AMD Sues Intel for Antitrust Violations
by Timothy Prickett Morgan
On Monday, chip maker Advanced Micro Devices decided it had simultaneously had just about enough and not nearly enough. It did not have enough of the chip business relating to desktops, laptops, and servers, and it had had enough of what it alleges are anticompetitive practices from its rival, Intel. And so late Monday, AMD filed a complaint in U.S. Federal District Court in Delaware that alleges Intel is using its monopoly power to illegally maintain that monopoly.
AMD was clearly emboldened by a ruling by the Japanese Fair Trade Commission in early March that found that Intel's wholly owned subsidiary in Japan, Intel KK, had violated Japan's Antimonopoly Act by offering rebates, discounts, and other incentives to five major Japanese OEMs (three of who are presumed to be Sony, Toshiba, and Fujitsu) in exchange for them selling Intel's processors nearly exclusively. In mid-April, Intel agreed to heed the recommendations of the JFTC--notably that it no longer tie rebates and other marketing incentives to dominant use of Intel chips--but Intel said that it did not agree with the facts the JFTC asserted in its 11-month investigation and, in a cheeky move, neither did it contest its findings. Intel simply wanted to avoid a messy legal battle.
Well, that worked out, didn't it?
Now AMD has filed a complaint with the Delaware court, where both AMD and Intel are technically headquartered even though they are both from Silicon Valley, which outlined how 38 OEMs of PCs, laptops, and servers as well as parts distributors have been convinced by threats and the withholding of rebates and other illegal maneuverings to not adopt AMD's chips. And, by the way, after the Japanese ruling, the European Commission began its own investigation into similar antitrust violations by Intel.
The 48-page complaint filed in the U.S. court, which you can read at www.amd.com/us-en/assets/content_type/DownloadableAssets/AMD-Intel_Full_Complaint.pdf , is an entertaining document if you like looking at the seedy underbelly of the IT market. AMD alleges that Intel has a monopoly over the two dominant operating systems on the planet--Windows and Linux--with about 80 percent of processor unit shipments and 90 percent of the revenue, and that it has violated the federal Sherman Antitrust Act and the Clayton Act as well as the California Business and Professions Code. In essence, AMD is alleging that Intel's pricing, rebating, co-marketing, and co-development deals with major equipment suppliers and parts suppliers forces customers in exclusive or near-exclusive deals with Intel.
Hector Ruiz, AMD's chairman and CEO, held a conference call on Tuesday morning to explain AMD's reasoning. He said AMD has become the true innovator in the X86/X64 chip market, that its products compete effectively on price, technical features, and low power consumption with any products Intel brings to market, yet something has stood in AMD's way as it should have grown much larger given all of these advantages. "We deserve to have a significantly larger share," he proclaimed. "The only thing that is keeping us from achieving those numbers is the illegal, monopolistic practices of our competitor." Ruiz added that it was only the stubbornness of IT executives, who wanted the features in the 64-bit Opteron processors, that forced the OEM suppliers to begin creating Opteron-based platforms. But AMD's share of the desktop and laptop market has not increased accordingly, mainly because PC and laptop buyers are not savvy like server users are, nor are they as hard-pressed for better lower power use and higher performance on X86 code that 64-bit memory extensions and other features of the Opteron line offer.
While it is hard to argue that Intel is the only thing standing in AMD's way to a much larger market share, if what AMD is alleging is correct (and the JFTC ruling seems to indicate that the brass-knuckle practices that AMD is alleging have been used at least sometimes and in some geographies by Intel), it will be even harder for AMD to argue that Intel's practices have economically hurt consumers even as it has managed to maintain its monopoly.
Think about it. Prices for PC, laptop, and server CPU components have come down along the Moore's Law trend line and prices for finished machines more or less keep pace with that trend, too. No lawyer will be able to sensibly argue that Intel is keeping the price of computers artificially high by giving big bags of money to OEMs. (Lawyers will surely be nonsensically arguing this for certain, and to the amusement of many.) Microsoft did the same thing for Windows: it created and preserved a monopoly by adding features and lowering its prices until it got to the point where it had dominant market share; at that point, any relatively small increase in price for any component (in Microsoft's case an operating system, in Intel's, a CPU) results in a lot of profits. Or, in the case of hardware vendors like Intel, just being able to keep prices relatively constant and supplies growing results in profits, since Moore's Law makes chips less expensive to make over time.
AMD can argue that Intel's practices are illegal, but AMD cannot easily argue that consumers have been directly hurt unless it can prove that by having OEMs use more AMD chips (which would presumably be cheaper), the price of a computer would come down a lot more than they already have. This doesn't make a lot of sense. If Intel stopped giving payola to the OEMs--that's what AMD is really alleging, after all--it would have to cut chip prices to compete with Intel, to be sure, but neither AMD nor Intel want to cut prices any more than they have to. AMD's pricing is set to be enticing because of the Intel money and influence among the OEMs. Remove that, and AMD surely would not cut prices so far and would compete on the technical merits of its chips--not on price. Because it cannot get the OEMs to adopt Athlon and Opteron chips across the board and compete head-to-head with Intel, AMD has to compete on price through the select few OEMs who will sell Athlon and Opteron products.
AMD had other complaints as well, saying that Intel has threatened OEMs who contemplated launching products based on AMD chips; established quotas that force retailers to overwhelming stock Intel-based machines and forced OEMs to boycott AMD product launches and promotional deals; and forced technical standards on the computer industry that have the explicit purpose of handicapping AMD's own technology.
Thomas McCoy, AMD's executive vice president of legal affairs and chief administrative officer, said in the conference call yesterday that when the antitrust division of the U.S. Department of Justice sued Microsoft on antitrust claims, the courts were able to get the case to trial in about 18 months, and he was hopeful that this case would be to trial by the end of 2006. AMD did not approach Intel prior to filing its complaint, nor did it contact the Department of Justice to see if it was interested in doing the suit. (Given the very pro-business nature of the Bush Administration compared to the Clinton Administration that sued Microsoft, this is logical.) McCoy said it has contacted 40 parties instructing them to preserve their emails and documents as AMD and Intel move into the discovery phase of the lawsuit.
Intel has not commented on the case as we go to press. It is hard to say if Intel will countersue AMD, alleging that it engages in anticompetitive practices--AMD was at one point trying to give away 1 million free chips to Hewlett-Packard to sell machines based on AMD CPUs, and HP only took 160,000 of them because of its fear of reprisals--but it will almost certainly fight every allegation, tooth-and-nail, in the Delaware courts. It is entirely likely that AMD will file a motion with the court to get an injunction to compel Intel to stop these alleged anticompetitive practices immediately, but in the complaint it has only said it wants injunctive relief as well as a trial by jury. AMD said Intel acted "oppressively and maliciously" and as such it is entitled to punitive as well as compensatory damages as well as Intel footing the bill for its legal fees. Exactly what the tally on those damages might be, AMD did not say.