Competition in the Innovation Economy - New York Attorney General

Intel's Response to the New York Attorney General's Complaint

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The NYAG's Distortion of the Antitrust Laws.
Despite the NYAG's repeated allegations, Intel does not "pay" to, or "bribe" OEMs. Intel provides discounts to its customers, generally in the form of rebates, often based on the volume of microprocessors purchased – the greater the volume of products purchased, the greater the discount (and the lower the effective price). This is a normal and lawful business practice. The NYAG, however, takes this normal pricing mechanism of offering customers a discount and accuses, Intel, contrary to common sense, of using lower prices to raise prices. The re-labeling of rebates on amounts owed as "payments," however, does not change that Intel's prices, after all discounts or rebates, were lower, but invariably comfortably above Intel's costs, profitable and therefore not predatory or unfair under any recognized legal standard.

In a series of six United States Supreme Court decisions spanning more than 20 years, the Supreme Court has rejected any antitrust challenge to above-cost price cutting, regardless of what form it takes, because price-cutting is recognized as good for consumers. In a seminal 1986 decision, the Supreme Court explained that "cutting prices in order to increase business is often the very essence of competition." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 594 (1986). More than that, the Court has repeatedly held that it is not the role of the Courts or government agencies to try and regulate or punish discounting, except under very limited circumstances. The Court has said that "mistaken inferences" of anticompetitive effects "are especially costly" in cases involving discounting "because they chill the very conduct the antitrust laws are designed to protect." Id. In Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104 (1986), the Court said it would be a "perverse result" to hold illegal a "decision by a firm to cut prices in order to increase market share" when the firm's prices are above cost. Id. at 116.¹ These clear legal standards explain why the NYAG is using rhetoric, not law, to pursue its case.

In effect, the NYAG seeks to condemn Intel's lower prices when the purpose was for Intel to win or retain business against AMD, particularly in circumstances where a customer had previously awarded all of its business to Intel, and therefore "winning" the business would, by definition, preserve a high market share. While the NYAG purports to be seeking lower prices for consumers, it actually complains that Intel's prices were too low, not too high – complaining, in essence, that Intel should have declined to provide such attractive discounts to major OEMs, such as Dell, HP and IBM, so AMD would have a better chance of winning more business. The specifics of the complaint boil down to the fundamental objection that Intel's aggressive above-cost discounting made it more difficult for AMD to make sales. Such a practice would harm consumers, who are the ultimate beneficiaries of aggressive price competition. The NYAG's effort to protect AMD is highly speculative. It would require a trade-off of consumers paying higher prices now in exchange for a hope of better prices in the future -- not an attractive concept. The antitrust laws, however, are not designed to force a competitor to make it easier for its rival to win sales by easing its price cuts.

For example, the NYAG complains about $130 million in discounts Intel provided to IBM over the course of a year in connection with IBM's server business. There is nothing wrong with these discounts, where they were provided to meet specific AMD competition and supported by Intel's specific line by line analysis and volume forecasts. The NYAG nevertheless appears to take the position that this discount was unnecessary and was only given to buy business, and not meet competition.² The competition was obvious – HP and AMD had publicly announced a wide-ranging server partnership in February 2004. The result was greater competition in servers for IBM and Intel. Intel competed by lowering prices (while always setting its discounted prices at levels above cost) and partnering with IBM on a number of technology initiatives. This is the essence of competition.

The NYAG's Fails To Consider the Entire Record That Shows a Highly Competitive Market and Instead Takes Snippets of Emails out of Context.
The NYAG attempts to profoundly oversimplify an extremely complex industry. Intel and AMD sell some of the most advanced technology in the world. Intel works closely with its customers on all levels – technical, marketing and sales. There is literally daily communication between Intel and its customers, leading to thousands and thousands of emails, meetings and conversations a year on an vast array of business topics. This type of strategic cooperation between suppliers like Intel and AMD, and the OEM customers is well recognized and fundamental to the business. While such relationships necessarily involve tension, tough negotiations and friction, often expressed in emails, there are numerous emails, ignored by the NYAG, both internal and external, that celebrate and recognize the positive results to the companies through these collaborations.

