Even for a company as powerful as Intel, with $13 billion in cash on the books, $1.25 billion is a lot of money. So why drop that huge quantity of money in the lap of its biggest rival, Advanced Micro Devices?
The payment is, of course, to settle the antitrust suit AMD brought against Intel five years ago. AMD's stock surged 22 percent Thursday after the chipmakers announced the agreement, but Intel's share price dropped 1 percent, indicating which company the investors thought got the better deal.
Paul Otellini, speaking in September and holding a wafer of silicon chips
(Credit: Stephen Shankland/CNET)AMD does indeed come away with some serious perks--not just the cash, but also a new patent cross-license agreement that removes Intel's objections to AMD spinning off its chip-manufacturing business, enables multiple manufacturers to build AMD's chips, and eliminates the earlier patent agreement's payments to Intel. And it has Intel's agreement not to violate a list of restraints on its business practices.
But Intel gets something out of this, too.
Spend now, save later
Let's start with the money. Sure, shareholders likely frowned when they heard Intel's fourth-quarter expenses are expected to climb from $2.9 billion to about $4.2 billion. But Intel could have been out a lot more money if things had gone south.
In the European Union, Intel is wrestling with an antitrust case that produced a fine of 1.06 billion euros, or $1.6 billion at today's exchange rate. Intel appealed the European Commission fine, but it's a very concrete example of just how severe the Intel punishment could be.
There are other financial factors, too. Intel and AMD were set to begin their jury trial in March, and jury trials are famously unpredictable. Add on top of that risk the fact that antitrust suits can come with triple damages.
"It was a small multiple of the damage that could be awarded in a jury trial," Intel Chief Executive Paul Otellini said of the price tag in a conference call earlier Thursday.
Treble damages of the scale of just the European Commission fine would have been more than $4 billion, Technology Business Research analyst John Spooner observed. Facing that prospect, "Intel chose to control its own destiny and settle up front."
Taking commercial cases to a jury trial is indeed risky, said Richard Brosnick, who's involved in antitrust law at the firm of Butzel Long.
"Any complex commercial case going to the jury phase is challenging, and antitrust, given the economics, is probably more challenging," Brosnick said. "Trial is expensive overall, not in billions, but in terms of the risk you'll be able to explain these issues in a way that will be understood by and persuasive to a jury."
Goodwill in other antitrust cases
AMD's antitrust case isn't the only one Intel faces. It's also got the European Commission fine discussions, a new antitrust lawsuit from New York Attorney General Andrew Cuomo, and an antitrust investigation from the Federal Trade Commission.
The AMD settlement doesn't make those cases evaporate, but Intel hopes it'll help.
"We hope that having this major litigation settled with AMD would be viewed favorably by these regulatory bodies and eventually the cases would be dropped," Intel spokesman Tom Beerman said.
Certainly those regulators won't face as much of AMD's active prodding. Among the terms of the settlement is this, regarding all the regulatory actions AMD is involved in:
AMD agrees to promptly...notify in writing each authority...that except as provided in Section 3.5 AMD has resolved its disagreements with and complaints concerning Intel contained in that Administrative Complaint and believes that this Agreement provides AMD with fair compensation for any and all actual or alleged harm and damages that AMD did or may have suffered in connection with matters discussed in the Administrative Complaint. In addition, AMD agrees that it will not ghost-write or edit any other briefs, pleadings, or "friend of the court" or "friend of the tribunal" materials or briefs in any Administrative Action.
But whether Intel will actually get what it wants isn't certain.
"It's certainly possible that the public agencies will view this as a compromise they can live with, but it's equally possible not," Brosnick said.
One issue is Intel practices described in the section 3.5 mentioned above, where AMD and Intel still disagree. Brosnick said the governmental agencies still might be concerned about any of those practices--called "retroactive discounts," "accused bid bucket," and "accused end-user discounts" in the settlement.
Intel digging in its heels?
Though the agreement didn't preclude those practices as it did some others, it did agree not to defend them as hard as it might in settlement talks with the government organizations.
