-type language, and a recognition that it will have to toe the line.
The question I'm left with is that after seeing IBM, Microsoft, and others slapped about for antitrust activities, did Intel management learn anything from the object lessons? Or was this a case of a calculated gamble, in which additional profits over those five or so years still outweigh the fine?
[Update: as my colleague, Michael Hickins, points out, Intel "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.'" I just checked a more recent 10-Q, but even there Intel wrote: "The EC's rules provide that the maximum monetary fine could equal 10% of Intel's global turnover for all products and services for the prior fiscal year. Any such decision would be subject to appeal. Intel lacks sufficient information to predict the EC's future course of action, and both the outcome and the range of any potential actions by the EC are not reasonably estimable."
In addition, both the State of New York and the Federal Trade Commission have ongoing investigations into Intel.]
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