INTEL: THE FEDS ARE LOADED FOR BEARThis time, the trustbusters may have the right ammo
It's ironic. In July, Federal Trade Commission Chairman Robert Pitofsky, three commissioners, and several staffers attended a workshop on antitrust enforcement and the high-technology industry at Stanford University. The keynote speaker: None other than Intel Corp. Chairman Andrew S. Grove.
Now, these same trustbusters are taking their tech insights into Grove's very empire. On Sept. 24, the company disclosed that the agency has launched a broad investigation into whether the chip giant is using its dominance to hobble competitors, in violation of antitrust laws.
FREQUENT FLIERS. While Wall Street barely mustered a yawn over news of the inquiry--the stock hardly budged, moving from 95 5/8 on Sept. 24 to 93 1/4 on Oct. 1--government and industry insiders say this probe packs firepower. Indeed, over the past few years, FTC officials and employees have logged thousands of air miles between Washington and Silicon Valley to bone up on gigabytes, Ethernets, and other high-tech staples. That could signal trouble for Santa Clara-based Intel. ''People who think this is a snore are taking considerable risk,'' says Kevin A. Arquit, a lawyer who was a former director of the FTC's Bureau of Competition.
Unlike the agency's last inquiry into Intel, this one covers every high-tech nuance. The earlier, two-year probe was a narrower investigation that ended with no action in 1993. This time, the government has issued sweeping subpoenas to a host of Intel competitors and customers, including Advanced Micro Devices, Digital Equipment, and Hewlett-Packard. What's more, it has demanded that companies disclose any communication they have with Intel about the probe--a move designed to shake loose witnesses who last time feared that Intel would retaliate against them for voluntarily speaking with investigators. ''Companies didn't come forward last time because they weren't compelled to,'' says an industry executive. ''The FTC comprehends that problem and is trying to address it.''
And unlike the last go-around, the agency's most senior officials have been involved from the start. The FTC unanimously approved moving ahead with the investigation on Sept. 11. But that followed at least six months of amassing evidence about Intel's business practices. ''I was quite surprised by how much work they'd done,'' says an industry executive who met with regulators this summer. ''They had all the senior people at the table--more than 12, including [Bureau of Competition Director] Bill Baer.''
The FTC won't say what it's focusing on in the Intel probe. But insiders say it hopes to use standard antitrust theories to determine whether Intel is illegally using its muscle to thwart rivals. FTC documents do provide some glimpses into where trustbusters are headed. For one, regulators want to know whether Intel tries to keep PC makers from buying rivals' products by threatening to withhold allotments of its popular Pentium chips. Another question: Does Intel hold back technical information from companies that don't buy exclusively from Intel--data they need to develop compatible products.
The FTC also is examining whether Intel punishes companies that buy competitor's goods by being stingy with the rich marketing support it feeds to its most loyal customers. Intel spent more than $1.4 billion last year subsidizing its customers' advertising, via the Intel Inside cooperative advertising campaign.
Intel denies any wrongdoing. A spokesman says it is cooperating with regulators and is confident that, like before, it will be exonerated. ''We are successful, but we got there following the rules,'' says the spokesman.
Intel has reached a remarkable position. It owns 85% of the microprocessor market and does a masterful job of keeping that. Now, with clones beginning to take share in the Pentium market, it is pushing PC makers and customers to trade up to the Pentium II chip and a new PC architecture, which cloners will have trouble duplicating for years. That, analysts say, could drive profits to $6.5 billion this year, up 26% over 1996.
''AN A-TEAM.'' It's this astonishing market position that has drawn the FTC's attention. Also, the agency is alarmed by Intel's move into adjacent markets--supplying a variety of chips that also go into computers. In a separate but related inquiry, the FTC is reviewing Intel's proposed $420 million acquisition of Chips & Technologies Inc. At issue: Does the purchase of the San Jose-based graphics chipmaker give Intel control of a $1.4 billion market in which it now doesn't play? By owning Chips, Intel could embed its subsidiary's technology into Pentium microprocessors--squeezing out smaller outfits specializing in graphics.
The FTC would like to strengthen its weak reputation in Silicon Valley. In addition to passing on its first probe into Intel, the FTC deadlocked on whether to sue Microsoft Corp. in 1993. A subsequent inquiry by the Justice Dept. led to a settlement with Microsoft that, critics say, was little more than a slap on the wrist.
Has the FTC learned enough to bring a case that will stick? ''When you combine substantive knowledge of antitrust law with substantive knowledge of the industry, you have an A-team,'' says Christine A. Varney, a former FTC commissioner. Now, Silicon Valley will decide if the FTC can make the grade.
By Linda Himelstein and Andy Reinhardt in San Mateo, Calif., with Susan Garland in Washington, D.C.
Updated Oct. 2, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.