"Intel agrees that in the event it enters into voluntary settlement discussions with a government authority in the EC litigation, New York litigation, or the FTC investigation, and if such government authority proposes to include in a consent judgment or other governmental order a prohibition against Retroactive Discounts, Accused Bid Buckets or Accused End-User Discounts, Intel will not challenge such a prohibition as a general matter, although it may challenge the scope or specific language of the prohibition," the settlement agreement said.
Just how deeply Intel will dig in its heels in the other cases remains to be seen. Although it settled a big case, Otellini hardly sounded contrite. He reiterated on several occasions his belief that Intel didn't do anything illegal. He said airing the full context of seemingly incriminating e-mail would show Intel in a better light. And he vehemently attacked the New York case.
"We strongly disagree with the New York attorney general case and believe the complaint is entirely without merit," Otellini said. "Discounts and rebates are entirely fair business practices, and it's unfortunate the New York attorney general chose to distort the facts. We would have preferred to engage in a dialog with the New York attorney general."
Then again, Intel spoke in strong terms about the AMD trial. Perhaps Intel's pragmatic side will show in the other cases next.
New York Attorney General Andrew M. Cuomo filed a federal antitrust lawsuit Wednesday against Intel that accuses it of paying computer makers rebates to illegally maintain its monopoly power, the newest among several such attacks that have dogged the chipmaker in recent years.
"Intel has engaged in a systematic worldwide campaign of illegal, exclusionary conduct to maintain its monopoly power and prices in the market for x86 microprocessors," the suit asserts. "By exacting exclusive or near-exclusive agreements from large computer makers in exchange for payments totaling billions of dollars, and threatening retaliation against any company that did not heed its wishes, Intel robbed its competitors of the opportunity to challenge Intel's dominance in key segments of the market. This illegal behavior was highly detrimental to consumers, competition, and innovation."
The suit "seeks to bar further anticompetitive acts by Intel, restore lost competition, recover monetary damages suffered by New York governmental entities and consumers, and collect penalties," Cuomo said in a statement.
The suit (click for PDF) makes the state the newest party to go after the dominant chipmaker. Intel also is in the midst of an antitrust suit brought by top rival AMD in 2005 and appealing a massive $1.5 billion fine from the European Commission from a later case in the European Union.
New York Attorney General Andrew M. Cuomo
(Credit: New York Office of the Attorney General)Intel will defend itself, Intel spokesman Chuck Mulloy said in response to the New York suit.
"We disagree with the New York attorney general. Neither consumers--who have consistently benefited from lower prices and increased innovation--nor justice are being served by the decision to file this case now," Mulloy said.
Of e-mails the attorney general quoted as evidence Intel abused its position, all already emerged in earlier cases, he added. "It is the AMD case filed 4.5 years ago. It's the same case the EU brought. There's nothing significant or new here that hasn't been discovered," Mulloy said.
According to the suit, computer makers "frequently decided, when faced with the array of incentives and threats which Intel brought to bear, to collaborate with Intel in restricting their purchases from AMD."
"In a February 27, 2003 internal Dell document, for example, it was assumed that 'aggressive' purchases by Dell from AMD could result in '(r)etaliatory (rebate) reductions (by Intel that) could be severe and prolonged with impact to all LOBs (lines of business),'" the suit said. "Another Dell document from March 2003 concluded that '(a)nticipated Intel response wipes out all potential opinc (operating income) upside from going with AMD.'"
And an unnamed IBM executive said in a 2005 e-mail that balancing business interests against Intel's response was hard. From the suit:
I understand the point about the accounts wanting a full AMD portfolio. The question is can we afford to accept the wrath of Intel if we do the AMD full portfolio? It is a very hard question to deal with. On the one hand, having Intel help us has been one element of why we are doing better in the market. If they start to sell against us again I am afraid that we would be in a very difficult spot. On the other hand, if we leave Sun and HP an opening with AMD we will (be) very exposed on that side of things.
