Read the following article and answer the following questions. 2 pages the whole. 1

    On November 12 2009 Intel Corp. gave Advanced Micro
    Devices (AMD) $1.25 billion to settle a lawsuit AMD
    filed against it in 2005. Intels CEO Paul Otellini said
    he agreed to pay $1.25 billion to settle AMDs lawsuit
    because he no longer felt the time and money [spent
    fighting it] makes sense. 1 AMDs lawsuit accused Intel
    of being a monopoly and of using its monopoly power to
    unfairly keep computer companies from buying AMDs
    microprocessors. With about 70 percent of the market
    Intel Corp. is the worlds largest manufacturer of personal
    computer (PC) microprocessorsalso called
    computer chips microchips or processorstiny
    electronic devices that serve as the brain of a personal
    computer and carries out its basic operations. As
    the worlds second largest maker of PC microprocessors
    AMD is Intels only real competitor although it
    holds only about 20 percent of the PC processor market.
    It is difficult for other companies to get into the
    business of making PC microprocessors because of
    several barriers to entry. First Intel and AMD hold
    the patents for making the kind of microprocessors
    almost all personal computers use. Second it costs several
    billion dollars to build facilities for making microprocessors.
    Third Intel and AMD are so big and experienced
    that they can now make microprocessors for a lot less
    than a new company could so if a new company tried to
    enter the market its prices would likely not be competitive
    with Intels or AMDs.
    AMD was not the only one that had accused Intel of
    using monopoly power to stifle competition. On May 5
    2009 the European Commission fined Intel a record $1.5
    billion and said the company had used its monopoly power
    to unfairly block AMD from the market. On November 4
    2009 New York Attorney General Andrew Cuomo sued
    Intel for harming New Yorks consumers by using its monopoly
    power to keep computer makers from buying better
    AMD microprocessors. In June 2008 South Koreas
    Fair Trade Commission ruled that Intel had used its monopoly
    power in violation of its antitrust laws. In 2005 Japans
    Fair Trade Commission ruled that Intel had violated
    Japanese antitrust laws by paying companies to buy all or
    almost all of their processors exclusively from Intel.
    230 THE MARKET AND BUSINESS
    Explore the Concept on
    mythinkinglab.com
    ETHICS IN THE MARKETPLACE 231
    Many of the activities Intel was being blamed for
    originated in a strategic mistake the company made in
    the late 1990s when it invested hundreds of millions of
    dollars developing a new type of microprocessor that
    would not use x86 technology. x86 technology consists
    of certain instructions that are built into so-called
    x86 microprocessors. All microprocessors must contain
    instructions that allow them to read and run software
    programs like games word-processors or web browsers.
    Because all x86 microprocessors contain the same
    instructions the newest x86 microprocessors can generally
    read and use the same data and programs that ran on
    older x86 microprocessors. This means that when a customer
    who has been using a computer with an x86 processor
    buys a new computer with a more advanced x86
    microprocessor he or she does not have to throw away
    all his or her old programs and data because they will still
    work on the new computer.
    This ability of each new generation of x86 microprocessors
    to run most of the programs that previous
    generations of x86 microprocessors could run is a major
    advantage for both consumers and businesses alike.
    However from Intels perspective x86 microprocessors
    have a major disadvantage: AMD can legally make x86
    microprocessors so Intel is forced to compete with AMD.
    Intels biggest nightmare was that AMD someday might
    come up with an x86 microprocessor that was faster and
    more powerful than any of Intels and then take over the
    market.
    So when it invested in a new generation of microprocessors
    in the 1990s Intel decided to develop and patent
    a microprocessor that did not use x86 technology. Since
    Intel alone would hold the patent for this new non-x86
    processor AMD would be legally barred from making it.
    With luck Intel might eventually have the entire pc processor
    market to itself.
