...from: http://www.nytimes.com/2008/06/21/business/21nocera.html?_r=1&th=&ad...
A.M.D. and Its War With Intel
By JOE NOCERA Published: June 21, 2008 A few weeks ago, Stephen Labaton of The New York Times broke the news that the Federal Trade Commission had decided to open a formal antitrust investigation into Intel, the world’s dominant maker of microprocessors. Subpoenas had gone out not just to Intel, but to many of the computer manufacturers who rely on Intel chips. The investigation, as Mr. Labaton wrote, was going to revolve around “accusations that Intel’s pricing is intended to maintain a near monopoly on the microprocessor market.”
The chief accuser, of course, was Intel’s main (some would say only) rival, Advanced Micro Devices. I say “of course” because I can scarcely remember a time when A.M.D. hasn’t been complaining about Intel’s supposed predatory behavior. But I can also recall the company’s many missteps and execution failures over the years, which have tended to undercut its claims. It was always a little hard to swallow A.M.D.’s argument that it was being hurt by Intel’s anticompetitive practices when it had such a long history of snatching defeat from the jaws of victory.
In recent years, however, two things have happened. First, in 2003, A.M.D. came out with a chip called Opteron, which was far superior to anything Intel had on the market. Indeed, this was one of the few times that Intel was the company stubbing its toe; it took a year before it had a competitive chip. What’s more, the Opteron was aimed at the highly profitable server market, which has long been Intel’s domain. It is fair to say that Intel was none too happy with this state of affairs, and it wasn’t too long before A.M.D. was complaining that Intel was cutting deals to keep computer makers from straying, even though many of them wanted to use the Opteron.
Which perhaps explains the second thing that happened: A.M.D.’s accusations finally began to gain some traction. In 2005, after a lengthy investigation, Japan’s Fair Trade Commission asserted that Intel had violated the country’s antitrust laws by, in effect, paying Japanese computer manufacturers to limit their business with A.M.D. That same year, A.M.D. sued Intel in federal court, charging predatory pricing; the case is scheduled to be tried in February 2010. Meanwhile, the European Commission began looking into Intel’s pricing practices; it has since made several preliminary rulings that don’t bode well for the chip giant. And in South Korea this month, Intel was fined $25.4 million for giving rebates to two South Korean computer manufacturers, which had the effect of “excluding” A.M.D., according to the Korea Fair Trade Commission. Intel has said it will appeal. (The New York attorney general, Andrew Cuomo, has also started an investigation, but he’s just piling on.)
With all this ferment, it was probably inevitable that the F.T.C. would follow suit. If the rest of the world is busy imposing sanctions on Intel for abusing its monopoly power, it hardly looks good for the nation’s chief antitrust enforcer to be sitting on its hands.
When I made some inquiries this week, the strong sense I got was that the commissioners wanted to get to the bottom of the Intel accusations once and for all, and needed subpoena power to gather all the evidence they needed.
But in antitrust, the notion of “getting to the bottom of it” is notoriously squishy, and this case is squishier than most. There is no question that Intel offers large discounts to its big customers, along with rebates, quarterly marketing dollars and other goodies. Because those discounts are directly related to how much business a manufacturer gives to Intel, it necessarily has the effect of excluding A.M.D.—since it’s the only other company competing for the business.
Is that predatory behavior? Or is that good old-fashioned competition? What makes antitrust so maddening is that the answer depends as much on who is asking the question — and where — as it does on the evidence.
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Let’s start with a simple question: Are discounts good or bad? When I put it like that, the answer is obvious: discounts are clearly good. They allow consumers to buy things at lower prices. Indeed, price competition is at the very heart of free-market capitalism, and it is the natural result of competition. It’s what we as a society want companies to do.
For as long as we’ve had antitrust laws in the United States, predatory pricing — pricing intended solely to prevent a rival from being able to compete — has been against the law. After all, if a big company drops its prices on a short-term basis to drive a smaller rival out of business — and then can raise prices with impunity because it has eradicated its competitor — consumers are ultimately harmed by the price cuts.
