Case Study 4.1: Intel's AMD's lawsuit because he no longer felt the "time and money Rebates and Other Ways [spent fighting it] makes sense." AMD's lawsuit accused Intel of being a monopoly and of using its monopoly power to unfairly It "Helped" Customers keep computer companies from buying AMD's microprocessors. With about 70 percent of the market, Intel Corp. is the world's larg- On November 12, 2009, Intel Corp. gave Advanced Micro Devices est manufacturer of PC microprocessors-also called computer (AMD) $1.25 billion to settle a lawsuit AMD filed against it in 2005. chips, microchips, or processors-tiny electronic devices that Intel's CEO Paul Otellini said he agreed to pay $1.25 billion to settle serve as the "brain" of a PC and carries out its basic operations. Asthe world's second-largest maker of PC microprocessors, AMD is barred from making it. With luck, Intel might eventually have the Intel's only real competitor, although it holds only about 20 percent entire PC processor market to itself. of the PC processor market. It is difficult for other companies to get Intel called its new PC processor "Itanium," and it was faster into the business of making PC microprocessors because of sev- and more powerful than all previous generations of PC proces- eral "barriers to entry," which are as follows: sors. However, there was a problem. Since the Itanium processor 1. Intel and AMD hold the patents for making the kind of micro- did not use x86 technology, all software designed to run on cur- rent and older x86 processors would not work on the new Itanium processors almost all PCs use. unless the user first ran an "emulation" program that, in effect, 2. It costs several billion dollars to build facilities for making forced Itanium to imitate an x86 processor. However, the emula- microprocessors tion program slowed down the programs designed for x86 pro- 3. Intel and AMD are so big and experienced that they can now cessors, sometimes to a frustrating crawl. Thus, when a consumer make microprocessors for a lot less than a new company or business bought a new computer with the Itanium processor could, so if a new company tried to enter the market, its inside, its current software and data would not work well on the prices would likely not be competitive with Intel's or AMD's. new computer. This issue was a major deterrent for buyers. AMD was not the only one that had accused Intel of using AMD had also developed a more advanced generation of monopoly power to stifle competition. On May 5, 2009, the Euro- PC processors during the 1990s. However, AMD decided to pean Commission fined Intel a record $1.5 billion and said the stick with the x86 technology so that its new processor could run company had used its monopoly power to unfairly block AMD software designed for x86 processors without using an emulation from the market.2 On November 4, 2009, New York Attorney program. AMD called its new processor "Athlon." Since Athlon General Andrew Cuomo sued Intel for harming New York's con- was not slowed down by an emulation program when it ran x86 sumers by using its monopoly power to keep computer makers programs, all x86 programs ran extremely fast and smoothly on from buying better AMD microprocessors. In June 2008, South computers equipped with AMD's new processor. AMD's Athlon Korea's Fair Trade Commission ruled that Intel had used its could run x86 programs much faster and better than Intel's Ita- monopoly power in violation of its antitrust laws. In 2005, Japan's nium, and Athlon also used less electricity and sold for less than Fair Trade Commission ruled that Intel had violated Japanese Itanium. Intel's worse nightmare had come true. antitrust laws by paying companies to buy all or almost all of their processors exclusively from Intel. Actions and Reactions When AMD and Intel marketed their new microprocessors in A Strategic Mistake and a New Product 1999, reviewers and users raved about AMD's fast and low- Many of the activities Intel was being blamed for originated in a priced Athlon and heaped scorn on Intel's clunky Itanium. PC strategic mistake the company made in the late 1990s, when it manufacturers flocked to put AMD's processor into their new invested hundreds of millions of dollars developing a new type of computers, and AMD's market share grew from about 9 percent microprocessor that would not use "x86 technology." x86 tech- to about 25 percent of the PC processor market, while Intel's fell nology consists of certain instructions that are built into "x86 from 90 percent to 74 percent. microprocessors." All microprocessors must contain instructions However, in 2003 and 2004, AMD's sales hit a wall. Com- that allow them to "read" and run software programs like games, puter manufacturers suddenly refused to buy AMD's