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FTC: ‘Intel fell behind’ against AMD, used unfair tactics to catch up

By Scott M. Fulton, III, Betanews

Clearly choosing the path of minimum compromise, the US Federal Trade Commission this morning voted to press antitrust charges against Intel, in an action that now parallels that of the European Commission, as well as the state of New York.

The principal charges are those we’ve covered here before, and which are also at the root of the EC’s case, among them that Intel entered into near-exclusivity or exclusivity arrangements with Dell and Hewlett-Packard. According to the terms of those arrangements (which may or may not be legally considered “agreements” since they apparently were not entirely on paper), the OEMs promised to purchase mainly Intel parts in particular market segments, in exchange for preferential pricing and rebates (or programs that had the same effect as rebates).

But to those charges today, the FTC added an unexpected dose of venom — a tone completely opposite to that of the Bush-43 era FTC, which at times died down to such a lull it was difficult to tell whether the Commission had dropped its case. At the heart of the FTC’s claim today is a broader allegation: that Intel found itself to be technologically inferior to AMD, and that it concluded it could only regain its footing through anti-competitive behavior.

Seal of the US Federal Trade Commission (FTC)“In 1999 after AMD released its Athlon CPU and again in 2003 after AMD released its Opteron CPU, Intel lost its technological edge in various segments of the CPU markets. Original equipment manufacturers (‘OEMs’) recognized that AMD’s new products had surpassed Intel in terms of performance and quality of the CPU,” reads this morning’s complaint from the FTC. “Its monopoly threatened, Intel engaged in a number of unfair methods of competition and unfair practices to block or slow the adoption of competitive products and maintain its monopoly to the detriment of consumers. Among those practices were those that punished Intel’s own customers — computer manufacturers — for using AMD or Via products. Intel also used its market presence and reputation to limit acceptance of AMD or Via products, and used deceptive practices to leave the impression that AMD or Via products did not perform as well as they actually did.”

The complaint alleges that Intel entered into deals with Dell, HP, and others as a first-strike response to the technological threat from both AMD and Via, a player whose name has been forgotten in recent years.

But in a completely new set of charges, the FTC is adding fresh allegations that many did not see coming. Among them:

  • Intel is currently, actively engaged in manipulating the design of CPUs so as to limit the development of CPU/GPU hybrid technologies to favor Intel’s graphics parts. Specifically, the FTC charges Intel with “adopting a new policy of denying interoperability for certain competitive GPUs,” and adds that it’s protecting its technology by “making misleading statements to industry participants about the readiness of Intel’s GPUs.” This suggests that the FTC may also have been investigating Intel’s conduct with regard to Nvidia, including the skirmish over whether Nvidia was licensed to produce chips for Intel’s Nehalem platform.
  • Intel is currently, says the FTC, bundling its chipsets with CPUs at below-cost pricing in an effort to drive Nvidia out of the chipset market, “resulting in below-cost pricing of relevant products in circumstances in which Intel was likely to recoup in the future any losses that it suffered as a result of selling relevant products at prices below an appropriate measure of cost,” as this morning’s complaint alleges.
  • Intel intentionally designed the interface between its CPU and chipsets so as to selectively, at a time of its own choosing, exclude Nvidia and ATI (through AMD) from attaining full interoperability with its CPU.
  • ADDED 11:08 pm: Intel developed interface standards such as USB and the high-def HDCP connection in such a way that it could take advantage of their specifications before anyone else: “In these instances, Intel encouraged the industry to rely on standards that Intel controlled and represented that the standards would be fairly accessible,” states the FTC’s complaint. “But Intel has delayed accessibility to the standards for its competitors so that Intel can gain a head start with its own products and wrongfully restrain competition. Intel’s conduct has no offsetting, legitimate or sufficient procompetitive efficiencies but instead deters competition and enhances Intel’s monopoly power in CPUs.”
  • The FTC claims Intel intentionally distributed C++ compilers and software libraries whose code would run slower on AMD CPUs than on Intel’s. This has been a minor concern of AMD’s now-dismissed legal case against Intel, which Intel has continually denied. Nonetheless, Intel did promise to continue not doing this sort of thing, in its settlement last month with AMD.
  • Intel published misleading benchmark claims, the FTC alleges — misleading in that they didn’t use real-world representations of performance, and that they were on occasion manipulated. “In truth and in fact, the benchmarks Intel publicized were not accurate or realistic measures of typical computer usage or performance, because they did not simulate ‘real world’ conditions, and/or overestimated the performance of Intel’s product vis-à-vis non-Intel products,” the complaint states, going on to use the phrase “false and misleading” to make the publication of tinted benchmarks the equivalent of fraud.
  • Intel publishes false and misleading white papers, including this one (PDF available here“), says the FTC: “Intel’s Web site includes a White Paper called ‘Choosing the Right Client Computing Platform for Public Sector Organizations and Enterprises.’ In the document, Intel stated that the ‘SYSmark 2007 Preview is a benchmark test that measures the performance of client computing software when executing what is designed to measure real-life activities.’ In truth and in fact, the benchmark was not designed to measure ‘real life activities,’ but to favor Intel’s CPUs.” SYSmark 2007 Preview is a benchmark produced by Business Applications Performance Corporation, which that firm says was developed in cooperation with both AMD and Intel, among others. Betanews located the offending passage as footnote 1 on page 3.

