Federal prosecutors in New York have filed an antitrust lawsuit against Intel, leveling charges that echo those of European regulators, who eventually fined the giant chip maker $1.45 billion earlier this year.
The lawsuit, filed Nov. 4, accuses Intel of leveraging its monopoly position in the global processor market to cajole and threaten systems makers into using Intel processors and staying away from products from rival Advanced Micro Devices.
N.Y. Attorney General Andrew Cuomo’s lawsuit-which accuses Intel of breaking state and federal anti-monopoly laws-alleges that Intel paid billions of dollars to Dell, Hewlett-Packard and IBM to use Intel products at the expense of AMD and threatened those OEMs if they didn’t comply.
“Rather than compete fairly, Intel used bribery and coercion to maintain a stranglehold on the market,” Cuomo said in a statement. “Intel’s actions not only unfairly restricted potential competitors, but also hurt average consumers, who were robbed of better products and lower prices. These illegal tactics must stop and competition must be restored to this vital marketplace.”
The 83-page lawsuit is asking the federal court to ban Intel from continuing such practices, force the chip maker to pay damages to N.Y. residents and government entities, and level penalties against Intel.
The charges are similar to those leveled by investigators with the European Commission-the antitrust arm of the European Commission-who also found that Intel offered rebates and made direct payments to such systems makers as Acer, Dell, HP and NEC to buy all or mostly Intel products for their machines. Intel, which owns about 80 percent of the world’s x86 processor market, also coerced these companies into favoring the chip maker, the EC said.
Intel has appealed the EC’s fine, and officials have been vocal in accusing European investigators of conducting a one-sided investigation and ignoring evidence that is positive to Intel and its case. They also argued that consumers have benefited by Intel’s practices through greater innovation and lower prices.
At the Intel Developer Forum in September, Intel CEO Paul Otellini reiterated that argument and denied allegations of conditional rebates or exclusive deals.
“I think they have consistently ignored information that would paint an entirely different picture around the memos” from OEMs that the EC unveiled Sept. 21, Otellini said at IDF.
Regarding the N.Y. case, Intel spokesman Tom Beermann said the company disagrees with Cuomo’s decision to file the lawsuit, particularly given that Intel and AMD are locked in court proceedings over a lawsuit filed by AMD in Delaware that essentially addresses the same allegations and similar evidence.
Both Intel and AMD have spent hundreds of millions of dollars, filed hundreds of pages of evidence and conducted 2,200 hours of depositions in connection with the AMD lawsuit. It doesn’t benefit either company or consumers to have another lawsuit filed to go over the same issues, Beermann said.
“The same tired line of thinking that AMD has been shopping to regulators around the world has been picked up by the Attorney General’s Office in New York,” he said.
Intel Rebates Equal Payoffs
The allegations from Cuomo’s office, which follow a 22-month investigation, in many ways repeat what the EC found. His office said that rebates were nothing more than payoffs that had no legitimate business purpose. It also accused the chip maker of covering up its anti-competitive behavior.
The AG’s office noted that the money Intel paid out to OEMs was so much that at times it could make the difference between a profit and loss for a vendor or a vendor’s business unit, and at times eclipsed the company’s quarterly net income.
AMD officials applauded Cuomo’s actions. In a statement, Tom McCoy, executive vice president of legal, corporate and public affairs, said the lawsuit “details explicit evidence of Intel’s harm to U.S. consumers and computer manufacturers. Stopping that illegal harm will serve the settled purpose of the American antitrust laws: ensuring that innovation is unconstrained and competition is free to serve consumers.”
Citing internal documents and e-mails from Intel and OEMs, Cuomo’s office says that in 2006, Intel paid Dell almost $2 billion in rebates. Intel also paid HP hundreds of millions of dollars in rebates to cap sales of AMD-based PCs to 5 percent of its overall commercial desktop business, and paid IBM $130 million not to launch an AMD-based server.
From 2001 to 2006, Intel also gave Dell a privileged status in comparison with other PC makers for not marketing AMD-based products and threatened to pull out of joint projects with IBM and HP if they marketed AMD-based systems.
Among the documents cited by Cuomo’s office was a November 2005 e-mail conversation between Dell CEO Michael Dell and Otellini, in which Dell said: “We have lost the performance leadership and it’s seriously impacting our business in several areas.”
Otellini replied: “There is nothing new here. Our product roadmap is what it is. It is improving rapidly daily. It will deliver increasingly leadership products. … Additionally, we are transferring over $1B [billion] per year to Dell for meet comp efforts. This was judged by your team to be more than sufficient to compensate for the competitive issues.”
Officials with the CCIA (Computer and Communications Industry Association), which has been vocal against Intel and other technology vendors they believe conduct unfair business practices, said the N.Y. lawsuit underscores the chip company’s anti-competitive behavior.
“Intel certainly had other clues, more recently including the findings against them by antitrust officials in Japan, Korea and the EU,” CCIA President and CEO Ed Black said in a statement. “We hope this action by U.S. authorities convinces Intel to change its business strategy-not just its PR strategy.”
Black said Intel’s legal strategy of denial appears to be failing, and he urged officials with the chip maker to admit their misconduct and change their business practices.
The N.Y. suit is the latest example of regulators here and abroad taking a deep interest in antitrust issues in the tech industry. An investigation by the EC is delaying the completion of Oracle’s $7.4 billion acquisition of Sun Microsystems, with investigators concerned over Oracle’s possible ownership of MySQL.
In addition, U.S. investigators reportedly are taking a look at IBM’s dominance in the mainframe space.
Clay Ryder, an analyst with the Sageza Group, said regulatory attention is nothing new to Intel.
“Intel’s been under scrutiny so many times in the past by so many regulatory agencies, and so far has pretty much emerged unscathed,” Ryder said. “Maybe a slap on the wrist or two by a parochial nun, but nothing too severe.”
Whether that happens again remains to be seen, he said. The biggest risk to Intel is that having to change its practices of tightly controlling how much product it sells to whom could impact the bottom line.
“If you can’t cherry-pick how [the product] is sold, it’s going to hurt revenues,” Ryder said.
In addition, Intel and other top-tier vendors may just have to get used to closer scrutiny from regulators, although while there may be questions around the chip maker’s practices, no one really wants Intel to go away, he said.
“They want [Intel] to play better at the playground, but they don’t want to steal their lunch money,” Ryder said.