With the chip giant Intel Corp. (INTC) and its smaller rival Advanced Micro Devices Inc. (AMD) showing no signs of resolving their long protracted legal battle related to antitrust issues, the U.S. FTC (Federal Trade Commission) finally served a subpoena to Intel on June 4.
Intel and AMD are the two major players in microprocessor market. According to Mercury Research, a source for market information on PC Microprocessors, Intel's market share of x86 microprocessors as of the fourth quarter of fiscal 2007 was 76.7%, up from 74.4% in 2006. AMD controlled 23% of the market last year, compared with 25.3% in 2006.
Since 2006, Intel has been working closely with the FTC on an informal inquiry into competition in the microprocessor market. The FTC probe on Intel has been elevated with the issuance of a subpoena as the Commission will be now able to obtain not only information that Intel has already committed to provide but also information from other parties.
The legal tussle between Intel and AMD extends back to 2005 when AMD filed an antitrust suit against Intel in June 2005 in the U.S. District Court in Delaware. AMD alleged that Intel abused its monopoly power in the desktop CPU market to coerce PC manufacturers including Dell, Sony, Toshiba, Gateway, and Hitachi and other retail stores to boycott AMD chips and prefer Intel chips by offering them rebates. However, Intel has been refuting AMD's allegations.
It is not only in the U.S., that Intel is facing antitrust claims. Barely days after suing Intel in the U.S., AMD filed a similar antitrust complaint against Intel K.K., Intel's Japanese subsidiary in June of 2005.
In July 2006, AMD filed an antitrust suit in Germany's Federal Cartel Office against Intel after reports claimed that "Media Markt, a German chain of stores selling consumer electronics, had agreed to sell only "Intel Inside" computers in exchange for an undisclosed payment from the chip giant".
In early 2005, Japan's trade watchdog, the Fair Trade Commission or JFTC warned Intel for engaging in anticompetitive practices. In a statement issued in March 2005, JFTC said "Intel is engaging in actions to keep CPUs made by competing companies from being used." The JFTC also recommended Intel to end its practice of offering rebates to PC makers to shun competitors' products. Intel agreed to the Commission's recommendation, a move that helped the chip giant avoid a long-drawn-out legal battle.
But legal troubles continued to mount for Intel when the European Commission in July 2007 issued antitrust charges against Intel for its alleged business tactics to stifle smaller rival AMD.
In a Statement of Objections issued to Intel on July 26, 2007, the European Commission concluded that:
-- First, Intel has provided substantial rebates to various Original Equipment Manufacturers (OEMs) conditional on them obtaining all or the great majority of their CPU requirements from Intel.
-- Secondly, in a number of instances, Intel made payments in order to induce an OEM to either delay or cancel the launch of a product line incorporating an AMD-based CPU.
-- Thirdly, in the context of bids against AMD-based products for strategic customers in the server segment of the market, Intel has offered CPUs on average below cost.
The European Commission is expected to pronounce its decision before the end of September. According to the European Union rules, the European Commission can fine a company up to 10% of its worldwide sales for violating antitrust rules. In 2004, the European Commission had slapped a fine of $800 million against Microsoft Corp. (MSFT) for abusing its dominant market power.
As if all this was not bad enough, in September of 2007, Intel received a statement of objection from the Korean Federal Trade Commission or KFTC for its alleged anticompetitive behavior. As recently as June 4, 2008, the South Korean regulators fined Intel $25 million for its unfair trade practices. The KFTC concluded that Intel had breached antitrust rules by offering rebates to PC makers Samsung Electronics Co. and Trigem Computer Inc. in exchange for boycotting A.M.D. chips.
While expressing its "disappointment" with the KFTC findings, Intel indicated that it would challenge the ruling in the Seoul High Court saying that the KFTC did not give full consideration to the evidence presented.
In the just concluded first quarter, Intel's net income declined to $1.4 billion or $0.25 per share from $1.6 billion or $0.28 per share for the year-ago quarter. However, the company's per share earnings matched Wall Street analysts' consensus estimate of $0.25 per share. The company blamed the higher restructuring and asset impairment costs as well as increased provision for income tax for the decline in earnings. Intel's quarterly revenue was $9.67 billion, up 9% from $8.85 billion in the same quarter last year. Analysts polled by Thomson FirstCall had a consensus revenue estimate of $9.63 billion.
AMD reported a GAAP net loss of $358 million or $0.59 per share in the just concluded first quarter, compared to a GAAP net loss of $611 million or $1.11 per share for the year-ago quarter. AMD's first quarter revenues increased 22% to $1.51 billion from $1.23 billion in the same quarter last year. Wall Street analysts expected the company to lose $0.51 per share on revenues of $1.50 billion.
The civil lawsuit filed by AMD against Intel in the U.S. District Court in Delaware in 2005, is now scheduled to go on trial in February 2010. Intel believes its business practices are well within the U.S. law. While noting that the prices for microprocessors declined by 42.4% from 2000 to end of 2007, Intel added "When competitors perform and execute, the market rewards them. When they falter and under-perform, the market responds accordingly".
Did Intel flout the rules to retain its monopoly in the PC processor market or is AMD's claims against Intel a bit blown out of proportion? Investors will get to know all about these when the antitrust suit goes on trial in February 2010.
For comments and feedback: editorial@rttnews.com