Intel's chipped credibility

NEW YORK (Fortune) -- Yesterday's action by the European Commission, leveling a record $1.45 billion fine against semiconductor giant Intel Corp., after finding that it had engaged in a wide variety of illegal, anticompetitive conduct against perennial rival Advanced Micro Devices from 2002 through 2007, deals a body-blow to Intel's credibility.

It also bodes ill for the company's prospects in ongoing investigations into similar - indeed, in many respects, identical - allegations now being scrutinized by the U.S. Federal Trade Commission and by the New York State Attorney General's Office, as well as in a federal, treble-damages antitrust suit being brought in Delaware by AMD (AMD, Fortune 500) and in about 80 associated consumer class-actions.

Intel (INTC, Fortune 500) has always strenuously denied the allegations involved in all these inquiries, and still does. "Intel takes strong exception to this decision," said Intel CEO Paul Otellini in a prepared statement yesterday. "We believe the decision is wrong and ignores the reality of a highly competitive microprocessor marketplace - characterized by constant innovation, improved product performance and lower prices. There has been absolutely zero harm to consumers. Intel will appeal."

Yet for this reporter, at least, Intel's sweeping denials are losing their plausibility. In 2006 I wrote a feature story for Fortune magazine exploring the antitrust suit AMD had filed against Intel in June 2005, which catalogued many of the accusations that were the subject of today's EU action. Intel provided considerable cooperation with the story, and what its top legal officer, D. Bruce Sewell, told me then was very much in line with his public remarks yesterday.

"We don't buy exclusivity," he told me bluntly. While Sewell acknowledged offering ordinary volume discounts - which are, obviously, procompetitive and good for the consumer - he denied that Intel ever made rebate payments contingent upon a customer's agreeing to fill all (or an overwhelming percentage of) its microprocessor needs with Intel processors.

But since then, a lot of regulators have looked hard at a lot of evidence and have found otherwise. In the three-page statement the EC released yesterday (skeletally summarizing a 500-page, nonpublic document), it concluded that Intel actually did buy exclusivity, and did so rather often. Specifically, the EC found that "Intel gave rebates to computer manufacturer A from December 2002 to December 2005 conditional on this manufacturer purchasing exclusively Intel CPUs"; "Intel gave rebates to computer manufacturer B . . . conditional on this manufacturer purchasing no less than 95% of its CPU needs for its business desktop computers from Intel"; "Intel gave rebates to computer manufacturer C . . . conditional on this manufacturer purchasing no less than 80 % of its CPU needs for its desktop and notebook computers from Intel"; "Intel gave rebates to computer manufacturer D . . . conditional on this manufacturer purchasing its CPU needs for its notebook computers exclusively from Intel." Though the EC does not identify which of Intel's alleged transgressions relate to which computer maker, it does list the universe of computer makers involved in their inquiry: Acer, Dell (DELL, Fortune 500), HP (HPQ, Fortune 500), Lenovo, and NEC.

In addition, the commission also found that Intel made payments to MediaMarkt - Europe's largest chain of computer retailers and, essentially, its equivalent to Circuit City or Best Buy - "on condition that it exclusively sold Intel-based PCs in all countries in which [it was] active."

The commission said its findings were based on evidence contained in "e-mails obtained . . . from unannounced on-site inspections, in responses to formal requests for information and in a number of formal statements made to the commission by the other companies concerned." In a final drop-kick, European Commissioner for Competition Policy Neelie Kroes asserted that "Intel went to great lengths to cover-up many of its anti-competitive actions," suggesting that Intel well understood the illegality of its practices.

All of these findings, remember, must now be added to those made by Korean regulators in November 2008, who reached very similar conclusions relating to Intel's dealings with Korean computer makers Samsung, LG, and Sambo. The Korean findings, in turn, should be heaped on top of those made by Japanese regulators in March 2005, who reached similar conclusions with respect to Intel's payments to five unidentified Japanese computer makers. (In its Delaware suit AMD has accused Intel of paying coercive loyalty rebates to Japanese manufacturers Sony, Toshiba, NEC, Fujitu, and Hitachi.)