processors. word processors, or web browsers. Because all x86 micropro- In 2002, Sony had put AMD's Athlon into 23 percent of its com- cessors contain the same instructions, the newest x86 micro- puters; by 2004, it had stopped using Athlon completely. NEC processors can generally read and use the same data and went from using Athlon in 84 percent of its desktop computers to programs that ran on older x86 microprocessors. This means using it in virtually none. Toshiba went from using it in 15 percent that when a customer who has been using a computer with an of its computers in 2000 to using it in none by 2001.3 Altogether, x86 processor buys a new computer with a more advanced x86 AMD's share of the Japanese PC processor market fell from microprocessor, he or she does not have to throw away all his or 25 percent in 2002 to 9 percent in 2004. her old programs and data because they will still work on the What had happened? Tom Mccoy, AMD's executive vice new computer. president for legal affairs, claimed in an article that the drop in This ability of each new generation of x86 microprocessors orders for Athlon chips was "a matter of sheer exercise of to run most of the programs that previous generations of x86 monopoly power" by Intel.4 Mccoy claimed that Intel paid the microprocessors could run is a major advantage for both con- Japanese companies-Sony, NEC, and Toshiba-millions of sumers and businesses alike. However, from Intel's perspective, dollars in "rebates" provided that they stopped buying AMD's x86 microprocessors have a major disadvantage: AMD can microprocessors and used only Intel microprocessors inside legally make x86 microprocessors, so Intel is forced to compete their computers. However, Mccoy claimed, these payments with AMD. Intel's biggest nightmare was that AMD someday were not really rebates. A true rebate is a payment based on the might come up with an x86 microprocessor that was faster and number of products a customer purchases, and so it is in effect more powerful than any of Intel's and then take over the market. a discount that is paid after the customer buys the product So when it invested in a new generation of microprocessors unlike a regular discount, which is subtracted from the price in the 1990s, Intel decided to develop and patent a microproces before the purchase). However, the payments Intel was giving sor that did not use x86 technology. Since Intel alone would hold computer makers, Mccoy asserted, were not related to the the patent for this new non-x86 processor, AMD would be legally number of processors they bought. Instead, Intel handed overthese payments when a company agreed to stop buying from companies that make the chips, in this case Intel and AMD, that AMD, regardless of the number of processors the company sub- are each supposed to provide compilers that will allow programs sequently purchased to run on both their processors. The FTC said that Intel changed Moreover, Mccoy wrote, Intel threatened companies by its compilers in 2003 so that programs compiled with Intel's com- warning them that if they did not stop using AMD's microproces pilers would run fine on Intel processors, but would run slowly or sors, Intel might stop supplying them with any microprocessors poorly on AMD's. Without their knowledge, when software com- at all. The threat was a powerful one because even if they used panies used Intel's compilers to process one of their programs, AMD's microprocessors on some of their top-quality computers, Intel's compiler secretly inserted bugs into the program that every computer manufacturer still depended on Intel for the slowed it down when it ran on an AMD processor, but not on an microprocessors in all their other computers. Because of its Intel processor. Customers and reviewers blamed AMD's proces- small size, AMD could not provide the full range of microproces sor when their new programs did not run well on a computer that sors that the larger companies needed. had an AMD chip inside. 8 Convinced that Intel was using unfair and illegal means to The FTC also claimed that Intel had provided software com- block it out of the market, AMD sued Intel on June 27, 2005. panies with "libraries" of software code that were also designed Intel's general legal counsel, Bruce Sewell, responded to AMD's to trip up programs when they ran on AMD microchips. The soft- claims by arguing that the reason computer makers stopped ware code the FTC was talking about were short bits of software buying AMD's microchips was because once they started using that carry out certain frequently used, but routine operations on them in large numbers and running many different programs x-86 processors. Software engineers insert these short bits of on them, they found AMD chips did not run the programs as