The EC’s startling vindication of AMD’s claims against Intel

When the European Commission sent its broad “statement of objections” to Intel (INTC) on Thursday — its preliminary finding that Intel has been competing illegally against Advanced Micro Devices (AMD) — it bestowed an unprecedented imprimatur of legitimacy upon AMD’s oft-voiced, but oft-rebuffed complaints about Intel. (Both companies compete in the market for x86 microprocessors, which Intel has long dominated.)

Though the statement of objections (SO) itself remains confidential, an EC spokesperson (see his press conference here) and an EC press release (see here) both maintain that after a “rigorous,” six-year investigation, the commission believes Intel has engaged in three categories of misconduct, each of which amounts “in its own right” to an “abuse of dominant position” (akin to illegal monopolization under Section 2 of the Sherman Antitrust Act in the U.S.), and which together reinforce one another as “part of a single overall anti-competitive strategy.” If ultimately found guilty, Intel could be subject to fines worth 100s of millions of euros.

To be sure, Intel is far from any such guilt finding even by the commission, let alone by the European courts to which it could appeal such a finding, should there ever be one. Intel has 10 weeks to submit a written response (i.e., until October 8, 2007) to the Commission and it has told the Wall Street Journal (see here) that the EC’s charges are based on unfounded “assumptions” and a “failure of logic.” In a statement, Intel’s senior vice president and general counsel D. Bruce Sewell said: “We are confident that the microprocessor market segment is functioning normally and that Intel’s conduct has been lawful, pro-competitive, and beneficial to consumers.”

Still, the issuance of the SO in itself robs Intel of an important talking point it has enlisted in its efforts to belittle AMD’s claims in the public eye. Last year, when I was working on a Fortune feature story (see here) about the 48-page federal antitrust complaint AMD filed against Intel in Delaware in June 2005, one of Intel’s key arguments was, in effect, that AMD was just recycling garbage, and this was all old news.

“If you look at the history of this,” Bruce Sewell told me then, “repeatedly we have had these clashes, and in essentially no case has there ever been a finding against Intel that we have in fact violated any antitrust laws other than this very narrow issue in Japan.” (He was referring to the “recommendation” of the Japanese Fair Trade Commission in March 2005, finding that Intel had violated Japanese competition law — a finding which Intel disputes, but which it chose not to contest, stating that it could comfortably live with the injunctive relief the JFTC was seeking.) “But when the E.U. has looked at this previously, when the U.S. authorities have looked at this previously, the conclusion has been that there is no support for these allegations.”

And in May 2006, when Sewell told me that, he had a solid basis for his claim. AMD’s Tom McCoy, it’s executive vice president for legal affairs, had taken a boatload of antitrust complaints to the U.S. Federal Trade Commission in the mid-1990s, but the FTC ignored almost all of them, choosing to act (in 1997) only on a narrow issue having to do with how Intel dealt with customers who tried to bring patent claims against it. (Even those claims were settled in 1999 with no admission of wrongdoing, and a federal appeals court actually exonerated Intel of that specific charge in a related civil case later that year.)

McCoy then shopped many of the same claims to the European Commission in 2000, but by 2002 the commission, too, appeared to have dismissed them. On February 5, 2002, the New York Times reported one commission spokesperson saying that the EC had “come to the preliminary conclusion that the accusations made against Intel are unfounded,” while a second told the paper “the decision has been made to drop the investigation.”

What happened then? Well, I don’t know what happened inside the EC but we all do know that in 2002 AMD began suffering sudden and dramatic losses in market share in Japan, where AMD’s unit share slid from 25% in mid-2002 to 9% in mid-2004, according to Gartner Dataquest. AMD’s share of Sony’s business, for instance, dropped from 23% in 2002 to zero by 2004, AMD later alleged in its federal antitrust lawsuit against Intel in Delaware. It’s consumer desktop business with NEC allegedly sank from 84% to almost nothing over the same period. These were the developments that prompted the Japan Fair Trade Commission to raid Intel’s offices in April 2004, and to issue its preliminary findings of violations of Japanese competiton law in March 2005.

