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When the head of a group designed to monitor and restrict companies deemed too dominant makes jokes at your expense, you might get the impression that impartiality was lacking.
So it was for Intel CEO Paul Otellini, who, in the middle of a two-day meeting with investors and analysts, took time out on Wednesday for a conference call with the media to discuss the $1.45 billion fine the EU just slapped on Intel. Normally even-tempered, Otellini sounded rather indignant this time.
After announcing the fine, the EU’s Competition Commissioner Neelie Kroes joked that Intel (NASDAQ: INTC) should change its slogan from “sponsors of tomorrow” to “the sponsor of the European taxpayer.”
Otellini clearly took a dim view of his firm being viewed as Europe’s ATM. Intel has $3.5 billion in the bank as of the end of its first quarter, down from $7.6 billion a year ago, thanks to the precipitous drop in sales that took place starting late last year. “I don’t think it’s a joking matter. I think she was making a joke and I’ll leave it at that,” Otellini said.
He was more forthcoming about the fine: He thought it was way too much. Even though both Japan and Korea had made similar anticompetitive discoveries against Intel in the past, Japan levied no fine and Korea only hit Intel with a $23 million fine.
“There seems to be no correlation between the number and the process,” Otellini said. “You’ll have to ask the EU how they came up with that and it’s one of the questions we’ll ask them when we have a chance.”
Gartner fellow Martin Reynolds agreed that the fine seemed exorbitant. “If it had been a $50 million or even a $400 million fine, they might have let it go, but at $1.4 billion, they have got to contest it,” he told InternetNews.com.
Selective review?
Intel said it has so far only seen a three-page summary of the Commission’s ruling, not the full 500-page document. Otellini said it will take some time to digest everything. The allegations against the company come down to Intel granting conditional rebates, where the conditions weren’t just based on sales volume but allegedly around exclusive dealings, large percentages of customer volume or in one case, exclusivity on retail shelves.
The EU cited a single German chain, MediaMarkt, that sold nothing but Intel product for five years. The commission cited by name Acer, Dell (NASDAQ: DELL), HP (NYSE: HPQ), Lenovo and NEC as getting contracts that forced them to buy most or all of their CPUs from Intel and paid them to stop or delay the launch of personal computers based on AMD (NYSE: AMD) chips.
Inquiries to HP, Acer and Dell were not returned as of press time.
Otellini responded that some of its customers are larger than Intel and “excellent negotiators,” and that there were a number of documents from the OEMs involved in the case that refute the EU’s claims.
“In some cases, OEMs made statements in fact that there were not exclusive deals and not under conditional terms. Those documents were not allowed into the case file or used properly by the case team in making their decision,” he said.
Next page: “The EC isn’t obliged to listen.”
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That’s because the EC isn’t obliged to listen, Reynolds pointed out. “It’s not a trial. This is the EU Commission on Competition, and their job is to make sure that companies with more than 70 points of market share behave appropriately in the market because they believe that dominance leads to higher prices and lower quality for consumers,” he said.
“They can operate under policies and processes that they find appropriate,” he added. “If they find evidence of wrongdoing, that’s all they need. That’s what they feel they had. If it all comes down to this one argument about the German retail store, they may still say ‘our decision stands.'”
The Commission can choose to ignore all exculpatory evidence, and if Intel is correct, it seems to have already done that. “The challenge is how much evidence do they need to say anticompetitive behavior took place? They may only need one of their cited examples to justify their position,” Reynolds said.
Intel plans to appeal the decision to the Court of First Instance, the first place in this process where a third party will review all the evidence.
“We believe a significant amount of evidence was either ignored or disregarded or both by the case team that would refute the allegations they made in their own claims,” Otellini said.
Almost a decade-long investigation
This case has dragged on for nearly a decade, something Intel and AMD both noted, but for different reasons.
“This has gone on nine years with a single complaintant, AMD,” Otellini said. “No customers have complained or joined the complaint. At the end of Commissioner Kroes’s press conference, she spoke of harm to consumers. It’s hard to imagine how consumers were harmed in an industry which has lowered cost of computing by a factor of 100 over the time of this case.”
“At the same time that happened, AMD claimed it’s more vibrant than ever,” he added. “So I don’t see either evidence of consumer harm or competitor harm happening here.”
Of course, that would be Intel’s likely reaction, AMD said.
“This came after a nine-year investigation that was very thorough and is consistent with what came out of Japan and Korea,” Patrick Moorhead, vice president of advanced marketing at AMD, told InternetNews.com. “Quite frankly, I think Intel is acting like it’s too big to be bothered.”
AMD expects this will positively impact its case, set to go to trial next year in Delaware. “Intel is 0 for 3 now — first Japan, then Korea and then the EU. We’re hoping it shines a big spotlight to the New York attorney general’s office, which is investigating them, the U.S. Federal Trade Commission, which is investigating them, and we’re hoping it will have a similar impact on our case here in the U.S.,” Moorhead said.
[cob:Special_Report]Moorhead said AMD can compete more effectively “if Intel complies [with the EC decision] and stops this behavior. If they stop the exclusionary practices and some of the other behavior, it gives us the ability to compete in Europe on the merit of our products, as opposed to people being bullied around.”
There may, however, be an unintended consequence that no one, least of all the EU, thought about, research firm IDC noted in a report (available here in PDF format).
If Intel is indeed socked with this enormous fine, it may be forced to raise processor process, and with average selling prices under so much pressure, AMD, which is desperate to get back into the black, might take the opportunity to follow.
So if nothing else, the price of computers might go up as Intel complies with the EU order.
“In the long term, Intel will probably have to eliminate incentives such as rebates and co-branding dollars, or at least restructure them to meet the expectations of the European Commission for Europe,” IDC noted.
