Intel's in Hot Water in Europe

The European Commission's ruling against Microsoft—as well as other recent antitrust cases—put the chipmaker in a vulnerable position

by Jennifer L. Schenker

The repercussions from the Sept. 17 ruling by Europe's second highest court affirming a landmark 2004 antitrust order against Microsoft (MSFT) are only just starting to be felt. But of all the technology companies facing scrutiny by the European Commission, perhaps none has more to worry about than semiconductor giant Intel (INTC), which became the subject of a formal proceeding in July.

The EC cases against Microsoft and Intel are based on different kinds of alleged market abuse and draw on separate legal precedents. But both reflect a widening gap in how the U.S. and Europe view the legality of hardball business tactics by dominant companies. While regulators in both regions look for signs of harm to consumers from monopoly behavior, Europe gives as much or more weight to the impact on competitors.

That distinction played a critical role in the Microsoft ruling. On the face of it, Microsoft's free inclusion of Media Player in Windows was a boon to consumers. But the EC was able to show that the software bundling harmed rivals such as Real Networks (RNWK) and Apple (AAPL) and reduced competition in the media player market—thus potentially hurting customers in the long run by leading to less choice in digital content formats. A similar argument held that by limiting the information it gave out about Windows networking standards, Microsoft had foreclosed competition in desktop and server operating systems, to the detriment of consumer choice.

Crossing the Line?

The same kind of thinking is at the core of the commission's case against Intel. Prompted by complaints from rival chipmaker AMD (AMD) dating back to 2000, the EC has charged Intel with illegal use of sales tactics such as rebates and incentives to maintain or increase its market share in microprocessors. Such programs are normally permissible but can cross the line into abuse when practiced by companies with monopoly market share.

Intel strongly denies any wrongdoing and says it has acted within the law with its market incentive programs. It also argues that the programs have led to lower chip prices for consumers.

That may not be enough of a defense in Europe—especially now that the commission's hand has been strengthened in the wake of the Microsoft defeat. "European authorities and courts put a higher duty on dominant firms to deal fairly with their competitors," says Philip Marsden, a senior research fellow at the British Institute of International & Comparative Law. "They want to foster gentlemanly competition, a premise that is foreign to American antitrust thinking."

A recent ruling from Europe's highest court, the European Court of Justice, could make matters even tougher for Intel. In March, the court upheld a case against British Airways (BAY.L) in which the carrier was found guilty of harming competition though the use of loyalty rebates and discounts for travel agents. Also on the books is an earlier case against French tiremaker Michelin (ML.PA) that found its retail incentive program illegal. "If you apply the law as it is, Intel is in a very difficult position," says Simon Bishop, a co-founder of RBB Economics, a European firm specializing in antitrust economics.

Dawn Raids

AMD has been pressing the European Commission for years to take antitrust action against its larger rival. After on-and-off investigations, the commission and national regulatory officials carried out a series of coordinated dawn raids (BusinessWeek, 7/14/05) of Intel's European offices in July, 2005. But it wasn't until two years later that the EC finally brought charges (BusinessWeek, 7/27/07) alleging that Intel engaged in three categories of abuse of its dominant market position. "The three types of conduct reinforce each other and are part of a single overall anticompetitive strategy," said the Commission in a press release about its confidential Statement of Objections, a legal step roughly equivalent to an indictment.