But our definition of predatory pricing has tended to vary over time. In the 1950s and 1960s, United States antitrust enforcers — and the courts — tended to view many forms of discounting as predatory. One sorry result was that actions that actually helped consumers were considered illegal practices.
But in the 1970s, that all changed, as legal scholars argued persuasively that anticompetitive behavior had to be defined in more rigorously economic terms, and that there needed to be a high standard of proof that monopolistic behavior was harming consumers. This became known as the Chicago School of antitrust theory, and in time, the courts embraced many of its theories.
One consequence is that today, it is almost impossible to bring a discounting case, even if it has exclusionary consequences. It is presumed by the courts that discounting benefits consumers. The only form of discounting that is now viewed by the courts as proof of predatory behavior is pricing below cost. When I spoke to Robert E. Cooper, a lawyer at Gibson, Dunn & Crutcher, who is representing Intel, he cited a series of Supreme Court cases, going back 20 years, that has come down in favor of discounting — even enormous discounts based on market share, which have the effect of excluding rivals. Intel insists that it doesn’t price below cost, and given the nature of these things — selling in huge volume brings Intel’s own costs down, thanks to economies of scale — it will be almost impossible to prove otherwise.
Does this mean that Intel is all warm and fuzzy when it is negotiating with the big computer manufacturers? Not remotely. Roger Kay, the president of Endpoint Technology Associates, and a very close observer of the Intel-A.M.D. wars, laid out a scenario to me that he thought likely. A computer manufacturer sees its market share declining. When it comes time to negotiate a new microprocessor contract with Intel, it is told that its volume has diminished so much that it can not longer get the same big discounts it has come to depend on for its own profits. But, the Intel salesman adds, if the company is willing to shift more business to Intel, and increase the volume a little, it will still get the discount. Naturally, the company agrees.
Indeed, Mr. Kay says he believes this is precisely what happened in Japan, where the two companies that abandoned A.M.D. completely were Toshiba and Sony — which were both losing market share to competitors. “Thus,” he wrote me in an e-mail message, “Intel can claim it is doing nothing wrong and A.M.D. can claim its options are being foreclosed, and in a sense, they’re both right.”
One reason A.M.D. has had more success pressing its case abroad than in the United States is that in many places in the world, the reigning antitrust view is what’s called the post-Chicago School, which holds that there are times when pricing above cost can still constitute predatory behavior. Indeed, the European Commission tends to put far more emphasis on competition than on consumers, and views with suspicion companies with oversize market share, like Intel
But what happens if the commission rules against Intel — as seems likely — but the F.T.C. and the United States courts rule in favor of the company? That’s what happens these days with mergers that need government approval — Europe has turned thumbs down on a number of mergers involving two American companies, and as a result they haven’t gone through. The world economy really won’t function very well if multinational companies have to dance between dueling regulators. Either we need to adopt their standards, or they need to adopt ours. The Intel-A.M.D. shows, if nothing else, how untenable the current state of play is in antitrust.
Despite its recent investigation, the F.T.C. has long been reluctant to pursue a formal investigation against Intel; I hear that even now many of its economists simply do not believe that Intel’s policies amount to predatory pricing. But there is one other reason why A.M.D. faces an uphill struggle pressing its case in the United States. Its own market share numbers don’t seem to back up its contention that Intel is preventing it from competing. According to data provided to me by Ashok Kumar, a well-known technology analyst with CRT Capital Group, A.M.D.’s overall market share in microprocessors was 17 percent in March 2005. By December 2006, it had risen to 25 percent. Today it has sunk back to 20 percent.
The rise in market share is directly attributable to A.M.D. having strong products like the Opteron. But then Intel came roaring back, leap-frogging A.M.D.’s technology. Meanwhile, the smaller company’s latest high-end chip, code-named Barcelona, has been delayed when a flaw was discovered in it. A.M.D. has lost money for six quarters in a row.
Apparently, some things never change.