And the indisputable facts show a bottom line of an incredible record of innovation, vastly superior technology, operating at virtually the molecular level, at consistently lower prices.³ In fact, the NYAG simply ignores mobile computing, which is the area of the greatest innovation and growth during the past 7 years, all indisputably led to Intel, starting with its release of Centrino in 2003.⁴ To try and characterize competition in the microprocessor business based on a handful of statements (often internal and never communicated), out of context does no service to competition or consumers. It subjects price competition to the hindsight review, based not on objective facts, but based on the NYAG's unilateral determination of which price cuts are "legitimate" and which ones are not.

Intel Does Not Punish or Threaten Its Customers
Another consistent theme in the NYAG's complaint is that Intel achieves its success, at least in part, through threats or punishment of its customers when they engage with Intel's competition. It is undisputed, however, that during the period covered by the NYAG complaint (primarily 2002-2006), AMD achieved its greatest success, significantly increasing its overall market share overall and at the largest computer manufacturers – a result directly inconsistent with the NYAG's theory.⁵ Further, what the NYAG characterizes as "threats" is once again a mischaracterization grounded in a misunderstanding of the microprocessor business. Intel (as well as AMD) engages its customers in, among other things, technical and marketing collaboration. These collaborations often involve large investments by Intel. Intel is not required to make such investments, continue them indefinitely at any particular level, in any particular area. Intel's (and its customer's) negotiations and resulting decisions to continue, expand or change ongoing technical or marketing investments are not "threats" or "retaliation" – they are legitimate business activities. And to analogize to every day life, no one would judge the nature of any relationship by the statements made in the heat of argument – but would look at the entire picture, not the least of which is the ultimate outcome.

A central OEM in the NYAG complaint is Dell, and the NYAG alleges that Intel kept Dell using only Intel microprocessors through 2006, with a combination of payments and threats (¶ 74-148), and purports to tell a colorful story, including what was allegedly in the mind of Intel and Dell executives, based on a string of quotes from isolated documents, mainly emails . But since when did the truth become a cut and paste from a tiny selection of emails? The full record is very different. Extensive discovery was taken in the action brought by AMD, which provides a very complete picture of the dealings between Intel and the OEMs. Intel is precluded from citing the vast majority of that discovery by a Court-ordered Protective Order, but is authorized to disclose that the lengthy depositions of Dell witnesses, where they were called to explain the facts under oath, confirm the following key facts – which are directly inconsistent with the essential theories underlying the NYAG's complaint, yet were never even acknowledged or addressed the NYAG, who instead spins a fiction based on selectively chosen excerpts of a hodgepodge of documents generated over many years:

• Dell did not understand that the rebates Dell received from Intel were conditioned upon Dell not using AMD or any other brand of microprocessors in the computers it sold.
• Dell never agreed with Intel to buy microprocessors exclusively from Intel and always had a choice to use other microprocessors vendors.
• Dell constantly negotiated with Intel as it does with all of its suppliers. Although Dell maintained a business model of sole-sourcing CPUs until May 2006, it regularly sought to get better pricing from Intel.
• Dell believed that its volume of purchases from Intel gave Dell bargaining leverage with Intel. Dell was aware that its volume of purchases would have a dramatic impact on the capacity utilization for a semiconductor manufacturer, which Dell believed, put Dell in a good negotiating position with Intel.
• Intel never threatened Dell with retaliation if Dell bought microprocessors from AMD or any other supplier.
• Dell never chose not to buy from AMD because of fear of retaliation from Intel.
• After Dell did switch to AMD in 2006, Dell does not believe that Intel retaliated against Dell.