Next: The FTC’s proposed remedies…

The FTC’s proposed remedies

While charges of violating the Sherman Antitrust Act were anticipated, the Federal Trade Commission also charged Intel this morning with violations of Section 5 of its own FTC Act of 2006 — specifically, with creating the conditions for an unfair method of competition not covered by Sherman.

In their explanation of charges this morning, FTC Chairman Jon Leibowitz and Commissioner Thomas Rosch wrote, “Despite the long history of Section 5, until recently the Commission has not pursued free-standing unfair method of competition claims outside of the most well-accepted areas, partly because the antitrust laws themselves have in the past proved flexible and capable of reaching most anticompetitive conduct. However, concern over class actions, treble damages awards, and costly jury trials have caused many courts in recent decades to limit the reach of antitrust. The result has been that some conduct harmful to consumers may be given a ‘free pass’ under antitrust jurisprudence, not because the conduct is benign but out of a fear that the harm might be outweighed by the collateral consequences created by private enforcement. For this reason, we have seen an increasing amount of potentially anticompetitive conduct that is not easily reached under the antitrust laws, and it is more important than ever that the Commission actively consider whether it may be appropriate to exercise its full Congressional authority under Section 5.”

Section 5 permits the FTC to prevent individuals, partnerships, and corporations (excluding banks) “from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.” In essence, the Act broadens the FTC’s power to prohibit what it deems to be anti-competitive activity, and it does not need to show case precedent with regard to the Sherman Act to do it.

The Commission considered Intel’s oft-heard argument that its conduct can’t be held as exclusionary if the net effect was the lowering of CPU prices. But in his partial dissent from the complaint — specifically, with regard to the part in which he did not dissent — Comm. Rosch explained why Intel may still be held accountable under Sections 2 and 5 of the FTC Act:

“To be sure, most conventional Section 2 cases alleging monopoly maintenance or attempted monopolization rise or fall on proof of higher prices — if for no other reason than that kind of injury is easiest to measure. But that is not the only kind of consumer injury with which a law enforcement agency like the Commission should be concerned. The Commission must also be concerned with whether a course of conduct by a firm with monopoly power reduces consumer choice by reducing alternatives. That is true whether the ‘consumer’ suffering the reduction in choice is an original equipment manufacturer…or an end user of computer equipment that buys equipment from the OEM. Thus, if and to the extent that an exclusionary course of conduct by a firm with monopoly power results in that less measurable form of consumer injury, Section 5 is the most appropriate vehicle for the analysis, and the Commission, with its expertise and experience, is the most appropriate plaintiff to make that determination.”

So among the remedies the FTC is seeking are price controls that would effectively bar Intel from making any kind of pricing discount deal with an OEM that it would not make with any other OEM of like standing in the market. It seeks to bar Intel from offering conditional rebates and discounts to OEMs, and from manufacturing any technology that intentionally impairs the performance of another from a competing manufacturer. It would prohibit Intel from producing false and misleading advertising, and to correct allegedly false statements it made in the past.

And the FTC would also require Intel to license interoperability information under terms and conditions specified by the Commission, “including whatever is necessary to interoperate with Intel’s CPUs or chipsets.”

Intel’s response early this afternoon came from newly appointed general counsel Doug Melamed, who characterized his company as one bewildered by an arsenal of new charges against it. “This case could have, and should have, been settled,” Melamed said. “Settlement talks had progressed very far, but stalled when the FTC insisted on unprecedented remedies — including the restrictions on lawful price competition and enforcement of intellectual property rights set forth in the complaint — that would make it impossible for Intel to conduct business…The FTC’s rush to file this case will cost taxpayers tens of millions of dollars to litigate issues that the FTC has not fully investigated. It is the normal practice of antitrust enforcement agencies to investigate the facts before filing suit. The Commission did not do that in this case.”

Copyright Betanews, Inc. 2009

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