Semiconductors

Intel Gets Slammed in Brussels


Justice was severe, if not exactly swift. After an investigation that dragged on nearly nine years, on May 13 the powerful Competition Directorate of the European Commission slapped California-based semiconductor giant Intel (INTC) with the largest fine ever levied in an EU antitrust case and placed significant, but as yet vague, restrictions on Intel's future use of rebates and other sales incentives to spur sales of its market-leading microprocessors in Europe.

The Commission's €1.06 billion ($1.45 billion) fine amounts to 3.8% of Intel's $37.6 billion in 2008 revenues (it could have been as high as 10%) and about 2.4% of Intel's estimated x86 PC processor sales in Europe during the period covered by the case, from 2002 to 2007.

The reverberations of the closely watched case will be felt from Warsaw to Washington. For the second time in five years, the EU has landed a major antitrust blow against an American tech giant. In 2004, European competition authorities declared Microsoft (MSFT) an abusive monopolist and fined it more than $650 million. The agency also is currently investigating the licensing practices of mobile phone chipmaker Qualcomm (QCOM) and is keeping a close eye on Google (GOOG).

While some Americans object to what they see as overreaching by bureaucrats in Brussels, the Europeans say their tough tactics have defended consumer interests at a time when U.S. antitrust prosecutions ground to a halt under the Bush Administration. But with signs now emanating from the Obama Administration that the government may become more proactive in antitrust, the Intel decision comes at a decisive moment.

The Europeans could provide fodder for an inquiry into Intel's business practices launched by the Federal Trade Commission in 2008. On May 13, the EU's steely competition commissioner, Neelie Kroes, described bluntly that her agency's long investigation had "uncovered serious wrongdoing in the x86 processor market," including proof that Intel had given "wholly or partially hidden" rebates to computer makers on the condition that they buy most or all of their x86 processors from Intel and not its smaller rival, Advanced Micro Devices (AMD).

"Millions and Millions" Harmed

The Commission also found that Intel had made direct payments to some PC makers to delay or cancel entirely the launch of AMD-based computers, and had paid German PC retailer Media Markt to stock only Intel-based PCs—a claim that Intel vehemently denies.

"We find that Intel abused its dominant position in the market for x86 computer processing units," Kroes said. "Intel used illegal tactics to exclude its primary competitor…[it] did not compete fairly." The result, she asserted without offering specific proof, was that Intel's actions harmed "millions and millions" of European consumers, primarily by denying them greater choice in PC processor suppliers.

Intel's response was immediate. "Intel takes strong exception to this decision," said Chief Executive Paul Otellini in a statement released minutes after the EU announcement. "We believe the decision is wrong and ignores the reality of a highly competitive microprocessor marketplace—characterized by constant innovation, improved product performance, and lower prices. There has been absolutely zero harm to consumers. Intel will appeal."

In a Brussels press conference 90 minutes after the Commission's decision was announced, Intel chief counsel Bruce Sewell categorically denied the allegations made in the case—especially the contention that Intel had unlawfully used discounts to divert business away from AMD. "Intel has never required a customer to agree not to buy from AMD in order to obtain a discount, nor raised a customer's prices when it decided to buy from AMD," he said. Sewell also took issue with Europe's fine, which he described as arbitrary. "It bears no relationship to any actual or proven harm or injury."

Outside observers also weighed in on the outcome. Some saw the EU's move as a blow against free markets and innovation. The Brussels-based Association for Competitive Technology, for instance, said that "[Europe's] efforts to manipulate competition in the technology industry without identifying actual consumer harm are worrying." Others, such as the Washington-based Computer and Communications Industry Assn., welcomed the move as a boost to competition. "The downstream effects of Intel's misuse of its market power have a negative effect on virtually all industries and consumers," said Ed Black, the association's president and CEO.

AMD Worked Closely with Investigators

AMD, meanwhile, was exultant. "The EU decision will shift the power from an abusive monopolist to computer makers, retailers, and above all PC consumers," said Giuliano Meroni, AMD's president for Europe, the Middle East, and Africa in a statement. AMD was the primary instigator of the EC's case. AMD CEO Dirk Meyer later added: "Today's ruling is an important step toward establishing a truly competitive market." AMD won't receive any money from the fine levied against Intel, which will go instead to European taxpayers as a sort of "compensation" for the harm Intel allegedly caused.

Intel's longstanding rival has seen its fortunes swing wildly over the years, for the most part due to ebbs and flows in its product portfolio. But AMD also has insisted for years that Intel's sales incentives give the chip giant a kind of stranglehold over PC makers that prevents AMD from achieving the market share its products deserve. Under former CEO Hector Ruiz, the company took a more aggressive legal stance against Intel, approaching the EC's competition agency and filing a civil lawsuit against Intel in the U.S. that is expected to come to trial this year.

As the sole complainant in the European case, AMD worked closely with investigators to supply evidence, but European investigators also conducted their own raids on Intel offices and collected hundreds of thousands of pages of documents, including contracts, e-mails, and interviews with industry sources. Five PC makers were identified as having been "harmed" by Intel's conduct: Acer, Dell (DELL), Hewlett-Packard (HPQ), Lenovo, and NEC (6701.T).

To illustrate her case, Kroes cited examples on May 13 that had been unearthed during the inquiry concerning specific but unnamed PC makers. One of these companies, Kroes said, was given rebates by Intel from December 2000 until December 2005 on the condition that it buy exclusively Intel chips, while another was given incentives to buy only Intel chips for its laptops in 2007. Others were offered rebates in exchange for buying between 80% and 95% of their processors from Intel over the course of several years.

Kroes was careful to point out that rebates, even given by companies with dominant market positions, are not illegal per se. The issue in this case, she asserted, was that Intel's rebates were given conditional on the recipients buying less of a rival's products—or not buying them at all—which is considered abuse of market under Article 82 of the Treaty of Europe. Intel counsel Sewell denies the existence of conditional terms and says that PC makers typically approach Intel with purchase offers that propose a certain volume of chips coupled with requested discount rates.

Selective Evidence?

Intel has 60 days to file an appeal and says it will satisfy the demand for a fine via a bank guarantee that may or may not be accrued on its books. The company could file for immediate court relief from the EU's ruling, pleading "irreparable harm" to its business, but most analysts say the request probably would be denied. Instead, Europe's second highest judicial body, the Luxembourg-based Court of First Instance, likely will take up the case within a year.

As the case winds its way through appeals, the main issue at stake will be the facts and evidence, not the underlying case law. If the actions Kroes describes really occurred, there's little doubt under longstanding European legal precedents that Intel would be found to have abused its market power and used unlawful incentives to reinforce its monopoly position.

But Intel chief counsel Sewell's categorical denial of the evidence asserted in the case raises doubts about what comes next. Speaking to reporters, Sewell implied that in their quest for proof of Intel's wrongdoing, the Commission's investigators may have turned a blind eye to information that refuted their position. "The Commission has chosen to rely on pieces of evidence that I would characterize as weak and not to consider contradictory evidence," Sewell said, suggesting that investigators favored "one piece of hearsay over five pieces of sworn testimony that contradicted it."

In other words, he believes that Europe's case could fall apart on appeal if Intel can provide enough evidence to undermine the basic assertions about its behavior made by AMD and the EU's competition agency. This legal battle will go on for years, but there's little doubt that on May 13, Intel suffered a stinging rebuke that could open the floodgates to further civil and governmental prosecution.

Reinhardt is Europe channel editor for BusinessWeek.com.

Andy_reinhardt
Reinhardt is Europe channel editor for BusinessWeek.com.

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