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Sweet Deals -- Or Strong-Arm Tactics


For years, Advanced Micro Devices Inc. (AMD) has tried to go after its giant rival, Intel Corp. (INTC), accusing it of illegally using its monopoly power. But time and again, Intel has emerged relatively unscathed. Now the Sunnyvale (Calif.) chipmaker is again raising its slingshot. On June 27, AMD filed a 48-page complaint that charges Intel with employing a range of anticompetitive practices aimed at crippling the smaller chipmaker. Intel denies the allegations. "We unequivocally disagree with AMD's claims and firmly believe this latest suit will be resolved favorably, like the others," said Intel CEO Paul Otellini.

Can AMD prevail? The root of its allegation is that Intel uses exclusionary practices -- rebates, discounts, and marketing dollars -- to strong-arm customers into buying its chips, shutting AMD out. Typically, antitrust cases turn on whether an accused monopolist is hurting consumers, rather than a rival, through its actions. But in recent years courts have ruled that exclusionary behavior by large companies against smaller ones is illegal because it hurts competition in the overall market. AMD clearly hopes the shift will help it win. "Not only are exclusion-type cases on the rise but courts have been more receptive to [them]," says Scott A. Sher, a partner with Wilson Sonsini, Goodrich & Rosati in Reston, Va.

On the face of it, there's nothing inherently illegal in providing discounts and rebates to customers, something Intel has been doing for years. "Even a dominant company has the incentive to compete hard, and it will often do this through exclusive contracts and low pricing," says Eleanor M. Fox, an antitrust expert at New York University School of Law.

But AMD alleges that Intel crosses the line by offering these inducements only if a customer agrees to buy most of its chips from Intel. Such exclusionary contractual practices, AMD claims, have the effect of shutting it out. But the mere fact that Intel is offering lower prices will probably not, in and of itself, lead to liability. Courts are generally reluctant to rule against market discounts or any tactic that leads to low, or predatory, pricing because such practices are seen as benefiting consumers.

TALE OF THE TAPE

AMD also would have to show Intel has no valid business justification for its behavior. Monopolists are permitted to use exclusionary deals if they benefit consumers, and Intel argues its payments to PC makers allow them to sell their machines more cheaply. To succeed, AMD would have to convince the court that Intel's aim is not to keep prices low but to prevent competition.

AMD is pinning its hopes on recent rulings that have condemned the practices it accuses Intel of using. In one case decided in 2003 by the Third Circuit Court of Appeals, transparent-tape maker LePage's Inc. sued 3M for offering customers cash payments to buy exclusively from 3M, plus higher rebates for buying other 3M products. The court ruled for LePage's on the grounds that bundled rebates offered by a monopolist "may foreclose portions of the market to a potential competitor." It's no coincidence AMD has filed its complaint in the Third Circuit.

Clearly, the courts and regulators are still figuring out how to think about exclusionary behavior. In a speech last November that reviewed the Justice Dept.'s antitrust policy, Deputy Assistant Attorney General Thomas O. Barnett said: "This is an area in which it is most difficult to distinguish between harmful exclusionary conduct and beneficial, albeit tough, competition."

In the end, the court has to decide if Intel's price cuts are so stifling to competition that consumers wind up with lesser products or higher prices. Without such a finding, AMD will lose once again.

By Spencer E. Ante


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