Posted by: Arik Hesseldahl on November 4, 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.
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."