Responding to an e-mail inquiry I sent yesterday, Intel spokesman Chuck Mulloy said that Intel stood by Sewell's earlier statements to me for the 2006 article.

What exactly had Sewell meant, then, when he said that Intel doesn't buy exclusivity? "What he meant was that if a customer chooses to buy everything from Intel, then AMD loses," Mulloy wrote back. "We discount on a volume basis or in competitive situations." Mulloy stresses that "we've said that the [EC] case team either ignored or refused to include evidence that would support our position. This evidence contradicts the assertions made by the Commission, including those you mentioned."

As for the MediaMarkt allegations, he asserts, "Intel did not pay [MediaMarkt's parent] Media Saturn Holdings on the condition that it sell only Intel-based PCs. Intel gave the same rebates to MSH that it gave to other retailers in Europe for similar business. Those other retailers did carry AMD-based PCs. The rebates were based on volume, not exclusivity. . . . In short, the rebates were not the reason MSH elected to sell only Intel-based PCs. MSH made its decision based on its independent business interests."

Well, could be. In fairness, almost all of the raw evidence remains nonpublic, so it's still at least possible that all the regulators so far have been biased, incompetent, overzealous or what have you. On the other hand, it's also possible that the regulators have been conscientious, earnest and privy to some pretty damning evidence.

Although many American observers are suspicious that foreign regulators' sanctionings of American companies reflect bias and protectionism, it is not easy to see how such sentiments, even if present, would play out in the context of a dispute in which Intel, a U.S. company, has only one meaningful competitor, AMD, which is also a U.S. company. Indeed, if Intel's claims are valid, and it's been extending only healthy, procompetitive rebates and discounts to its customers, one would anticipate that those customers - which do include Japanese, Korean, and European companies - would have been singing Intel's praises when regulators came to chat with them. Indeed, if foreign countries are anything like our own, one might even expect those Japanese, Korean, and European customers to be exerting influence through political channels to convey how they regard Intel. So if those nation's regulators keep ruling against Intel, it begins to sound like Intel's customers may not view Intel's conduct as benignly as Intel does.

Fortunately, more and more of the raw evidence is going to be worming its way into the daylight in the months ahead. In mid-June, discovery will be completed in the civil litigation between AMD and Intel, and by the end of this year summary judgment motions will probably be publicly filed, doubtless appending exhibits that will shed light on the relative merits of each side's contentions. (Trial is scheduled for March 2010.) In addition, representatives of the FTC and New York Attorney General Andrew Cuomo's office have been attending the depositions in that Delaware case, and monitoring all the documents produced, so it is possible that they, too, may pipe in before too long.

Finally, and, again, in fairness to Intel, it must be acknowledged that even if Intel's practices are as bad as regulators say they are, its legal position is still not hopeless. For while there is wide consensus among antitrust experts about the harmfulness and, consequently, illegality of collusive activity among competitors - e.g., cartelization, bid-rigging, price-fixing - there is far less agreement about when the conduct of one very big competitor, acting alone, goes over the line. Some free marketeers insist that even the use of loyalty rebates by dominant companies should be considered fair play in a vibrant marketplace, and that it will redound in the end to the consumer's benefit.

But last year's "once-in-a-century credit tsunami" - as the embarrassed and penitent Alan Greenspan has termed it - was a tough year for orthodox free marketeers, and it took its toll in November's elections. Just this week Christine Varney, President Barack Obama's new chief of the Justice Department's antitrust division, pledged to awaken that unit from its Bush-era somnolence. Her "changed course" and "new tack" would take particular aim, she stressed, at the abuses of dominant companies. (With the FTC already investigating Intel's conduct vis-à-vis AMD, however, no one expects the Justice Department to pile on with respect to Intel.) As President Obama begins appointing federal judges and justices to the bench, judicial attitudes can only be expected to move in the same direction as attitudes within the Antitrust Division.

Even before this palpable new pendulum shift, Intel's legal arguments looked dicey. Now they're beginning to look far-fetched.