Suit Puts Spotlight on Dell-Intel Relationship

Faced with a growing threat from a new microprocessor design by rival Advanced Micro Devices, Intel used its size and deep pockets to pressure systems makers into a difficult choice of meeting customer demand or taking Intel's money, according to the lawsuit filed against the chip maker by federal authorities in New York.

And no OEM benefited from the Intel money more than Dell, which received more than $6 billion between February 2002 and January 2007, states the lawsuit, filed by N.Y. Attorney General Andrew Cuomo.

The 87-page antitrust lawsuit, filed Nov. 4, accuses Intel of using a combination of financial incentives and coercion to convince server and PC makers like Acer, Dell, IBM and Hewlett-Packard to limit their purchases of AMD's processors in favor of Intel's chips.

The suit is the latest legal challenge for Intel. Already regulators in Korea and Japan have ruled against Intel for anticompetitive practices, and earlier in 2009 the European Union fined Intel $1.45 billion, a fine that the chip maker is appealing.

In addition, Intel and AMD are locked in a private lawsuit in Delaware that is due to go to trial within the next six months, and the Federal Trade Commission is looking into Intel's business practices.

Intel officials are defending the company by saying the rebates paid to OEMs were legitimate measures. A spokesperson also questioned why Cuomo's office would file the lawsuit when it goes over issues and evidence already being presented in the AMD court proceedings and to other regulators. The spokesperson also pointed out that during the past decade processor innovation has flourished while system prices have dropped.

The suit has stirred a mixed reaction. The Computer & Communications Industry Association, which has been critical of such companies as Intel and IBM for what it says are anticompetitive practices, applauded the move. Others, such as the Competitive Enterprise Institute, a Washington think tank, called the lawsuit a "baseless attack against Intel" that will lead to higher prices and stifled innovation.

According to the New York complaint, Intel officials became nervous about AMD's threat to its dominant position in the x86 chip market earlier this decade, when AMD was developing what would become its Opteron server chips and Athlon PC processors.

While Intel and HP were working on the new Itanium microarchitecture to address 64-bit workloads, AMD was creating an x86-based chip design that not only was backward-compatible with 32-bit applications, but also featured an on-chip memory controller and greater energy efficiency.

Intel officials saw that it would take a few years for Intel to catch up, and turned to the company's monopoly position in the market to thwart the threat from AMD, according to the complaint.

Referring to numerous e-mails from Intel, HP, Dell and IBM, the lawsuit lays out a scenario in which Intel executives explicitly conveyed to  the OEMs that sticking with Intel meant an influx of money from the chip maker and that buying too many AMD chips would lead to retribution.

Though HP and IBM both adopted AMD chips, their use was influenced by Intel's demands, according to the lawsuit. IBM killed an AMD server product in return for $130 million from Intel, and HP agreed to cap sales of AMD-based PCs at 5 percent of its overall system sales.

Much of this came at a time when customers were asking vendors for AMD-based systems, the suit states, putting the OEMs in a difficult position. In 2005, as demand from customers grew, an IBM executive reportedly said in an e-mail that Intel's negative reaction put IBM in a quandary.

"I understand the point about the accounts wanting a full AMD portfolio," the executive wrote. "The question is, can we afford to accept the wrath of Intel…? It is a very hard question to deal with."

That question seemed most difficult for Dell, which waited until 2006 before adopting AMD technology. Up until then, Dell executives were vocal in their Intel-only stance,  saying they were evaluating all technologies but had not heard enough demand from customers to make the change.

According to the New York suit, that hard-line stance netted Dell billions of dollars from Intel, even as internal documents indicate that Dell officials saw AMD's technology as superior to Intel's.

"Each time Dell considered altering the arrangement and introducing an AMD line, however, Intel responded with both carrot and stick—increased payments accompanied by threats of retaliation—which kept the relationship in place," the suit states. "Moreover, as Intel's payments increased, Dell became more and more dependent on Intel for its reported profits, further locking in their agreement. … In pure dollar terms, Dell was far and away the leader in receiving Intel's largesse."

Most of the money was reportedly given to Dell under a program first called MOAP—which stood for "Mother of all Programs"—then MCP, which stood for "Meet Competition Payments." Under these programs, the amount of money paid would be set, then paperwork created to legitimize the payments as rebates, prosecutors allege. Dell also was given preferential treatment in shipments of chips.

For two fiscal quarters in 2006, the payments from Intel exceeded the profits Dell generated from its own business, according to the lawsuit, and in 2004 Dell requested payments of $100 million and, later, $400 million from Intel.

However, as early as 2004, when HP announced it was joining IBM in selling AMD-based servers, Dell executives worried that sticking exclusively with Intel would enable HP and IBM to squeeze Dell on price with the AMD servers and on performance with their RISC- and Itanium-based enterprise systems, according to the suit. Those worries continued until 2006.

In an e-mail to Intel CEO Paul Otellini in 2005, Dell CEO Michael Dell reportedly wrote that because of the Intel-only policy, "we have lost the performance leadership and it's seriously impacting our business in several areas."

Customers were increasingly strident in their desire for AMD-based products from Dell, and some, like Rackspace Managed Hosting, were vocal and public with their demands. By the time Dell announced in May 2006 that it was preparing AMD-based servers, Rackspace already had moved over to HP for its AMD servers.

According to the lawsuit, Intel retaliated by cutting the amount of money it was sending to Dell. From February through April 2006, Intel had paid Dell $800 million in rebates. From November 2006 to January 2007, that figure reportedly dropped to less than $200 million.