fast code into their programs instead of writing them out each time as they had first appeared to. "When AMD has good parts, they they need them. Intel provided software engineers with "libraries" do fine," said Sewell, "When AMD has lousy parts, they don't do consisting of dozens of these bits of code. However, the FTC so well. That's what a competitive market is all about." claimed, Intel changed the software codes in its library so they Sewell also defended Intel's rebates. If it is not wrong, he would not work well on AMD processors. Consumers and said, for a small company to build loyal customers by giving reviewers again blamed AMD's chips when a program contain- them more rebates when they agree to use your products exclu ing Intel's codes did not run well on a computer that used an sively, why should it be wrong for a larger company to do the AMD microchips.9 same? Moreover, rebates in effect lowered the price of its com- The FTC also said that Intel had paid computer makers to puter chips, and what was wrong with that? Ultimately, didn't boycott AMD's processors by giving them what Intel called that benefit the consumer? Why was it so important to relate "rebates." However, these payments required only that a com- rebates to the number of units a customer buys? If Intel gave pany agree not to buy AMD processors and were unrelated to the arger rebates to those companies that agreed to use its prod- amount of Intel processors the company bought. Computer ucts exclusively, and smaller rebates to those companies that manufacturer Dell, Inc., is a good example of how Intel paid com- would not make the same commitment, what was wrong with puter makers to boycott AMD. Intel had begun making significant that? Wasn't a company's agreement to use Intel as its exclusive quarterly "rebates" to computer manufacturer Dell, Inc. in 2001, supplier valuable to Intel, and so shouldn't Intel be allowed to and Dell at that time stopped using AMD's processors, even reward that company with larger rebates than the discounts it though many of its customers said they wanted computers with offered other companies? AMD's processor. Because the AMD lawsuit was complicated and required gathering and reviewing a great deal of documentary evidence, it Dell and Intel had still not gone to trial by the end of 2009. By then, however, AMD's allegations had convinced several foreign governments- Dell was founded in 1984 by its current CEO, Michael Dell. A including the European Union, South Korea, and Japan-that student at the University of Texas at Austin at the time, Michael they should investigate Intel, and their investigations ended with Dell began by selling computers out of his dorm room. By 2001, substantial fines of Intel for violating antitrust laws. However, the Dell had become the largest PC manufacturer in the world and United States did very little until, toward the end of 2009, the FTC held 13 percent of the worldwide PC market. The company fin- sued Intel for "illegal monopolization," "unfair methods of compe- ished 2001 with a net income of $2.24 billion. tition," and "deceptive acts and practices in commerce."? In 2002, according to a Dell memo, Dell's chief operating officer (COO) met with several Intel officials. Before the meeting, The Federal Trade Commission Lawsuit Dell's lead negotiator had explained what he expected Intel's offi- cials would say to Dell's COO: "[without being blatant, [the Intel The FTC said in its suit that its investigations had discovered what representative] will make it clear that Dell won't get more [pay- Intel's legal counsel Bruce Sewell had suggested: some software ments] if we do [use] AMD [processors]. We'll get less, and programs ran slowly on AMD's processors. The reason was not someone else will get ours." During the meeting, Intel officials because AMD's processors were inherently slow. They had found said they were willing to do "whatever it takes" to get Dell not to that Intel had changed the programs sold by software companies use any AMD processors in its computers. According to the so that their programs would not work well on computers using memo, Intel agreed at the meeting that its quarterly payments to AMD's computer chips. All software companies use "compilers" Dell "should increase from the $70 million this quarter to $100 to convert their programs into a form that will run on particular million."1 However, Dell had to continue to refuse to use AMD's kinds of computer chips. The compilers are provided by the processors. 