    Intel called its new pc processor the Itanium and it
    was faster and more powerful than all previous generations
    of pc processors but there was a problem. Since the Itanium
    processor did not use x86 technology all software
    designed to run on current and older x86 processors would
    not work on the new Itanium unless the user first ran an
    emulation program that in effect forced the Itanium
    to imitate an x86 processor. But the emulation program
    slowed down the programs designed for x86 processors
    sometimes to a frustrating crawl. This meant that when a
    consumer or business bought a new computer with the Itanium
    processor inside its current software and data would
    not work at all well on the new computer. This was a major
    deterrent for buyers.
    AMD had also developed a more advanced generation
    of PC processors during the 1990s. But AMD decided
    to stick with the x86 technology so its new processor
    could run software designed for x86 processors without
    using an emulation program. AMD called its new processor
    the Athlon. Since the Athlon was not slowed down by
    an emulation program when it ran x86 programs all x86
    programs ran extremely fast and smoothly on computers
    equipped with AMDs new processor. Not only could
    AMDs Athlon run x86 programs much faster and better
    than Intels Itanium it also used less electricity and AMD
    sold it for less than the Itanium. Intels worse nightmare
    had come true.
    When AMD and Intel marketed their new microprocessors
    in 1999 reviewers and users raved about AMDs
    fast and low-priced Athlon and heaped scorn on Intels
    clunky Itanium. PC manufacturers flocked to put AMDs
    processor into their new computers and AMDs market
    share grew from about 9 percent to about 25 percent of
    the PC processor market while Intels fell from 90 percent
    to 74 percent.
    But in 2003 and 2004 AMDs sales hit a wall. Computer
    manufacturers suddenly refused to buy AMDs
    processors. In 2002 Sony had put AMDs Athlon into
    23 percent of its computers; by 2004 it had stopped
    using the Athlon completely. NEC went from using the
    Athlon in 84 percent of its desktop computers to using
    it in virtually none. Toshiba went from using it in
    15 percent of its computers in 2000 to using it in none
    by 2001. 2 Altogether AMDs share of the Japanese PC
    processor market fell from 25 percent in 2002 to 9 percent
    in 2004.
    What had happened? Tom McCoy AMDs executive
    vice president for legal affairs claimed in an article that
    the drop in orders for Athlon chips was a matter of sheer
    exercise of monopoly power by Intel. 3 McCoy claimed
    that Intel paid the Japanese companiesSony NEC and
    Toshibamillions of dollars in rebates provided they
    stopped buying AMDs microprocessors and used only
    Intel microprocessors inside their computers. But these
    payments McCoy claimed were not really rebates. A true
    rebate is a payment based on the number of products a
    customer purchases and so are in effect discounts that are
    paid after the customer buys the product unlike regular
    discounts which are subtracted from the price before the
    purchase. But the payments Intel was giving computer
    makers McCoy asserted were not related to the number
    of processors they bought. Instead Intel handed over
    these payments when a company agreed to stop buying
    from AMD regardless of the number of processors they
    subsequently purchased.
    Moreover McCoy wrote Intel threatened companies
    by warning them that if they did not stop using
    AMDs microprocessors Intel might stop supplying
    them with any microprocessors at all. The threat was
    a powerful one because even if they used AMDs microprocessors
    on some of their top-quality computers
    every computer manufacturer still depended on Intel
    232 THE MARKET AND BUSINESS
    for the microprocessors in all their other computers. 4
    Because of its small size AMD could not provide the
    full range of microprocessors that the larger companies
    needed.
    Convinced that Intel was using unfair and illegal
    means to block them out of the market AMD sued Intel
    on June 27 2005. Intels general legal counsel Bruce
    Sewell responded to AMDs claims by arguing that the
    reason computer makers stopped buying AMDs microchips
    was because once they started using them in large
    numbers and running many different programs on them
    they found AMD chips did not run the programs as fast as
    they had first appeared to. When AMD has good parts
    they do fine said Bruce Sewell When AMD has lousy
    parts they dont do so well. Thats what a competitive
    market is all about.
