Intel-Dell Dealings Under Fire

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In 2006, Dell received $1.9 billion. During two quarters that year, Intel payments even exceeded Dell earnings. In the quarter that ended in April, payments were $805 million, compared with $776 million in net income. For the quarter that ended in July 2006, Intel's payment amounted to 116% of net income.

Intel portrayed the payments as price cuts made in response to competitive offers from AMD, according to the court documents. Yet, they were "decoupled from particular products," the documents go on to say. Intel would determine the amount to be paid to Dell in a given period, then create a paper trail that would allocate portions of the payment to purchases of individual chips, Cuomo alleges.

Use of AMD Chips Blocked?

Whatever the justification given, the purpose of the payments was to make computer makers reluctant to buy chips from AMD, the lawsuit alleges. "Dell was being paid for holding AMD at bay," the complaint says. It cites a Dell document dated Feb. 27, 2003, as showing that Dell assumed that "aggressive" purchases of AMD chips by Dell would trigger retaliatory reductions in rebate payments that "could be severe and prolonged with impact to all lines of business." Another Dell document from March 2003 concluded that if Dell were to buy AMD processors, the likely Intel response would "wipe out" all potential operating income improvements that might result from adding AMD to its machines.

A Dell executive explained to colleagues in 2002 that any embrace of AMD would prompt Intel to shift the funding priorities to another PC company or "match whatever we're getting," the complaint says. Intel described this arrangement as "monogamy," the complaint says.

Rewards for Dell weren't just financial, according to Cuomo. In return for buying only Intel chips, Dell also received assurances that it would have access to a preferred supply of chips over competitors, the lawsuit alleges. Satisfying Dell's demand for chips was a top priority for Intel, while demand from other PC makers went unmet, according to the filing.

Over time, however, the allure of AMD grew, and amid speculation that Dell might end its Intel-only policy, exchanges between Intel and Dell executives became "increasingly emotional and frank," the complaint says. Dell became particularly enamored of AMD chips for servers, the powerful machines that run corporate networks, and grew concerned that its server business was suffering in relation to those of rivals IBM, Sun Microsystems (JAVA), and HP. "Each time Dell considered altering the arrangement and introducing an AMD line, Intel responded with both carrot and stick," the lawsuit says. Higher payments and threats of retaliation "kept the relationship in place," the complaint says.

Relationship Broke Down in 2006

By late 2005, enough was enough. During a November 2005 phone call, Michael Dell told Intel CEO Paul Otellini, "I am tired of losing business," according to a confidential e-mail cited in the complaint. Dell was losing high-margin server business to rivals using AMD chips, Dell lamented, according to the e-mail. "Dell is no longer seen as a thought leader," Dell complained.

Otellini's response in a follow-up e-mail later that month was that Intel's chips were improving day by day. He added that Intel was sending Dell more than $1 billion a year, more than enough to compensate Dell for its lost business, Otellini pointed out. Michael Dell persisted in an e-mail response. Dell was "losing the hearts, minds and wallets of our best customers," he said in an e-mail quoted in the complaint.

By April 2006 the Intel-Dell relationship was at a breaking point, the complaint says. When Dell introduced a range of products using AMD chips, the response from Intel was "severe," the complaint says. Then-Intel Chairman Craig Barrett made clear that Dell would be deprived of the payments it had been getting from Intel and no longer receive preferential treatment over rivals. "They have just signaled they are only interested in being a transaction-based customer," Barrett told Otellini, according to the complaint. "I think you should reply in kind. Not a time for weakness on our part. Stop writing checks immediately and put them back on list prices ASAP."

So, after receiving $800 million from Intel in March and April of 2006, Dell received less than $200 million from Intel from November 2006 to January 2007, after it had released its first AMD-based server.

With Aaron Ricadela in San Francisco. Hesseldahl is a reporter for BusinessWeek.com.

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