NY AG Cuomo Files Antitrust Lawsuit Against Intel

Posted by: Arik Hesseldahl on November 04, 2009

New York Attorney General Andrew Cuomo, has filed an antitrust lawsuit against the computer chip manufacturing giant Intel, accusing the company of engaging in a “systematic worldwide campaign of illegal, exclusionary conduct to maintain its monopoly power,” in the market for computer chips starting in 2001.

The complaint alleges that Intel paid hundreds of millions and in some cases billions of dollars in rebates to PC manufacturers in an attempt to limit their use of chips from rival Advanced Micro Devices. When PC companies appeared to be getting too close to AMD, Intel would, the complaint says, threaten them with retribution by withholding payments they were receiving from Intel.

These payments, which Intel called “rebates,” amounted to what Cuomo called “payoffs with no legitimate business purpose that Intel invented to disguise their anticompetitive nature.”

“Rather than compete fairly, Intel used bribery and coercion to maintain a stranglehold on the market,” Cuomo said in a statement. “Intel’s actions not only unfairly restricted potential competitors, but also hurt average consumers who were robbed of better products and lower prices. These illegal tactics must stop and competition must be restored to this vital marketplace.”

The complaint paints a picture of PC makers struggling to maintain their slim profit margins, fearing that Intel’s payments might dry up if they used AMD chips in their computers. The complaint accuses Intel of threatening PC makers with retaliation if they did business with AMD. During the period from 2001 to 2006, the complaint alleges, Dell sold no computers with AMD chips in exchange for billions in payments from Intel.

In cases where PC makers did business with AMD against its wishes, the complaint says that Intel made efforts to limit how much business AMD could get. In 2002, the complaint says, Intel reached an agreement with Hewlett-Packard under which HP would cap the amount of AMD-based computers it would offer at 5%, effectively giving Intel a guaranteed 95% share of HP’s computer business.

The complaint also covers the server business, a space where AMD made some serious competitive gains against Intel during 2005 through 2007. In instance, the complaint alleges that IBM agreed to cancel a server that was to use AMD chips after being offered a $130 million payment from Intel and various threats. Another server that used AMD chips was marketed only on an “unbranded” basis, the complaint says.

Intel didn’t immediately return a call seeking comment, but I’ll update this post as soon as I hear from someone there.

The entire 87-page complaint is embedded below. There’s a lot more information after the jump.

Cuomo v Intel Complaint Final

The complaint is full of anecdotes where Intel and its senior executives are portrayed as throwing their weight around with PC company executives.

It cites an instance in March of 2006 where Intel CEO Paul Otellini received a courtesy call from an executive at HP concerning HP's plan to sponsor an advertisement touting its long relationship with AMD, built around the theme of customer choice. Otellini's reaction, according to the complaint: "It is certainly insulting to us and I do not see how it helps you....If we are your key partner, this is nothing but a slap at us."

Intel used what the complaint describes as a "favorite code word" in its dealings with PC companies: That word was "alignment." If a PC company was not "aligned" then they could not expect favorable treatment from Intel, the complaint says, including the payment of rebates, pricing concessions, priority in obtaining needed parts during shortages, and marketing funds.

A key part of Intel's strategy for years has been to help PC companies market their products. Under the "Intel Inside" programs, PC makers you touted their use of an Intel processor or a combination of Intel technologies in their machines, would have their advertising costs partially subsidized by Intel. This arrangement has been described by a PC company executive cited in AMD's lawsuit as "the cocaine of the industry," meaning that PC companies relied heavily upon these payments in their business plans.

During a period when AMD was exerting itself with chips aimed both at PCs and servers that were by some measures superior to those being put put by Intel at time, PC makers understood they could benefit from increased competition in the marketplace, the complaint says. "Nevertheless they frequently decided, when faced with the array of incentives and threats which Intel brought to bear, to collaborate with Intel in restricting their purchases from AMD," the complaint says.

For the PC makers, payments from Intel could make the difference between a profitable quarter and a loss-making one. The complaint says that during 2002 to 2004, HP's corporate desktop PC business depended heavily upon payments from Intel for financial success. In September of 2004, HP executives were considering whether or not they would place limits on how they would market a PC using an AMD chip, as had been its practice since 2002. The agreement, the complaint alleges, had required HP to sell corporate PCs using AMD chips only via its direct sales channel, and not through third-party distributors. A senior HP executive, the complaint says, vetoed a plan to start including distributors on the grounds that Intel would learn of violation of the terms of the agreement, and that rebate payments from Intel were essential for the business unit to "make it financially."

Dell also found its profitability dependent upon payments from Intel, the complaint says. It cites internal Intel emails from April of 2004, where a Dell executive asks Intel for an additional payment of $100 million. Without such a payment, an Intel executive reports, Dell would "readjust their margin guidance downward."

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Reader Comments

slash paren

November 4, 2009 02:09 PM

Let's see if State attornies (Ed Brown) follow NY's Cuomo lead to tax or sue major out-of-state entities. Paybacks to some poor unsuspecting NY firm...

norman ravitch

November 4, 2009 02:35 PM

Cuomo will be running for governor or senator next year. That explains a great deal. He could be another Eliot Spitzer who also claimed to be a great slayer of Wall Street dragons -- until his "escort" showed up. Cuomo does not have a totally pure past either.

rk

November 4, 2009 02:41 PM

Wow, that's nasty. Bad Intel!
If you are going after the prostitute (Intel), you should also go after the Johns (Dell, HP and other huge pc manufacturers that took their money) - all of them worked together to reduce competitiveness and slow down computer development.

