Does Intel hold the edge in antitrust case?
Wednesday, November 11, 2009 04:48 PM
The antitrust forces lining up against Intel may face an uphill battle, legal experts said.
The world's largest maker of computer chips is accused by New York State Attorney General Andrew Cuomo of behaving illegally in the market for semiconductors, causing harm to its smaller rival, Advanced Micro Devices (AMD).
A similar case brought by AMD in 2005 goes to trial in March, and the Federal Trade Commission is widely thought to be winding up an investigation that could result in another lawsuit.
To win, prosecutors will need to prove not only that Intel has a monopoly in the market for semiconductors, but that it used its monopoly power to trample competition. The first part shouldn't be a problem, said attorneys who include Stephen Calkins, a former FTC lawyer who teaches law at Wayne State University.
During the period covered by the lawsuits, Intel's share of the market in chips that go into PCs, notebooks, and servers, which run Web sites and corporate computing networks, ranged from 75 percent to 83 percent, according to research firm IDC. Intel's market share is "sufficiently high enough for a court to be comfortable calling it a monopoly", Calkins said.
Simply being a monopoly isn't against the law; it's how a company behaves once it reaches that point that matters most in courts, said legal experts.
"Under U.S. law, it's O.K. to be a monopoly--and even to charge monopoly prices," said Scott Hemphill, a law professor at Columbia University. "What's not O.K. is conduct that's aimed at unreasonably prolonging and maintaining that monopoly. Cuomo's case against Intel is essentially about monopoly maintenance." That will be a bigger challenge, Hemphill said.
Coercion: "Good evidence of abuse"
Cuomo alleged that Intel paid PC makers including Dell and Hewlett-Packard large sums of money over several years to favor its chips over those made by AMD. Dell alone received US$6 billion over a half-decade through 2007, according to the New York Attorney General's complaint. Intel spokesman Chuck Mulloy said the company has done nothing wrong and that it expects to present evidence in court disproving the allegations against it.
To be sure, some legal experts who have no association with the case contend that there's no question Intel behaved illegally--that the company used its market power to bully customers and harm a rival. "If a firm coerces its customers into deals [they] might not prefer, that is direct evidence of market power that is a very good evidence of abuse," said David Balto, former policy director at the FTC.
Still others said competition in the larger market continued apace--that both Intel and AMD were able to innovate and drive down chip prices. "The courts will probably conclude that Intel fits the definition of a monopolist," said Joshua Wright, a law professor at George Mason University and former FTC attorney. "Then the question becomes whether or not its conduct was harmful to competition, rather than simply harmful to a competitor."
Falling prices can impede prosecution
The average selling price of a PC chip was US$98.50 in 2008, compared with US$163 in 2000, according to IDC. The rate of decline accelerated in 2005, around the time AMD showed vigor in selling server chips, taking share and arguably causing Intel to respond with more aggressive price cuts. PC prices also fell throughout the decade, even as the number of companies producing chips for PCs dwindled to three (Taiwan's VIA Technologies still has a tiny fraction of the market), from five in the mid-1990s. On desktop PCs, the average factory price--the price before any retail markup--fell about 20 percent to US$447 in 2008, from US$559 in 2001, according to research iSuppli.
Prosecutors may thus struggle to persuade the court that consumers haven't benefited from the competition between Intel and AMD, Wright said. In that case, they'll need to focus on the potential threat in the future, an argument that holds more water in foreign courts than in the U.S., he added.
"U.S. courts have a built-in skepticism to the argument that a market that benefits consumers now--a bird in the hand--is outweighed by the potential loss of that benefit in the future--the bird in the bush," Wright said. Indeed, Intel has lost antitrust cases brought against it in Japan, South Korea, and the European Union.
Far from being victims of alleged malfeasance, PC makers used the rivalry between Intel and AMD to their advantage, Wright adds. "What strikes me about this situation is the relatively small number of buyers who have become very proficient at playing off Intel and AMD against each other," he said. "The mere threat or implication that they might buy more AMD chips seems to prod Intel into doing what they want."
In instances cited in Cuomo's complaint, Dell executives prodded Intel for higher payments in order to keep the PC maker from buying AMD chips. Dell has declined to comment on the issue, calling it "an Intel matter".
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