12It was not difficult for Intel to pay the hundreds of millions of microprocessors. In April of that year, Michael Dell sent an e-mail dollars it was giving Dell. Intel had unusually high profit margins to his top executives, which said: "We have been looking at the of 50 percent that allowed it to accumulate $10.3 billion of cash situation for a long time, and have decided to introduce a broad at the end of 2001, and by the end of 2005 it held $14.8 billion range of AMD based systems into our product line to provide the of cash. In a February 2004 e-mail, Michael Dell remarked on choice our customers are asking for."21 In the second quarter of Intel's profitability: "[Intel's] profits in the 2nd half of 2001 were the year, perhaps testing Intel's reaction, Dell announced a single $1.397 billion on revenues of $13.528 billion. In the 2nd half of new line of high-end computers with AMD chips inside. That quar- 2003 they were $4.885 billion on revenues of $16.574 billion. In ter its payments from Intel dropped to $554 million. The next quar- other words their sales went up 22.5% and their profits went up ter Dell announced additional lines of PCs with AMD processors 350%! Or said another way, their revenues went up $3.046 bil- inside and Intel paid it only $200 million. lion and their profits went up $3,488 billion! Not even Microsoft Intel's board chairman told Intel's CEO that the company can do that."13 should respond harshly to Dell's actions: "I think you should reply Although many smaller companies started using AMD's in kind. Not a time for weakness on our part. Stop writing checks chips, Dell feared retaliation from Intel if it tried to do the same. In immediately and put them back on list prices li.e., on prices with an e-mail, a Dell executive noted that if "Dell joins the AMD exo- no discounts or rebates] asap."22 The next day, Intel CEO Otellini dus," the consequences would be costly for Dell. He noted that instructed his people as follows: "[We should be [prepared to Intel's CEO and chairman "are prepared for jihad if Dell joins the remove all [payments] and related programs. Post haste . . . then AMD exodus. We [will] get ZERO MCP [payments] for at least one we ought to enter negotiations."23 quarter while Intel 'investigates the details"there's no legal/moral/ Now subject to Intel's punishment, Dell received no more threatening means for us to apply and avoid this."14 "rebates." In 2007, Dell's net income fell to $2.58 billion, down Although Dell complained that its refusal to use AMD pro- from $3.57 billion in 2006. The company recovered a bit in 2008, cessors was hurting its sales, Intel kept Dell loyal throughout a year in which it posted a net income of $2.95 billion, but then it 2004 by increasing its quarterly payments to $300 million per began a downward slide to $2.48 billion in 2009 and $1.43 billion quarter, an amount equal to almost a third of Dell's quarterly net n 2010. Between 2001 and 2006, Intel had pumped an esti- income and apparently enough to compensate Dell for any mated total of about $6 billion into Dell's income figures. Because sales declines. Dell had not reported that most of its profits during those years Dell continued to lose market share, and CEO Michael Dell were cash it was receiving from Intel, the U.S. Securities and became increasingly frustrated. On November 4, 2005, Intel's Exchange Commission (SEC) accused Dell and its officers of CEO, Paul Otellini, wrote an e-mail saying that he had just deceiving investors, who had been told by the company that its received "one of the most emotional calls I have ever, ever had high profits were due to its ultra-efficient management of its sup- with [Michael Dell]."15 Otellini noted: ply chain, its direct-sales strategy, its cost reduction initiatives, and the declining costs of computer parts.24 Dell had become [Michael Dell] opened by saying "I am tired of losing business" one of the most admired companies in America because it was . . . he repeated it 3-4 times. I said nothing and waited. [He said] falsely assumed that its strong profits were due to the company's he has been traveling around the USA. He feels they are losing all management skills. the high margin business to AMD-based sku's [computers] . . . "Dell is no longer seen as a thought leader."16 The Federal Trade Commission Settles A week later, Michael Dell sent an e-mail to Otellini complain- Intel pressured other big companies, like HP and IBM, into refus- ing that "We have lost the performance leadership and it's seri- ing to use AMD processors. Unlike Dell, HP and IBM did not ously impacting our business in several areas."17 Otellini agree to completely boycott AMD's processors. In HP's case, responded to Dell's complaints by pointing out how much Intel Intel got HP to agree to limit its purchases of AMD processors to was paying Dell: "[We are [now] transferring over $1 billion per percent or less, and Intel agreed to give HP a "rebate" of year to Dell for meet comp efforts. This was judged by your team $130 million, spread out over