Richard Sievert

November 4, 2009 02:46 PM

Owe wow' Now companies have to go to court hey they are people after all. There face is a chip' Of the old board' Now I wonder how this has anything to do with actual people' No there there for one thing only money . Wow just wait tell Nike sues MacDonald I see a shoe throw at the great golden arch and burgers flying but still no people. This is what happens when you give a corporation a human form' No one to complain to except a building and all they want is More.

thanku4playing

November 4, 2009 02:47 PM

Another politician fishing for money, and raising the price of what we buy, in the name of protecting us.

HERMAN

November 4, 2009 02:50 PM

Why is it that the NY AG seems to be busy filing suites against everyone in the country while other AG's are busy taking care of their states problems.\
Is the NY AG the national watchdog? Where is the US AG? Who's in charge?

rw

November 4, 2009 03:04 PM

want to nail someone... how about joint trail against auto oil and politicians for lie.. holding information from public for profit..

read all and links..

ev1.org

mark alesse

November 4, 2009 03:18 PM

With all the criminal political violations of the law going on in Albany, particularly those of the "pay to play" variety, you'd think that Cuomo would have better things to do than go after a high tech giant that is fueling growth around the world.

Show some real courage General, go after Sheldon Silver, the Speaker of the Assembly for being on the payroll of prominent law firms for no other apparent reason than his ability to kill every Tort Reform bill that is ever introduced.

That's a crime worth your attentions.

Joncj5

November 4, 2009 03:49 PM

I have never and will never buy an Intel processor. AMD has always been my choice and would not consider a system without it. Intel is finally getting what they deserved.

bill

November 4, 2009 03:50 PM

AMD makes crappy processors. Had a few machines with those and promptly returned them.

Kenny

November 4, 2009 03:50 PM

What a boy! I am a business student and I learn much from this article. The key issue here is that PC market has too low a margin and seriously heavy competitions while chip set market is dominated by one or two makers. The government needs to think about bringing more competition into the chip market or integrate the PC market. However, Intel is at a winning position as even if the PC manufacturers fail, people still need PCs and PCs need inside chips. The only feasible way of improving the situation here is an introduction of a big innovation in personal application model, say computers that are powered by lights? Ha Ha.

Kenny

November 4, 2009 03:55 PM

Or you can help China buid up a strong competitor to Intel since both of our labour costs and high-tech elites are CHEAP!

Tom

November 4, 2009 04:00 PM

Andrew Cuomo is another example of misguided self esteem. He has never worked for a private business nor does he have a clue how American Business works. He is a leech sucking the blood of the taxpayer for his own gain. In a time of economic chaos he chooses to persue a lawsuit against one of America's most successful companies. He is only doing this so he can pad his resume for his run for governor. Grow up Andrew.

Tom

November 4, 2009 04:00 PM

Andrew Cuomo is another example of misguided self esteem. He has never worked for a private business nor does he have a clue how American Business works. He is a leech sucking the blood of the taxpayer for his own gain. In a time of economic chaos he chooses to persue a lawsuit against one of America's most successful companies. He is only doing this so he can pad his resume for his run for governor. Grow up Andrew.

Shadow

November 5, 2009 03:05 AM

I truly hope this opens up real competition in the microchip industry. Having only one brand of chips available at the local stores only hurts consumers. I actively looked for a comparable AMD powered laptop recently but couldn't find any at Fry's.

gerrrg

November 5, 2009 03:26 AM

So, is the NY AG going to sue the automakers for holdbacks? Just curious. Or is this more about extorting Intel for cash to fill NY's coffers?

allrise

November 5, 2009 06:46 AM

The State of New York VS. Intel case is now online in AllRise community court. Join the debate and cast your vote - http://bit.ly/AllRise270

mr fixit

November 5, 2009 03:39 PM

AMD chips are much faster than Intel, but in all fairness, they run too hot, overall for this reason they are not quite safe to use in any HP or Dell servers in a data center environment.

gerrrg

November 5, 2009 09:43 PM

@Mr. Fixit - give us a break; AMD has no equivalent for the i7 and i9 processors, nor do they lead in performance, head to head with Xeons. Go look for yourself at the benchmarks: http://www.cpubenchmark.net/high_end_cpus.html

Sherman

November 6, 2009 11:31 AM

The assault on Intel's pricing practices is itself anticompetitive

What everyone fails to understand is the nature of the microprocessor market. Intel faces large up-front costs in terms of research and development (about $5 billion for FY 08). Moreover, the shelf life of a particular microprocessor is relatively short--around a few months.

To recoup this large investment, Intel must offer discounts to its competitors to sell as many chips as it can before the shelf life expires. Importantly, these discounts are ABOVE COST and result in LOW PRICES for OEMs and, in turn, consumers.

The antitrust laws have no business condemning an above-cost pricing strategy that increases output and is overall beneficial for consumers.

The NY AG's office should be ashamed of itself for using the antitrust laws to compel Intel to stop such beneficial practices. The result will likely be a chill to innovation in the microprocessor industry and higher prices for PC consumers.

ST

November 7, 2009 01:19 PM

Of course this has nothing at all to do with the face that NY put $650M into the foundry company...
http://news.softpedia.com/news/New-York-Transfers-650M-for-AMD-039-s-New-Plant-100478.shtml

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