The regulator is holding out for big changes in the way Intel competes
By Ian King and Arik Hesseldahl
(Bloomberg) — The U.S. Federal Trade Commission, pursuing the biggest U.S. antitrust case in more than a decade, may transform the way Intel Corp. competes in the computer-chip industry.
The FTC said yesterday that Intel (INTC), the world's largest chipmaker, stifled competition by using "threats and rewards" to force computer makers not to buy chips from rivals. Richard Feinstein, the FTC's director of competition, said he would rather Intel alter its business practices than be saddled with a fine that does little to foster competition.
Regulators said they want to keep Intel, the world's largest chipmaker, from signing exclusive deals with computer makers and require the company to share more of its technology with rivals. If successful, the government may gain influence over how Intel licenses its technology, says Robert Lande, a law professor at the University of Baltimore.
"That would be a bombshell," Lande said.
Victory for the FTC would help Nvidia Corp., which has sparred with Intel over whether it has the right to develop chips that work with the company's microprocessors. In February, Intel asked a judge in Delaware to declare that a chip license with Nvidia doesn't cover future products. Nvidia countersued for breach of contract. Nvidia, based in Santa Clara, California, added 8.1 percent yesterday in Nasdaq Stock Market trading.
The European Union levied a record €1.06 billion ($1.55 billion) fine against Intel in May. In the U.S., Intel agreed to pay $1.25 billion to Advanced Micro Devices Inc. last month to settle a four-year civil case. The company's shares fell less than 1 percent after each announcement, a sign of investors' confidence the fines would have little effect on Intel's business. The company had $12.9 billion in cash and short-term investments at the end of September.
"I'd almost rather see them pay money than be forced to change their ways," said Bill Gorman, an analyst at PNC Institutional Investments in Pittsburgh, which oversees $104 billion, including Intel shares. "It's a lot of uncertainty as to how this might work out in a way that affects their ability to gain share."
Intel, based in Santa Clara, California, dropped 42 cents to $19.38 yesterday in Nasdaq Stock Market trading. The stock has gained 32 percent this year. AMD jumped 33 cents, or 3.7 percent, in New York Stock Exchange composite trading.
Intel General Counsel Doug Melamed said yesterday that the company's settlement talks with the FTC broke down after the agency asked for "unprecedented remedies," such as restrictions on pricing and the requirement that Intel license patents.
"The FTC is advocating new rules for regulating and micromanaging business conduct," Melamed said on a conference call. "The FTC asked for remedies that would make it impossible for Intel to conduct its legitimate business."
The FTC is focusing on Intel's behavior in the market for graphics chips, which control how images are displayed on computer screens. That makes it further reaching than cases brought by regulators in the European Union, South Korea and Japan. Those cases focused on Intel's dominance of computer processors, where it controls more than 80 percent of the market and dwarfs AMD.
"The big thing that jumped out at me was that they are going after graphics chips," Bill Whyman, head of technology research at Washington-based International Strategy and Investment Group, said in a Bloomberg Television interview. "The real forward looking aspect of this case dealt with graphics processors."
Nvidia has taken a lead in graphic-chip technology, considered as a potential competitor to traditional computer chips, known as central processing units.
"Intel allegedly once again finds itself falling behind the competition—this time in the critical market for graphics processing units," the FTC said. "These products have lessened the need for CPUs, and therefore pose a threat to Intel's monopoly power."
Intel said last week that it is behind schedule on developing stand-alone graphics products. "Intel knows that they need to be in the GPU market and is trying to get there," said Tom Halfhill, an analyst at Scottsdale, Arizona-based In-Stat.
FTC officials also alleged Intel coerced computer manufacturers, including Round Rock, Texas-based Dell Inc., Palo Alto, California-based Hewlett-Packard Co. and Armonk, New York- based International Business Machines Corp. not to buy rivals' processor chips, the FTC said, reiterating concerns voiced by regulators in earlier antitrust lawsuits.
The FTC case will be heard before an administrative law judge next year, possibly in September, the FTC said. Whichever party loses can take the case before the full commission for review. If Intel loses before the commission, it can ask for a review by the U.S. Court of Appeals in any state where the company does business. If that fails, Intel could then take the case to the Supreme Court, the FTC said. The commission can't take the case to outside courts.
The FTC's case against Intel reflects increased antitrust scrutiny of the technology industry under President Barack Obama's administration. The Justice Department has started a review of IBM's position in the mainframe-computer business, the Computer and Communications Industry Association said in October. Earlier this year, the FTC examined whether Apple Inc. and Google Inc. were breaking antitrust law by sharing board members. Google Chief Executive Officer Eric Schmidt has since resigned from Apple's board, while Arthur Levinson, an Apple director, resigned from Google's board.
When settling its dispute with AMD last month, Intel said it also agreed to abide by a set of business-practice provisions, such as not punishing customers who don't buy minimum amounts of chips. Intel said it doesn't do that and agreed not to do so in the future.
AMD had sued Intel in Delaware in 2005, alleging that Intel controls the microprocessor market in part by providing discounts to customers that avoid AMD's products.
"As a shareholder, I'd rather seem them fight it," said Pat Becker Jr., chief investment officer at Becker Capital Management in Portland, Oregon. "I don't think the consumer has been harmed at all—it's been a very competitive market over the last ten years. I don't hear consumers complaining about Intel being a monopoly."
To contact the reporters responsible for this story: Ian King in San Francisco at firstname.lastname@example.org; Arik Hesseldahl in New York at email@example.com.
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