    Bruce Sewell also defended Intels rebates. If it is not
    wrong he said for a small company to build loyal customers
    by giving them more rebates when they agree to
    use your products exclusively why should it be wrong for
    a larger company to do the same? Moreover rebates in
    effect lowered the price of its computer chips and what
    was wrong with that? Ultimately didnt that benefit the
    consumer? And why was it so important to relate rebates
    to the number of units a customer buys? If Intel gave
    larger rebates to those companies that agreed to use its
    products exclusively and smaller rebates to those companies
    that would not make the same commitment what
    was wrong with that? Wasnt a companys agreement to
    use Intel as its exclusive supplier valuable to Intel and
    so shouldnt Intel be allowed to reward that company
    with larger rebates than the discounts it offered other
    companies?
    Because the AMD lawsuit was complicated and
    required gathering and reviewing a great deal of documentary
    evidence it had still not gone to trial by the
    end of 2009. By then however AMDs allegations had
    convinced several foreign governmentsincluding the
    European Union South Korea and Japanthat they
    should investigate Intel and their investigations ended
    with substantial fines of Intel for violating antitrust laws.
    The United States however did very little until toward
    the end of 2009 the U.S. Federal Trade Commission
    (FTC) sued Intel for illegal monopolization unfair
    methods of competition and deceptive acts and practices
    in commerce. 5
    The FTC said in its suit that its investigations
    had discovered what Intels legal counsel Bruce Sewell
    had suggested: some software programs ran slowly on
    AMDs processors. But the reason was not because
    AMDs processors were inherently slow. They had
    found that Intel had changed the programs sold by software
    companies so that their programs would not work
    well on computers using AMDs computer chips. All
    software companies use compilers to convert their
    programs into a form that will run on particular kinds
    of computer chips. The compilers are provided by the
    companies that make the chips in this case Intel and
    AMD who are each supposed to provide compilers that
    will allow programs to run on both their processors. But
    in 2003 the FTC said Intel changed its compilers so
    that programs compiled with Intels compilers would
    run fine on Intel processors but would run slowly or
    poorly on AMDs. Without their knowledge when software
    companies used Intels compilers to process one of
    their programs Intels compiler secretly inserted bugs
    into the program that slowed it when it ran on an AMD
    processor but not on an Intel processor. Customers
    and reviewers blamed AMDs processor when their new
    programs did not run well on a computer that had an
    AMD chip inside. 6
    The FTC also claimed that Intel had provided software
    companies with libraries of software code that
    were also designed to trip up programs when they ran
    on AMD microchips. The software code the FTC was
    talking about were short bits of software that carry out
    certain frequently used but routine operations on x-86
    processors. Software engineers insert these short bits
    of code into their programs instead of writing them out
    each time they need them. Intel provided software engineers
    with libraries consisting of dozens of these bits
    of code. However the FTC claimed Intel changed the
    software codes in its library so they would not work well
    on AMD processors. Consumers and reviewers again
    blamed AMDs chips when a program containing Intels
    codes did not run well on a computer that used an AMD
    microchips. 7
    The FTC also said that Intel had paid computer makers
    to boycott AMDs processors by giving them what Intel
    called rebates although these payments required only
    that a company agree not to buy AMD processors and
    were unrelated to the amount the company bought. The
    computer manufacturer Dell Inc. was a good example of
    how Intel paid computer makers to boycott AMD. Intel
    had began making significant quarterly rebates to computer
    manufacturer Dell Inc. in 2001 and Dell at that
    time stopped using AMDs processors even though many
    of its customers said they wanted computers with AMDs
    processor.
    Dell which was founded in 1984 by its current CEO
    Michael Dell who was then a student at the University of
    Texas at Austin began when he started selling computers
    out of his dorm room. By 2001 Dell had become the
    largest PC manufacturer in the world and held 13 percent
    of the worldwide PC market. The company finished 2001
    with a net income of $2.24 billion its largest so far.
