Europe's Tough Case Against Intel

EU officials may prove the chipmaker's alleged unfair practices affected rival AMD, but they may have a harder time showing they hurt consumers

by Jennifer L. Schenker

It was just over two years ago, at dawn on July 12, 2005, that antitrust investigators from the European Commission and officials from at least four European countries raided the European offices of chipmaking powerhouse Intel (INTC). The officials sought evidence that Intel abused its dominant market share in microprocessors to force customers into exclusive contracts that shut out rival chipmaker Advanced Micro Devices (AMD).

The European officials believe they've built their case. Europe's competition directorate on July 27 issued a "statement of objections" that alleges Intel broke European Union law "with the aim of excluding its main rival, AMD," from the market for the widely used x86 computer chip.

Unfair Tactics Alleged

The landmark findings in a long-standing battle between the world's top two computer chipmakers reflect AMD's allegations that Intel used unfair practices to persuade computer makers to choose its chips. The charges allege three types of antitrust violations: 1) offering substantial rebates to computer makers as long as they agreed to obtain most of their CPU chips from Intel, 2) making payments to induce computer makers "to either delay or cancel the launch" of products that used AMD chips, and 3) providing strategic customers below-cost CPU chips in an attempt to outbid AMD.

Intel, which denies its actions were illegal or anticompetitive, has 10 weeks to reply and then will have the right to an oral hearing. If Intel fails to sway antitrust officials, Neelie Kroes, Europe's tough chief competition cop, can impose fines of up to 10% of the company's total annual sales, which in 2006 was $35.4 billion. "In the short-, medium-, and long-term, we think that the actions of Intel are bad news for competition and consumers," said Ton Van Lierop, a spokesman for the European Commission's competition directorate, at a July 27 press conference.

Customer Impact Disputed

To prevail, the commission must prove not only that Intel's business practices were illegal but also that they hurt consumers. It won't be an open-and-shut case, some analysts argue. "Prices are going down, both companies continue to innovate, and consumers are getting more for their money," says Chris Ingle, a consulting and research director at technology consultancy Interactive Data (IDC). "It is difficult to see where consumers are losing out."

Ashok Kumar, an analyst at CRT Capital Group San Francisco, concurs that the EU will have an uphill battle. "All industries use rebates and incentives to lock in customers," Kumar says. "You could argue that price competition has more than benefited end users." Indeed, Kumar adds, "Intel's market share and pricing power has eroded over the last few years."

Both analysts contrast the charges against Intel with the European Commission's case against Microsoft (MSFT). In that case, the impact on consumers was more clear-cut, Kumar and Ingle say. The commission said Microsoft illegally used Windows, which runs on the majority of the world's PCs, to crush competition from rival makers of server software and media players. In 2004, the European Commission fined Microsoft $685 million for abuse of its dominant market position, ordering Microsoft to sell a version of Windows without Media Player software. The commission later fined Microsoft for failing to fully respect the antitrust ruling. Microsoft has challenged the antitrust decision.

No "Smoking Gun"

Bruce Sewell, Intel's in-house lawyer, denies AMD's allegations and says Intel has not broken any European laws. The discounts were lawful and were not conditioned on promises of exclusivity, he says. "I don't believe there is any kind of smoking gun," Sewell adds.