Antitrust suit targets Intel tactics

In 2005, Michael Dell's namesake company was getting pounded. His competitors were selling personal computers and servers built on cheap, popular and powerful chips from Advanced Micro Devices (AMD), while Dell had stuck loyally with slower chips from Intel.

In an e-mail note to Intel's chief executive, Paul Otellini, Dell threatened to switch to AMD.

"I am tired of losing business," Dell wrote. "We are losing the hearts, minds and wallets of our best customers."

Otellini reminded Dell that Intel had paid Dell more than $1 billion in the last year. "This was judged by your team to be more than sufficient to compensate for the competitive issues," he wrote.

Dell delayed buying AMD chips, and Otellini said in a later e-mail to a colleague that Dell was "the best friend money can buy."

Such payments to PC makers, along with other aggressive business tactics, are at the heart of the antitrust lawsuit filed Wednesday against Intel by New York Attorney General, Andrew Cuomo.

Cuomo's case — the first antitrust charges against the company in the United States in more than a decade — comes after similar actions by regulators in Europe and Asia.

According to Cuomo's lawsuit, the world's largest chip-maker, has for years used large rebates and co-marketing arrangements to talk Dell and other manufacturers into sticking with its products rather than increasing their business with AMD, a much smaller chip-maker.

Monopoly claims

As the supplier of about 80 percent of the central chips that power PCs and servers, Intel had monopoly power, which it abused, according to Cuomo. "Intel has used illegal threats, coercion, fines and bullying to preserve its stranglehold on the market," he said at a news conference. "We intend to stop them."

Intel spokesman Chuck Mulloy said the company had done nothing wrong. "Neither consumers, who have consistently benefited from lower prices and increased innovation, nor justice are being served by the decision to file a case now," he said.

The Santa Clara, Calif., company is no stranger to antitrust controversy. Intel has spent the last five years defending itself against antitrust allegations, first in Asia and then in Europe.

In May, the European Commission hit Intel with a record $1.45 billion fine for antitrust violations, which the company is appealing.

Intel also faces a 4-year-old antitrust lawsuit filed by AMD in U.S. District Court in Delaware and a continuing investigation by the Federal Trade Commission.

Although Intel has faced various antitrust claims for two decades, the cases have picked up steam because of developments in the chip industry.

In 2003, AMD, Intel's longtime nemesis, began selling a new line of chips widely regarded as superior in design and performance to Intel's products.

The chips were good enough to lift AMD from the PC market into the higher-profit server-computer market, and AMD begin selling to Hewlett-Packard, IBM and Sun Microsystems.

It took Intel about four years to come up with chips that matched or surpassed AMD's products in performance.

Curtailed potential

While AMD did well both in sales and market-share gains during that period, its top executives have long argued it could have sold far more products had Intel not used strong-arm tactics to blunt its advantage.

The lawsuit, which was filed by Cuomo in the Delaware court, stretches beyond the interests of AMD, which is building a $4.2 billion plant in Saratoga County in upstate New York through a spinoff company, GlobalFoundries.

Cuomo argues that Intel's behavior had curtailed industry innovation and forced consumers and businesses to pay higher prices for computers.

Under federal antitrust law, states have the power to bring charges independently of the federal government. The FTC and other states may file similar cases, much as in the government's antitrust case against Microsoft a decade ago.

Use of rebates

The major complaints surrounding Intel concern its use of rebates and marketing dollars to keep customers. The New York suit argues that Intel executives threatened to take away such incentives if customers did more business with AMD.

In addition, the lawsuit contends that if businesses were close to buying AMD-based computers from a company like HP or Dell, Intel would jump in to help the computer makers sell Intel-based machines at a large discount.

Overall, the companies often became dependent on Intel's incentives to keep their computer businesses profitable, making them reluctant to make a meaningful shift to AMD, the lawsuit said.

Communications cited in the lawsuit show Dell executives turned to Intel for payments to help them meet or surpass Wall Street's expectations for quarterly financial results.

When Dell finally decided to make products with AMD chips, Intel reduced its chip rebates for the company by $600 million, according to the suit.

The suit also contends Intel paid IBM to halt the production of a server based on AMD's chips.

Rebate payments and other incentives fall into a murky area of the law, according to antitrust scholars. Intel's critics must show it went beyond the typical actions one would expect from a company trying to protect its business.

"A lot of what they are talking about here sounds nefarious, but others would look at it and say that is how markets work," said John Lopatka, a professor and antitrust expert at Pennsylvania State University's Dickinson School of Law.

Choice of venue

Harry First, a professor at New York University's School of Law, said Delaware was an odd venue for Cuomo to pick for the lawsuit against Intel. "I assume they filed there because AMD's litigation against Intel is pending there," he said.

Piggybacking on AMD's lawsuit could make sense since most of the current cases against Intel share much of the same evidence. More than 200 million pages of documents have been exchanged between the parties in AMD's case against Intel.

Antitrust experts said both AMD and Armonk, N.Y.-based IBM, which competes against Intel in the server chip market, have invested billions of dollars in chip plants in New York.

Keith N. Hylton, a professor at the Boston University School of Law, said Cuomo could benefit politically by taking such a prominent stand on behalf of local workers and consumers.

"An attorney general is understood to be an aspiring governor," Hylton said. "They are politicians, and they want to be on the gravy train for big cases."

During the news conference, Cuomo said thwarting Intel's abusive actions was important to consumers and businesses worldwide. "It is not just about New York."

Steve Lohr contributed reporting.