The guts of the JFTC’s allegations, of AMD’s lawsuit against Intel in the U.S., of 80 related private consumer class actions, and, now, of the EC’s preliminary charges against Intel all revolve around Intel’s alleged use of so-called loyalty rebates. (The other two categories of wrongdoing the EC alleged in its public statements Friday were that Intel paid computer makers not to promote AMD product launches and that it sold server chips to computer makers at below cost.)

On July 27, Commission spokesperson Ton van Lierop said that the loyalty rebates were of “such a quantity and such an amount that an efficient competitor would be forced to price below cost.” He continued, “We think that would be bad for competition and bad for consumers who would be buying computers.”

Both the EU law and the U.S. antitrust law governing loyalty rebates are very unsettled. In general, there is much less consensus among competition experts about how easily consumers are injured by hardball conduct by dominant companies than there is about the harm to consumers caused by collusive conduct among multiple companies (like, e.g., price-fixing). AMD brought its US case in Delaware because there are certain federal appellate precedents regarding loyalty rebates in the Third Circuit, which includes Delaware, that AMD considers favorable to its position. (Though both companies are headquartered in Silicon Valley–about a mile away from one another–both are incorporated in Delaware.)

Here are the key paragraphs from my earlier feature laying out AMD’s perspective on these loyalty rebates, and Intel’s rebuttal:

The rebates allegedly worked like this: Suppose XYZ computer maker needs 100 chips per quarter, and that during the last quarter it bought 90 from Intel and ten from AMD. Since AMD wants to grow, it might bid for 20 of XYZ’s 100 units in the new quarter. (It can’t realistically bid for all 100 units because it can’t increase its capacity that quickly and because XYZ will have some preexisting contracts that specify delivery of Intel-powered computers.)Here’s how Intel allegedly dashes AMD’s hopes for gradual growth. It tells XYZ that its price per processor is, say, $90, but that if XYZ ends up buying more than 80% of its processors from Intel that quarter, it will pay a rebate of $10 per processor, resulting in an $80 price.

Meanwhile, in January 2007, class-action impressario Bill (”Partner B“) Lerach cast the most dramatic rebate-related aspersions of all against Intel, albeit in a shareholder suit primarily targeting Dell (DELL). [SEE COMMENT FROM INTEL AND CORRECTION/ADDENDUM BELOW] There, he alleges that Intel paid Dell up to $1 billion per year not to use AMD chips. (See earlier post, here.) Lerach makes no antitrust claims but, rather, accuses Dell of misaccounting for the rebates, and failing to disclose them.) Dell and Intel have denied the charge.

Regardless of the true facts regarding all these accusations, Intel is not likely to sustain any adverse legal consequences soon. AMD’s U.S. suit, where lawyers are in the process of obtaining and reviewing millions of documents from computer makers, suppliers, and retailers, is not scheduled to go to trial until April 2009.

COMMENT FROM INTEL SPOKESMAN CHUCK MULLOY (7/29 at 1:26 pm) :
Two points: First, the Statement of Objection in no way changes the fact that AMD has been and continues to be the source of complaints about Intel’s business practices. There are no customers complaining, there are no consumers complaining. The microprocessor market is fiercly competitive and is functioning properly and consumers are benefiting.

Second, you might want to check some of the information you use for completeness, in particular those that come from AMD’s press releases. The Larach case against Dell and Intel was dropped in May of this year. You could have found that by checking court records in Austin instead of relying on AMD press releases and press statements.

CORRECTION/ADDENDUM (7/29 at 2:26 pm): Lerach and co-counsel asked that their suit against Dell be voluntarily dismissed without prejudice on April 24, 2007, explaining only that the investor group they represented “no longer intends to pursue the Complaint on behalf of the class.”

COMMENT FROM AMD SPOKESPERSON DREW PRAIRIE: (7/30 at 9:58 am): To Intel’s comment, the decision to investigate was made by the Competition Directorate of the European Union. AMD filed a complaint with the European Commission in October, 2000. Ultimately, however, the Commission’s action is based on the Commission’s review of the large volumes of evidence it seized from Intel offices and collected from computer makers during its thorough seven year investigation. At the heart of the issue isn’t AMD’s complaint, in the words of the EC spokesman it is about how “in the short, medium and long-term, we think that the actions of Intel are bad news for competition and consumers.”