Intel-Dell Dealings Under Fire

Pressure on Dell, as outlined in Cuomo's lawsuit, provides fresh insight into the marketing payments that regulators say left PC makers beholden to Intel

By Arik Hesseldahl

It was called the Mother of All Programs, or MOAP for short. That was the code name Intel (INTC) bestowed on a series of payments it made to Dell (DELL), one of its largest customers, over a five-year period through January 2007.

Now that $6 billion in payments has become the mother of all predicaments for Intel, the world's largest computer-chip maker. New York Attorney General Andrew Cuomo, in a federal antitrust lawsuit, says Intel wielded those payments to coerce computer makers into using its chips instead of those made by Advanced Micro Devices (AMD).

Over several years, Intel used payments to a host of computer makers including Hewlett-Packard (HPQ) and IBM (IBM) as part of a "systematic campaign of illegal conduct" intended to harm AMD, according to the lawsuit. Cuomo's suit follows legal action by antitrust regulators in Europe, Japan, and South Korea who also allege that Intel used the payments to gain an unfair advantage over AMD.

Newly filed court documents in the New York Attorney General's case draw on extensive communication among senior executives at Dell and Intel and shed fresh light on Dell's increasing reliance on Intel money to meet financial targets. Capping an investigation announced in January 2008, the lawsuit also provides added insight into the accounting methods used by Intel to justify payments that prosecutors say had no legitimate business purpose, and the swift retribution that followed Dell's decision to begin using computer chips from AMD.

Intel Labeled Payments as "Rebates"

At the crux of Cuomo's case, in an 87-page complaint filed with the U.S. District Court in Delaware, are payments Intel labeled as "rebates" to companies using its chips. Cuomo alleges the payments gave Intel leverage to induce PC makers to limit the use of AMD chips in personal computers and servers. Cuomo argues that these payments "bore no genuine relationship to pro-competitive volume-based discounts or reasonable efforts to meet specific competitive offers."

Intel denies the allegations and says the payments resulted in lower prices for customers. The company says most of the material cited in Cuomo's complaint duplicates arguments made by regulators in other parts of the world, as well as in a federal lawsuit filed by AMD. "We disagree with the New York Attorney General," says Intel spokesman Chuck Mulloy. "Neither consumers who consistently pay lower prices for PCs and computer power and get increased innovation, nor justice are being served by bringing this case at this time. Clearly we will defend ourselves." On Nov. 4, Intel shares rose 9¢ to 18.59.

The interplay between Dell and Intel, as outlined by Cuomo, provides a case study in the sometimes hardball negotiations at the heart of manufacturer-supplier ties, as well as what prosecutors say is the widening leverage gained by Intel as its payments to PC makers rose.

For Dell, an early increase came in 2002. After a July 9, 2002, meeting between Dell's then-COO Kevin Rollins and a top Intel executive, Rollins reported to Dell CEO and founder Michael Dell that Intel was willing to do "whatever it takes" to keep Dell from buying AMD chips, according to the complaint. Around that time, payments were set to increase from $70 million to $100 million.

Lawsuit Alleges Dell Sought Increases

Dell sought at least two increases in 2004, according to the lawsuit. In April, Dell asked Intel to boost its payment by $100 million, the lawsuit says, citing an internal Intel e-mail. Without the increase, Dell would have to "readjust their margin guidance downward," an Intel executive is quoted as saying. On Dec. 7, 2004, Dell's lead negotiator wrote an e-mail to an Intel executive saying then-Chairman Michael Dell wanted an additional $400 million payment.

For the three-month period ended October 2004, Dell received $304 million, amounting to 36% of the $846 million profit Dell reported for that quarter.

A Dell spokesman declined to comment on the substance of the lawsuit and Dell's part in it, calling it "an Intel matter, not a Dell matter."

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