Guess we have to bring this up finally

Today a $1.45 billion fine was handed down to Intel for antitrust and anti-competitive practices in the European markets. We take a look at the summary judgment, both Intel’s and AMD’s initial response and just how the decision might after the consumer.
Sometimes it’s not a great thing to break records.  Just ask Intel today: they are now hold the record for the largest fine ever handed out by the European Commission.  The fine is about $1.45 billion; with ‘B’.  The reason behind the decision: Intel had “skewed competition and denied consumers a choice for chips.”  The previous high water mark for fines from the EC was Microsoft’s $675 million in 2004 for blocking competition in markets of server software. 

There are a lot of different angles on this discussion and I will attempt to summarize a lot of them by sourcing other news articles from around the globe. 

The Decision

A good summary and Q&A on the Intel antitrust case can be found on the EU’s informational page here

There are two primary practices for which Intel is being punished and caused harm to competitive markets in the European Union.  The first is hidden rebates to PC manufacturers based on the condition that they would purchase all, or nearly all, of their x86 processors from Intel.  Essentially AMD was giving increasing larger amounts of money to companies that would increase their percentage of Intel-based systems versus AMD-based systems.  Intel also was accused of making direct payments to at least one major retailer on the condition that it would stock and sell ONLY computers with Intel inside (heh). 

The second violation, one that was likely more difficult to prove, was that Intel made direct payments to computer manufacturers to delay the launch of new systems/products containing new AMD x86 processors.  When AMD had a new highly competitive CPU to offer, Intel would basically pay off the system vendors to not build new systems using them at launch, if at all.

Intel Fined $1.45 Billion by EU for Antitrust Violations - Processors 3
EU’s competition commissioner Neelie Kroes with an aged CPU.  Source: NYTimes

The commission believes these practices have stifled innovation and consumer choice in the market:

Intel limited consumer choice and stifled innovation by preventing innovative products for which there was a consumer demand from reaching end customers. Such practices deter innovative companies which might otherwise wish to enter and compete in the market. By ordering Intel to end its abusive practices, competition on the x86 CPU market will play out on the merits with the effect that innovation to the benefit of the consumer can flourish.

The commission’s report does make claim that they are not preventing companies’ ability to provide discounts to customers as a business practice but rather they are showing that adding ‘conditions’ to these discounts is what is at fault for the fine.  This also doesn’t mean that the EC’s decision is based on protecting competitors to any one business: “the Commission acts in the interests of consumers. The Commission does not look at the specific interests of individual companies, but is charged with ensuring that competition on the merits is safeguarded. This creates an environment where consumers can benefit and where innovation can flourish.”

The healthy fine has a 3-month due date and cannot be delayed or waived during an appeal.  The money will go right back into the EU’s central budget; basically a tax cut for Europe.  The penalty assessed is actually well under what the EU could have demanded: the regulations of the EC state that the fine can be as high as 10% of the corporation’s annual income which was about $37 billion in 2008. 

The full EC decision will be made public very soon and if you feel like reading all 542 pages of it, good luck. 

AMD’s Response

Giuliano Meroni, president of AMD’s operations in Europe, said the decision would “shift the power from an abusive monopolist to computer makers, retailers and above all PC consumers.”

AMD has been putting the word to the street about this ruling, even to the extent in creating an AMD landing page discussing the ruling with the name “Break Free”!

Quotes from AMD’s press releases:

“Today’s ruling is an important step toward establishing a truly competitive market,” said Dirk Meyer, AMD president and CEO. “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.”

“After an exhaustive investigation, the EU came to one conclusion – Intel broke the law and consumers were hurt,” said Tom McCoy, AMD executive vice president for legal affairs. “With this ruling, the industry will benefit from an end to Intel’s monopoly-inflated pricing and European consumers will enjoy greater choice, value and innovation.”

AMD also made sure to include the other areas of the world in which Intel has been slapped down for antitrust or anti-competitive practices including Korea and Japan and the on-going investigation in the US. 

A very good blog post by AMD’s Nigel Dessau summarizes the company’s views points very elegantly:

We are all reading and analyzing the European Commission’s statements around consumer protection in the IT industry. At first blush, I believe the EC decision will signal a sweeping change in the IT industry. The ruling has the very real potential to transform the industry from being artificially organized around one player who owns less than a third of the bill-of-materials for an end product but makes nearly all the profit, into one that thinks consumers first. And we also see the very real potential for a step change in the long-term pace of innovation as a by-product.

While Intel may want you to believe this is about “discounting”, it really isn’t at all. The ruling – more than eight years in the making – is about how Intel deliberately used its monopoly profits to control a critically important industry. How it has decided what consumers are allowed to buy, and where they are allowed to buy it. How Intel severely punishes PC manufacturers, suppliers and retailers who do not play by its rules. That is what Europe is putting a stop to. We applaud them for doing so, and if you buy computers and value innovation, so should you.