    In 2002 according to a Dell memo Dells chief operating
    officer (COO) met with several Intel officials. Before
    ETHICS IN THE MARKETPLACE 233
    the meeting Dells lead negotiator had explained what he
    expected Intels officials would say to Dells COO: without
    being blatant [Intel] will make it clear that Dell wont
    get more [payments] if we do [use] AMD [processors].
    Well get less and someone else will get ours. 8 During the
    meeting Intel officials said they were willing to do whatever
    it takes to get Dell not to use any AMD processors
    in its computers. According to the memo Intel agreed at
    the meeting that its quarterly payments to Dell should
    increase from the $70 million this quarter to $100 million.
    9 But Dell had to continue to refuse to use AMDs
    processors. 10
    It was not difficult for Intel to pay the hundreds of
    millions of dollars it was giving Dell. Intel had unusually
    high profit margins of 50 percent that allowed it
    to accumulate $10.3 billion of cash at the end of 2001
    and by the end of 2005 it held $14.8 billion of cash. In a
    February 2004 email Michael Dell remarked on Intels
    profitability:
    [Intels] profits in the 2nd half of 2001 were
    $1.397 billion on revenues of $13.528 billion.
    In the 2nd half of 2003 they were $4.885 billion
    on revenues of $16.574 billion. In other words
    their sales went up 22.5% and their profits went
    up 350%! Or said another way their revenues
    went up $3.046 billion and their profits went
    up $3488 billion!! Not even Microsoft can do
    that. 11
    Although many smaller companies started using
    AMDs chips Dell feared retaliation from Intel if it
    tried to do the same. In an email a Dell executive noted
    that if Dell joins the AMD exodus the consequences
    would be costly for Dell. He noted that Intels CEO and
    Chairman are prepared for jihad if Dell joins the AMD
    exodus. We will get ZERO [payments] for at least one
    quarter while Intel investigates the detailstheres no
    legal/moral/threatening means for us to apply and avoid
    this. 12
    Although Dell complained that its refusal to use
    ADM processors was hurting its sales Intel kept Dell
    loyal throughout 2004 by increasing its quarterly
    payments to $300 million per quarter an amount equal
    to almost a third of Dells quarterly net income and
    apparently enough to compensate Dell for any sales
    declines.
    But Dell continued to lose market share and its CEO
    Michael Dell became increasingly frustrated. On November
    4 2005 Intels CEO Paul Otellini wrote an email saying
    that he had just received one of the most emotional
    calls I have ever ever had with [Michael Dell]. Otellini
    noted that [Michael Dell] opened by saying I am tired of
    losing business. . . He repeated it 34 times. I said nothing
    and waited. [He said] he has been traveling around the
    USA. He feels they are losing all the high margin business
    to AMD-based [computers]. Dell is no longer seen
    as a thought leader. 13 A week later Michael Dell sent
    an email to Otellini complaining that We have lost the
    performance leadership and its seriously impacting our
    business in several areas. Otellini responded to Dells
    complaints by pointing out how much Intel was paying
    Dell: We are [now] transferring over $1 billion per year
    to Dell for its efforts. This was judged by your team to be
    more than sufficient to compensate for the competitive issue.
    14 On November 25 Michael Dell wrote in an email
    to Otellini that None of the current benchmarks and reviews
    say that Intel-based systems are better than AMD.
    We are losing the hearts minds and wallets of our best
    customers. 15
    In spite of realizing that boycotting AMDs processors
    was hurting its revenues Dell remained so loyal to Intel
    that in February 2006 Otellini joked that Dells CEO
    was The best friend money can buy. 16 Intel continued
    to increase its payments to Dell through 2005 and 2006
    until they reached a high of $805 million a quarter in early
    2006 an amount equal to 104 percent of Dells net income
    per quarter that year.
