Your browser is not supported. Please update it.

13 May 2009

Intel’s gut reaction to fight $1.45 billion EU fine is wrong

It’s tough to accept that you were just driving too fast, and the tendency is to say that ‘To hell with the radar evidence, I’m going to take this to court.’ But the wise man just shrugs, pays the fine and carries on driving and either a) hopes he won’t get caught or b) slows down.

But somehow the outrage expressed in the appeal by Intel says that it won’t adopt either of these courses. ‘Intel takes exception to this decision. We believe the decision is wrong and ignores the reality of a highly competitive microprocessor market,’ Intel President and CEO Paul Otellini said in a statement.

Oh come on Paul. Your company made behind the scenes, back door discount deals with distributors and OEMs, which included an understanding that AMD chips would not be stocked. You are a monopoly in processor chips for PCs (a fact that should make you happy) and you can’t do that.

To address his points, the decision is not wrong, it IS all about reality and Intel just doesn’t like getting caught. But it should learn a lesson from Microsoft. The EU case distracted management attention there for several years, the fines were doubled and it stayed in the news all the time dragging down the Microsoft share price. In the end Microsoft also paid out $2 billion to Sun and another $761 million to RealNetworks in their anti-trust proceedings, so we would expect something similar to go down with AMD and Intel in the US.

For the sake of Intel shareholders Otellini should go with option b). Pay the fine, drop the appeal and put safeguards in place to stop this happening behind the backs of senior management. The last thing that Intel needs right now is a clear understanding of those harsh realities in the chip industry that Otellini is talking about. It is not a clear ‘price list’ online order world and the less that anyone investigates it the better. Other companies may have worse practises, but Intel is the big guy in this market and has to lead by acting responsibly.

The €1.06 billion ($1.45 billion) fine is about 20% of the cash and liquid assets that it has right not and if Intel just accepts this, and perhaps pays a similar amount to AMD to settle all other legal disputes, it will just take $3 billion off the corporate valuation and have done with it. Already more than $5 billion has come off the market capitalization virtually overnight, mostly an emotional over reaction as that money has shifted to AMDand over the past month its market capitalization has doubled to $3 billion.

How much is this going to affect Intel’s ability to keep AMD at bay fairly in the market? Not at all. These types of deals come out of unscrupulous individuals, put under pressure by the system, usually somewhere down the chain of command, making a small mistake in order to keep their bonuses and if Intel worried more about making sure this could never happen again, it would be a better company.

Once the sense of injustice and outrage dies down, Intel should realize that paying out and sitting down with AMD to compensate it to eliminate similar actions around the world, will get this out of the headlines rapidly and allow Intel to get on with business.

But big corporations don’t work like that and we can hear the sound of lawyers rubbing their hands with glee at what will be a few hundred $millions in legal fees over the next four years to reach the same result.

Intel already accepts in the latest SEC filings that its discovery process with AMD’s US legal action isn’t going well due to ‘certain lapses in our retention of electronic documents,’ and it is set to go to trial in March next year. Intel needs to get the bad news out of the way as quickly as it can, and move on with a clean slate.

The European Commission said that throughout the period October 2002 to December 2007, Intel had a dominant position in the worldwide x86 CPU market (at least 70% market share) and the Commission found that Intel engaged in two specific forms of illegal practice. It gave hidden rebates to computer makers on condition that they bought all, or almost all of their x86 CPUs from Intel. And it also made direct payments to at least one major retailer on condition it stock only computers with Intel x86 CPUs.

This evidence was all obtained by interview with all the people concerned some four years ago, and Intel has had every chance to show that it wasn’t true. The perception in the US is that the European Commission just pulls these decisions out of a hat and acts unfairly against US companies, but that’s not how it works. It is all kept quiet until the fine is announced and going back to August 2007 when the European Commission announced its finding, it was clear that Intel would get a big fine (and we said so at the time).

The European Commission said that the world market for x86 CPUs is currently worth approximately €22 billion ($30 billion) a year, with Europe accounting for approximately 30% of that (so $9 billion).

Competition Commissioner Neelie Kroes said: ‘Intel has harmed millions of European consumers by deliberately acting to keep competitors out of the market for computer chips for many years. Such a serious and sustained violation of the EU’s antitrust rules cannot be tolerated’.

The computer manufacturers referred to in the Commission’s decision are: Acer, Dell, HP, Lenovo and NEC. The retailer concerned is Media Saturn Holding, owner of the MediaMarkt chain.

The statement added that ‘Certain rebates can lead to lower prices for consumers. However, where a company is in a dominant position on a market, rebates that are conditional on buying less of a rival’s products, or not buying them at all, are abusive according to settled case-law of the Community Courts.

In its decision, the Commission does not object to rebates in themselves but to the conditions Intel attached to those rebates. Because computer manufacturers are dependent on Intel for a majority of their x86 CPU supplies, only a limited part of a computer manufacturer’s x86 CPU requirements is open to competition at any given time.’

In one case AMD offered a million free CPUs to a particular computer maker, which would have meant that the manufacturer would have lost Intel’s rebate, so it took only 160,000 CPUs for free.

If a product is competitive and works and yet it still cannot get any business by being given away, there is definitely a market distortion and it is time that it got fixed.

The Commission cited various cases including those against Hoffmann-La Roche, Michelin, British Airways and others, all that resulted in Commission findings and fines.

Intel will now have to pay the fine within three months and the money will go into escrow until its appeal is over.

The fine was calculated as 4.15% of Intel’s turnover during 2008 which is less than half the allowable maximum, which is 10% of a company’s annual turnover.