The social media savants of AMD are also a flutter today:

IanMcNaughtonAMD Innovation Fun Fact 3: Fact #3: 7 of the 10 fastest supercomputers in the world are powered by AMD processors. (Courtesy @nigeldessau )

IanMcNaughtonIntel either just doesn’t get it, or has no remorse for harm it inflicted on consumers » link to Intels general counsel “mystified” and “dismayed” – The Inquirer #IntelvEU

bburke_nvidiaIf bad biz practices force consumers to buy inferior products at a higher price, and prevent access better products, are consumers harmed?

IanMcNaughtonEC took nearly 9 years to reach its conclusion against Intel-no rush to judgment » link to Rapid – Press Releases – EUROPA #IntelvEU

Intel Fined $1.45 Billion by EU for Antitrust Violations - Processors 4

But I mean, wow, a whole website dedicated to a fine from EU?  Isn’t that a little much?

Intel’s Response

The chief executive of Intel, Paul Otellini, said Wednesday that the company would appeal.  “We believe the decision is wrong and ignores the reality of a highly competitive microprocessor marketplace,” Mr. Otellini said.

Intel as a whole is very obviously upset by the decision and have already vowed to appeal the decision.  Intel’s CEO has been making the rounds on the news circuit throughout the day pursuing the company’s innocence and demonstrating the “incoherency” of the EC’s decision. 

From a TGDaily piece posted recently:

He disagrees with the conclusion that consumers were harmed since processors prices have dropped by a factor of 100 during the time of the case. “It’s a matter of competition,” he said.

Otellini denied that Intel forced European retailers to shut out AMD from entire retail chains. It was our subjective impression during the call that Otellini was clearly unhappy about the casual way the EU announced the ruling and the fact that AMD was able to push this case through.

According to the executive, Intel has invested about $5 billion in Europe and employs about 6000 people throughout the continent. Most R&D efforts are taking place in Ireland and the company has no plans to make any changes to this commitment, Otellini said. However, he conceded that the ruling “will impact the sales and marketing teams” in Europe, even if he noted that the company does not know if and how it will have to change its business practices in Europe.

Is this decision headed to the US?

The next question on everyone’s list is if this decision will push the somewhat stagnant investigation going on in the US along and if would swing the FTC’s opinions one way or the other.  With the Obama administration obviously less buddy-buddy with big business, it seems likely now that the same fate will await Intel stateside. 

Last year, the Federal Trade Commission stepped up its inquiries into Intel, opening a formal investigation.

This week, the head of the antitrust division of the Justice Department, Christine A. Varney, made clear that regulators would return to an aggressive enforcement policy against companies that abused their market dominance, after more relaxed policies under President Bush. While Mr. Bush was in office, many small companies chose to take their complaints to regulators in Europe and Asia.

Intel had better be getting a different set of lawyers ready for this fight…

My Response

As you can see from most of the information above, it is very easy to see Intel as a devilish figure in all of this, and I think it would be nearly impossible now to not thing Intel has been acting immorally.  What I personally have issues with are how illegal these practices were.  Companies in the US are taught to innovate and grow, to earn money and profits to spark innovation for the future.  However, as it seems we now have precedence from the EU, maintaining a dominant position in the market is going to be a much tougher task.  To quote from an AMD blog today: “Earned success is one thing. Illegal maintenance of a monopoly is quite another.”

What good is going to come of this decision?  That is the easy part: lower prices, more competition, more innovation, more choice.  It would be impossible for any person or company to deny that those are beneficial results of the EU’s decision (unless of you course you were on the losing side).  Whether or not you think those changes were brought about by legal means, and not by the strong-arming of government entities, is a personal matter.  (One of my favorite quotes: “Now they are the sponsors of the European taxpayers”, Ms. Kroes said.)

What happens next depends on Intel’s competitors.  Truth be told, this decision is about 5 years too late for AMD.  The Phenom architecture on the desktop and the Opteron processors in the server/workstation market are simply outmatched by Intel’s Core 2 and Core i7 offerings.  Had this movement been started while AMD’s Athlon products were the king of the hill, we might see dramatic in-roads to the market share Intel has in the microprocessor world.  But now, even with a completely level playing field, it’s hard to make a case for the competition’s products even with lower prices. 

Another interesting debate is whether AMD, much like NVIDIA before, has awoken a sleeping giant.  I think that Intel might, and could afford to, simply slash the prices on their products across the board to the point where AMD’s options just weren’t a factor.  If you could buy an Intel Core i7-965 for $300 or a Core i7-920 for $99, would you even consider anything else?  Is this illegal or just immoral by some standards based on some people’s stance on the “Wal-Mart effect” on pricing?

Overall though, the results seem crystal clear and the majority of tech press and tech organizations agree that this decision by the EC will create a more open marketplace for products and innovation.  At least in Europe.  But to really make a statement on Intel as a company I think the same response will have to be seen in the US – and that decision may be closer to reality than ever before.