Cuomo's office said it began investigating the case in January 2008, "reviewed millions of pages of documents and e-mails and took testimony from several dozen witnesses."
Updated 9:43 a.m. PST with further details from the lawsuit.
Federal prosecutors have charged a prominent hedge-fund manager and five others with securities fraud resulting from insider trading involving some of the tech industry's best-known companies, including Intel, Google, and IBM.
Raj Rajaratnam of Galleon Group was arrested Friday in New York according to various reports and charged with 13 counts of securities fraud and conspiracy following a FBI investigation into Galleon Group's trading patterns. Also charged in the complaint, filed in U.S. District Court for the Southern District of New York, were co-conspirators Rajiv Goel of Intel and Anil Kumar of McKinsey, which provided consulting services to AMD.
A separate complaint charges two employees of New Castle Partners, another hedge fund, with insider trading along with IBM executive Robert Moffat, senior vice president and group executive for IBM's Systems and Technology Group. Danielle Chiesi and Mark Kurland of New Castle Partners allegedly exchanged information with Rajaratnam regarding the negotiation process surrounding AMD's decision to spin off its chip-making arm and receive outside investment, and obtained other insider information for the purpose of trading in Akamai and Sun Microsystems.
Galleon Group told CNBC that it was unaware of the investigation but planned to cooperate with authorities.
An Intel representative confirmed that Goel works in the treasury department of Intel's finance organization, and has been "placed on administrative leave as we look into this matter." Intel said it was never contacted by authorities regarding the investigation.
McKinsey said in a statement that it was "distressed" about Kumar's involvement in the case and was "looking into the matter urgently. AMD said it was looking at the complaints and had no further comment. IBM declined to comment.
A representative for Akamai did not immediately return a call seeking comment.
According to the complaint, Rajaratnam obtained information about strategic investments that Intel and others were about to make in Clearwire from Goel, and details about AMD's proposed fab spinoff from Kumar and Chiesi. Galleon Group and New Castle Partners then allegedly used that information to trade in shares of Clearwire and AMD, resulting in millions of dollars in profits.
Moffat is also said to have provided details about AMD's GlobalFoundries spinoff, which required IBM's approval due to an extensive technology-sharing partnership between the two companies. In addition, Moffat allegedly gave the traders information related to upcoming earnings announcements from IBM and Sun, which IBM was considering acquiring in early 2009.
Rajaratnam also had hired an individual identified in the complaint only as a "confidential witness" who has been cooperating with the FBI since November 2007 after agreeing to plead guilty to securities fraud and conspiracy. The witness had insider contacts at Polycom and a company called Market Street, which helps publicly traded companies--such as Google--prepare earnings reports.
The FBI said Galleon Group was able to learn through its Market Street contacts that Google's second-quarter 2007 earnings results were going to miss analyst expectations, which would usually send the stock down the following day. Before Google's earnings were released, Galleon Group purchased put options and sold Google's stock short in hopes of turning a profit, which, of course, they did, to the tune of $8 million.
Shares of Polycom and Hilton Hotels were also involved in the insider trading, according to the complaint. The FBI said it obtained its information by placing a wiretap on several phones--including Rajaratnam's mobile phone--as well as the participation of confidential witnesses.
Rajaratnam was named to Forbes' 2009 list of the world's billionaires, with an estimated net worth of $1.3 billion. He is a former employee of Needham & Co., an investment bank.
There's no question that the European Commission's $1.45 billion antitrust fine against Intel is a lot of money. But don't expect Wednesday's antitrust enforcement move to radically change what you see when it's time to buy your next PC.
Antitrust actions can have a dramatic effect when a decision breaks a company into pieces, but the biggest factors in the rivalry between Intel and AMD--and increasingly Nvidia, too--is technology. So while AMD can be pleased with the European Commission's conclusion, it's got bigger worries.
AMD investors cheered the European Commission's antitrust fine against Intel on Wednesday.