The Astounding Success of the Microprocessor Market in Delivering Value to Consumers Undermines the NYAG's Entire Case.
Finally, the success of the microprocessor market in delivering consistent value to consumer completely undermines the NYAG's core contention that Intel has engaged in "conduct to maintain its monopoly power and prices." Judicial intervention in a well-functioning market based on selective quoting from emails cannot be justified based on conclusory statements of consumer harm directly contradicted by the facts. In fact, the highly competitive microprocessor industry is and has been consistently characterized by: (1) falling prices; (2) increasing supply; and (3) improved performance – all facts directly inconsistent with a market strangled by alleged anticompetitive conduct as hypothesized by the NYAG. According to data published by the United States government's Bureau of Labor Statistics ("BLS"), the quality adjusted price of microprocessors has fallen 38.6% annually over the last eight years.⁶ The quality-adjusted price of microprocessors has declined more rapidly than any of the 1,200 product categories monitored by the BLS, including all other high-technology products. This is the exact opposite of what would be expected if a company engaged in improper conduct to maintain monopoly power. But it's not simply statistics that tell the story. Any person or business that has purchased computers over the past 5 years can see the enormous advances in capability, mobility, power consumption and price. There is no other industry that can compare. To suggest that this outcome is despite, not because, of the nature of competition, is irrational. And the underlying investments of many billions of dollars in manufacturing technology and other innovations, much of it made in the United States, and employing some of the finest engineering talent in the world, reinforce this obvious conclusion.

1 See also Atlantic Richfield v. USA Petroleum, Co., 495 U.S. 328, 339 (1990); Brooke Group Ltd. v Brown & Williamson Tobacco Corp., 509 U.S. 209, 222 (1993); Weyerhaeuser v. Ross-Simmons Hardwood Lumber Co., 549 U.S. 312 (2007); Pacific Bell v. Linkline Commc'ns, Inc., 129 S.Ct. 1109 (2009).

2 In paragraph 225, the NYAG alleges that Intel provided IBM with a discount of $130 million that was unnecessary as"... there was no directly competitive Intel product for IBM to weigh against AMD's Opteron." In paragraph 77, the NYAG refers to "Intel's largess" in providing discounts to Dell.

3 In fact, the NYAG complaint concedes that "[t]echnical progress and the accompanying prices declines in these products [microprocessors] have been largely responsible for the widespread affordability and availability of modern information technology. Economists agree that these developments have spurred wealth creating productivity growth. (NYAG Comp. ¶ 71). What the NYAG ignores is that this tremendous accomplishment was achieved as a result of Intel competition, not despite it.

4 Intel also introduced the Atom microprocessor, unleashing the new category of netbooks, in 2008. Intel's history of leading innovation in the microprocessor business is even acknowledged in portions of NYAG complaint: (see, e.g., ¶¶ 8, 9,18, 24).

5 For example, in the complaint, the NYAG quotes a publication that said: "almost overnight, [in 2004] AMD has become a major supplier of chips to the high-priced and high-margin world of servers, the big machines that power the internet and corporate networks." (NYAG Comp. ¶ 37) AMD's rapid success in the server market calls into question the NYAG's theory that Intel supposedly had a stranglehold on the market. When AMD had a genuinely competitive product, like Opteron, the market bought it. When AMD did not – for example, in the segment mobile – AMD did not achieve a similar level of success. This is how a competitive market works. The NYAG itself notes Intel's loss of business at HP (¶¶ 175, 182), IBM (¶ 228) and Dell (¶ 140).

6 U.S. Bureau of Labor Statistics producer price index, series identification numbers PCU33441333441312 (Microprocessors), PCU3341123341121 (Computer Storage Devices), PCU33411133411173 (Personal Computers), PCU33411133411172 (Portables and Laptops), and PCU511210511210 (Software). http://data.bls.gov/cgi-bin/dsrv?pc, accessed on September 8, 2009.

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