Intel, FTC Reach Tentative Settlement

Intel Corp. and the FTC (Federal Trade Commission) have reached a tentative settlement regarding the government agency's anticompetitive claims against the chip maker. The settlement resolves charges that the company illegally stifled competition in the market for PC chips.

According to the FTC, the settlement goes beyond the terms applied to Intel in previous actions against the company and will help restore competition that the agency claims was lost as a result of Intel's alleged past anticompetitive tactics. The FTC further said the settlement will leave the company room to innovate and offer competitive pricing.

"Our litigation against the Intel is an exceptionally important case and the commission was deeply troubled by Intel's action," FTC Chairman Jon Leibowitz said on a conference call and webcast discussing the settlement. "The complaint alleged, and we believe the evidence showed, that Intel stepped well over the line."

Leibowitz said the FTC accepted the settlement because it helps consumers. "It opens the door to competition in markets that are critical to our economy," he remarked. "The settlement provides fencing in protection to make sure that Intel does not come up with new ways to undermine competition. It's just as important it provide this relief right away, so it helps consumers right now. That is critical in such a dynamic industry. Our investigation went beyond other investigations [into] Intel and relief goes beyond the relief achieved [elsewhere]. The settlement covers not only CPUs, but chips and graphics, as well."

The charges were originally filed by the FTC in December 2009 and alleged that the company had "illegally used its dominant market position for a decade to stifle competition and strengthen its monopoly." In doing so, the FTC claimed Intel deprived consumers of choice and innovation in CPUs.

In the FTC complaint, it was alleged that Intel had waged a systematic campaign to shut out rivals' competing chips by cutting off their access to the marketplace. Tactics included exclusivity payments to PC OEMs that used only Intel chips and the modification or restriction of industry technologies, according to the FTC. The FTC on its call made particular note of so-called "predatory" chip design, in which a company designs its compilers to provide the fullest results only with their own chips. The FTC believes this significantly hurt the market competitiveness and industry reputations of Intel rivals including AMD, Nvidia, and Via Technologies.

"If Mother Theresa ran a microchip company, she wouldn't engage in this practice to disadvantage rivals," Leibowitz said. "Intel made it look as though that slowdown was AMD's fault. So software engineers and computer designers mistakenly believed that the AMD chip was responsible for diminished performance and didn't realize that the AMD chip was in some instances actually better than the Intel chip."

Other US government agencies have also made note of anticompetitive practices by Intel. Dell Inc. on July 22 agreed to pay a $100 million civil penalty after the SEC (Securities Exchange Commission) alleged that PC OEM did not disclose to investors large exclusivity payments the company received from Intel to not use CPUs manufactured by AMD.

The FTC complaint heavily noted AMD, Intel's closest rival, which had often made similar claims of anticompetitive behavior. In November 2009, Intel reached a landmark settlement with AMD to end all outstanding legal disputes between the two companies. Intel paid AMD $1.25 billion as part of the settlement and agreed to abide by a set of business practice provisions. The two companies also entered into a five-year licensing agreement.

The FTC's anticompetitive arguments followed on several international antitrust actions against Intel by FTC counterparts in such places as the European Union, Korea, and Japan, many of which did not ended in Intel's favor. Indeed, the EU imposed on Intel a record fine of more than $1.45 billion in May 2009; the Korea Fair Trade Commission found that Intel violated the country's antitrust laws in June 2008; and in 2005, the Japan Fair Trade Commission found that Intel used illegal tactics to deter competitors' growth. Intel vigorously maintained that its business practices are not anticompetitive in all cases.

While fierce in its accusations, the FTC on June 21 suspended administrative trial proceedings while it and Intel considered potential settlement with a July 23 deadline. Late last month the deadline for talks was moved back to August 6.

Terms of the settlement
The company's settlement with the FTC specifies that Intel will be prohibited from:
• conditioning benefits to PC makers in exchange for their promise to buy chips from Intel exclusively or to refuse to buy chips from others; and
• retaliating against computer makers if they do business with non-Intel suppliers by withholding benefits from them.

In addition, the FTC settlement order will require Intel to:
• modify its intellectual property agreements with AMD, Nvidia, and Via so that those companies have more freedom to consider mergers or joint ventures with other companies, without the threat of being sued by Intel for patent infringement;
• offer to extend Via's x86 licensing agreement for five years beyond the current agreement, which expires in 2013;
• maintain the PCI Express Bus interface for at least six years in a way that will not limit the performance of graphics processing chips; and
• disclose to software developers that Intel computer compilers discriminate between Intel chips and non-Intel chips, and that they may not register all the features of non-Intel chips. Intel also will have to reimburse all software vendors that want to recompile their software using a non-Intel compiler.

Unlike other governing agencies, the FTC does not have the authority to levy fines. As such, Intel faces no fines in its settlement.

Impact of the settlement to be 'modest'
Although the FTC settlement goes beyond the terms applied to Intel in previous actions against the company, the impact may still be minimal, industry watchers believe.

"While there could be some financial impact to Intel from these changes in business practices, central processing unit (CPU) supply and demand dynamics still rule the economic roost," FBR Capital Markets wrote in a report. "Said differently, PC consumers are willing to pay so much per machine, the world demands so many PCs, Intel and AMD built so much capacity to meet this demand ... these are the dynamics that determine most of Intel's revenues and profits, and we still believe free market economics will only be modestly impacted, at most, over the long-term as a result of settlements like these given the CPU market is still quite competitive today."

Intel agreed to the settlement without admitting either any violation of law or that the facts alleged in the complaint are true. The company in its own statement supported the settlement, noting that legal uncertainty diminishes with the settlement.

"This agreement provides a framework that will allow us to continue to compete and to provide our customers the best possible products at the best prices," said Doug Melamed, Intel senior vice president and general counsel. "The settlement enables us to put an end to the expense and distraction of the FTC litigation."

The FTC vote approving the proposed settlement order was 4-0. The order will be subject to public comment for 30 days, until September 7, after which the FTC commission will decide whether to make it final.

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