(Credit: Google)"They have a marketing problem. They need to increase size of their voice," said Technology Business Research analyst John Spooner. "And they've got to run faster than Intel. They've got to have products that really are better and provide more value."
AMD has been tirelessly agitating for antitrust actions against its larger rival, and it's made some headway. Japan and South Korea have come down against Intel, and the Federal Trade Commission in the United States is involved in its own Intel investigation--not its first. AMD also has its own private antitrust suit under way in Delaware.
But when it comes to taking on Intel, a far bigger factor has been technology--not just processor designs, but also manufacturing skill and capacity that means chips can be priced competitively while still being profitable.
Market share changes
Indeed, AMD made its biggest recent inroads against Intel when AMD's Opteron and Athlon processors could outgun Intel's Xeon and Pentium models, which used an outdated architecture. But Intel reclaimed that share once it modernized its designs at the same time AMD stumbled with its own manufacturing problems.
AMD CEO Dirk Meyer
(Credit: AMD)AMD's troubles continued into 2008, when it installed Dirk Meyer as the new CEO and undertook a plan to spin off its manufacturing business.
But Wednesday's decision gave AMD a new cause for optimism, including the hope it will materially improve sales.
"We are hopeful that it will. When we have products people want to buy we won't be in position that's artificially constrained by payments competitors are making to exclude us," said Harry Wolin, AMD's senior vice president of legal affairs. He did add, though, that technology and business practices remain important: "We still have to deliver fine products to our customers and treat our customers and partners well. We have to manufacture products with our partners."
Antitrust actions can change behavior, to be sure. Microsoft was largely unscathed by the U.S. Justice Department's antitrust suit that began in the 1990s. But its legacy arguably lives on: the company is exercising some self-restraint when it comes to how strongly it promotes its online services through dominant widely used products such as Windows and Internet Explorer, and it's not because Microsoft doesn't fiercely want a stronger online presence.
But in a conference call with reporters, Intel Chief Executive Paul Otellini argued that the overall market dynamic isn't changing: technology still is king when computer makers decide whether to buy AMD or Intel chips.
"Most customers buy from both suppliers today. Most customers buy more or less from each supplier depending on the quality of the product, the competitiveness of the product, and the pricing...that dynamic hasn't changed in my career at Intel, which is 35 years. I don't expect it to change," Otellini said. "I don't think a customer is going to put him or herself at a disadvantage by buying an inferior or more costly products, just to try to walk a line that may be artificial."
Intel CEO Paul Otellini
(Credit: Intel)
Antitrust headaches
The European Commission's Wednesday conclusions and fine certainly didn't make life any easier for Intel's sales force, though. It concluded that Intel used partially or completely hidden rebates to ensure computer makers would use Intel chips exclusively or nearly so. It also concluded Intel paid computer makers to cancel or delay the introduction of products using rival chips.
"My experience with salespeople is they'll say anything to get a sale. Intel now has to put some constraints on sales reps that would not be there if they had less than 70 percent market share in the European Union," said Gartner analyst Martin Reynolds. But that won't be enough to hobble Intel. "Intel's biggest challenge is not getting rid of competition, it's making sure of market growth."
The European Commission's move could further other actions against Intel, too, Reynolds said.
AMD's private antitrust case also alleges Intel rebates conditioned on exclusivity or near exclusivity and Intel payments conditioned on delaying AMD-based products, Wolin said--and any settlement awards or damages that Intel might end up paying in that case would go to AMD, not wronged taxpayers. That case is scheduled to go to trial in March 2010.
Though AMD's Wolin wouldn't comment on it, the Justice Department's new antitrust leader, Christine Varney, promised tougher enforcement of antitrust regulations, too.
Intel strongly denied any wrongdoing and is appealing the European Commission ruling. Otellini said the EU wouldn't accept some contrary evidence and suggested that its lack of written proof was lack of evidence, not of Intel operating in secret.
Overall, though, just as Intel's successes won't be erased by the fine and ruling, AMD's problems won't be fixed by it. The lawyers may be paid well, but engineers still are at the heart of the microprocessor market.
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