a year.25 IBM agreed to only use to be more than sufficient to compensate for the competitive AMD processors in its "High Performance Computers."26 issues."18 On November 25, Michael Dell wrote in an e-mail to The FTC's lawsuit against Intel never made it to court. On Otellini: "None of the current benchmarks and reviews say that Wednesday, August 4, 2010, the FTC announced that without Intel based systems are better than AMD. We are losing the admitting guilt, Intel had agreed to settle the FTC's antitrust law- hearts, minds and wallets of our best customers."19 suit. In a press release, the FTC wrote that under the settlement, In spite of realizing that boycotting AMD's processors was Intel would be prohibited from the following: hurting its revenues, Dell remained so loyal to Intel that in Febru ary 2006, Otellini joked that Dell's CEO was "[the best friend conditioning benefits to computer makers in exchange for their money can buy."20 Intel continued to increase its payments to Dell promise to buy chips from Intel exclusively or to refuse to buy through 2005 and 2006 until they reached a high of $805 million chips from others; and retaliating against computer makers if a quarter in early 2006, an amount equal to 104 percent of Dell's they do business with non-Intel suppliers by withholding bene- net income per quarter that year. fits from them."27 In 2006, Dell finally broke away from its agreement to not use In addition, Intel was prohibited from using its compilers or its AMD processors. That year, it purchased Alienware, a computer libraries of software code to inhibit the ability of programs to run on manufacturer that made high-end gaming computers with AMD competitors' microprocessors. Some observers argued that theEthics in the Marketplace 193 restrictions of the settlement no longer mattered since Intel had 4. Ibid. once again taken the lead in the x86 processor market and AMD 5. Ibid. was again a trailing competitor. In the first quarter of 2006, accord 6. Ibid. ing to CPU Benchmarks, AMD's market share had climbed as high 7. David Goldman, "FTC Sues Intel over Chip Dominance," as 48 percent and Intel's had fallen to 51 percent. However, AMD's CNNMoney.com, December 16, 2009. share dropped after that and by 2011, Intel had 71 percent of the 8. In the Matter of Intel Corporation, a Corporation, The United x86 microprocessor market, while AMD was down to 25 percent. States of America Before the Federal Trade Commission, Docket No. 9341, Complaint, December 16, 2009, paras. 56-61. WRITING PROMPT 9. Ibid., paras. 62-71. Market Perspective on Intel 10. State of New York, by Attorney General Andrew W. M. Cuomo, Plaintiff, vs. Intel Corporation, a Delaware Corporation, Defen- 1. In your judgment, is Intel a monopoly? Did Intel use monopoly- dant, Complaint in the United States District Court for the like power; in other words, did Intel achieve its objectives by relying on power that it had due to its control of a large portion District of Delaware, November 3, 2009, para. 90, http://www. of the market? Explain your answers. ag.ny.gov/sites/default/files/pdfs/bureaus/antitrust/litigation/ 2. In your judgment, were Intel's rebates ethical or unethical? 09-11-03%20Complaint.pdf. Explain your answer. 11. Roger Parloff, "Intel Settlement: The Power of Emails," Fortune, 3. Was it unethical for Intel to use its compilers and its "libraries" November 13, 2009 of software code in the way it did, or were its actions permis- 12. Ibid. sible in a free market economy? Explain your answer. 13. State of New York, para. 27. 4. Were Intel's rebates unethical? Explain why or why not. 14. Ibid., para. 105. 5. In your view, did Intel violate either of the two key sections of 15. Ibid., para. 135. the Sherman Antitrust Act? Explain. 16. Ibid. 17. Ibid., para. 136. The response entered here will appear in the performance 18. Ibid dashboard and can be viewed by your instructor. . Ibid., para. 137. 20. Ibid., para. 139. Submit 21. Ibid., para. 141. 22. Ibid., para. 142. Case Notes 23. Ibid., para. 143. 24. Justin Scheck and Kara Scannell, "SEC: Intel Cash Inflated 1. David Goldman, "Intel and AMD Reach $1.25B Settlement," Dell," Wall Street Journal, July 23, 2010. CNNMoney.com, November 12, 2009 25. In the Matter of Intel Corporation, para. 170. 2. Ibid 26. Ibid., para. 211. 3. Roger Parloff, "Intel's Worst Nightmare: Dwindling Market 27. Federal Trade Commission, "FTC Settles Charges of Anticom- Share Isn't the No. 1 Chipmaker's only Problem, says Fortune's petitive Conduct against Intel," news release, August 4, 2010, Roger Parloff. It needs to Mount a Fierce Defense to AMD's https://www.ftc.govews-events/press-releases/2010/08/ftc- Epic Antitrust Lawsuit," Fortune, November 16, 2006. settles-charges-anticompetitive-conduct-against-intel