New York vs. Intel

On January 10, New York State Attorney General Andrew Cuomo subpoenaed Intel. “After careful preliminary review, we have determined that questions raised about Intel’s potential anticompetitive conduct warrant a full and factual investigation,” he said in the official statement.

Intel is now being investigated for anti trust issues associated with the sale of x86 processors, the chips responsible for running most PCs and servers. Though the numbers vary, Intel is said to control over three quarters of the x86 market, worth roughly $30 billion, in both revenue and volume.

One of the accusations against Intel is that it dropped processor prices to keep its chief rival, Advanced Micro Devices (AMD), out of the market. Intel says that any price drop is due to, and illustrative of, a competitive market. Chuck Mulloy, an Intel spokesman said, “We do not sell product below cost—ever,” and further that, “We believe our business practices are lawful, and we believe the microprocessor market is competitive.”

Intel has also been accused of improperly distributing rebates and offering questionable pricing incentives. The Wall Street Journal notes the importance of this issue: “Any case against Intel is likely to turn on how Intel structures rebates, discounts and other incentives to win a greater share of computer makers’ chip purchases.” According to Thom Lambert, Associate Professor of Law at the University of Missouri School of Law and a blogger for Truth on the Market, “given that the press release refers favorably to Intel investigations by the European Commission and Korean and Japanese antitrust regulators, we can assume Cuomo is concerned about the behavior that troubled those foreign regulators. That purportedly troubling conduct is really just loyalty discounts — giving computer manufacturers a price-break, either an up-front discount or a rebate, if they agree to take the bulk of their requirements from Intel rather than from its competitors.”

None of this is new to Intel; back in 2005 AMD filed a private anti trust suit against the company. (That case is scheduled to go to trial in April of 2009.) At the time AMD filed its suit, they were also on the attack technologically speaking. According to BusinessWeek, “AMD captured market share from Intel in 2005 and 2006 by beating its larger competitor to a key breakthrough that affected chip speed, but Intel has since improved its technology and recovered share.” Strongly recovered share that is: BusinessWeek states further that, “Last year, AMD sold $4.1 billion worth of the x86 microprocessors that are the industry standard for PCs and corporate servers, garnering 13.4 percent of the $30.6 billion market, according to Dean McCarron, president of industry consultant Mercury Research. Intel’s estimated $26.5 billion in x86 sales accounted for 86.6 percent.”

AMD has also gone after Intel outside the U.S.; filing civil suits in Europe, Japan and South Korea. The latest news from the European front came in July when the European Commission issued a “statement of objections” against Intel. (This statement is, “a preliminary ruling that can lead to fines or other penalties,” writes the Wall Street Journal.) That action was followed up by South Korea which accused Intel of violating anti trust laws in September.

One of the subplots of the investigation stems from both its timing, “less than three months after the head of the Federal Trade Commission rejected requests from lawmakers and some commission members to open a formal investigation,” according to the New York Times; and its point of origin, New York, which is not the home of Intel. While the investigation was opened by Cuomo, it also has the backing of Representative Kirsten Gillibrand and Senator Charles E. Schumer, both Democrats from New York. The official Press Release from Cuomo’s office states that, “Protecting fair and open competition in the microprocessor market is critical to New York, the United States, and the world.” While this positions Cuomo as taking a stance on a global scale, he has also been accused of placing emphasis on the New York aspect of the statement.

The New York Times points out, “Advanced Micro has promised to open a $3 billion plant in upstate New York that will employ 1,200 people.” As Thom Lambert notes, “It seems that Intel’s chief competitor, Advanced Micro Devices (AMD), has promised to build a $3 billion plant in upstate New York. Thus, it makes sense that Mr. Cuomo would jump on the bandwagon led by Senator Charles Schumer and Representative Kirsten Gillibrand, both of whom have pushed for a federal inquiry into Intel’s loyalty discounts.”

Whatever the reason for the investigation, it is still undecided who will come out on top. While BusinessWeek states, “industry and legal analysts contend the allegations could be difficult to prove, given the competitive pricing of Intel’s chips.” However, as Tom McCoy, AMD’s executive vice president for legal affairs and chief administrative officer notes, “At least so far, Intel has not been able to convince any agency that has conducted a formal investigation that its practices are legal.”

At the very least the challenges amount to an unwanted hassle for Intel: “AMD’s charges may not ultimately adhere to Intel, but they’ll likely provide a continuing distraction at a time when the chip king can ill afford one,” says BusinessWeek.