    But 2006 was the year Dell finally broke away from
    its agreement to not use AMD processors. That year
    it purchased Alienware a computer manufacturer that
    made high-end gaming computers with AMD microprocessors.
    In April of that year Michael Dell sent an email
    to his top executives which said: We have been looking
    at the situation for a long time and have decided
    to introduce a broad range of AMD based systems into
    our product line to provide the choice our customers are
    asking for. In the second quarter of the year perhaps
    testing Intels reaction Dell announced a single new line
    of high-end computers with AMD chips inside. That
    quarter its payments from Intel dropped to $554 million.
    The next quarter Dell announced additional lines of PCs
    with AMD processors inside and Intel paid it only $200
    million.
    Intels Board Chair told Intels CEO that the company
    should respond harshly to Dells actions: I think you
    should reply in kind. Not a time for weakness on our part.
    Stop writing checks immediately and put them back on
    list prices [i.e. on prices with no discounts or rebates]. 17
    The next day Intel CEO Otellini instructed his people
    that We should be prepared to remove all [payments] and
    related programs. Post haste . . . then we ought to enter
    negotiations.
    Now subject to Intels punishment Dell received
    no more rebates. In 2007 Dells net income fell to
    $2.58 billion down from $3.57 billion in 2006. The
    company recovered a bit in 2008 when it posted a net
    income of $2.95 billion but then it began a downward
    234 THE MARKET AND BUSINESS
    slide to $2.48 billion in 2009 and $1.43 billion in 2010.
    Between 2001 and 2006 Intel had pumped an estimated
    total of about $6 billion into Dells income figures. Because
    Dell had not reported that most of its profits during
    those years were cash it was receiving from Intel
    the U.S. Securities and Exchange Commission (SEC)
    accused Dell and its officers of deceiving investors who
    had been told by the company that its high profits were
    due to its ultra-efficient management of its supply chain
    its direct-sales strategy its cost reduction initiatives and
    the declining costs of computer parts. 18 Dell had become
    one of the most admired companies in America because
    it was falsely assumed that its strong profits were due to
    the companys management skills.
    Intel pressured other big companies like HP and
    IBM into refusing to use AMD processors. Unlike
    Dell HP and IBM did not agree to completely boycott
    AMDs processors. In HPs case Intel got HP
    to agree to limit its purchases of AMD processors to
    5 percent or less and Intel agreed to give HP a rebate
    of $130 million spread out over a year. 19 IBM agreed
    to only use AMD processors in its High Performance
    Computers. 20
    The FTCs lawsuit against Intel never made it to
    court. On Wednesday August 4 2010 the FTC announced
    that without admitting guilt Intel had agreed
    to settle the FTCs antitrust lawsuit. In a press release the
    FTC wrote that under the settlement Intel will be prohibited
    from conditioning benefits to computer makers
    in exchange for their promise to buy chips from Intel exclusively
    or to refuse to buy chips from others; and [from]
    retaliating against computer makers if they do business
    with non-Intel suppliers by withholding benefits from
    them. In addition Intel was prohibited from using its
    compilers or its libraries of software code to inhibit the
    ability of programs to run on competitors microprocessors.
    Some observers argued that the restrictions of the
    settlement no longer mattered since Intel had once again
    taken the lead in the x86 processor market and AMD was
    again a trailing competitor. In the first quarter of 2006
    according to CPU Benchmarks AMDs market share
    had climbed as high as 48 percent and Intels had fallen
    to 51 percent. But AMDs share dropped after that and
    by 2011 Intel had 71 percent of the x86 microprocessor
    1. In your judgment is Intel a monopoly? Did Intel
    use monopoly-like power; in other words did Intel
    achieve its objectives by relying on power that it had
    due to its control of a large portion of the market? Explain
    your answers.
    2. In your judgment were Intels rebates ethical or unethical?
    Explain your answer.
    3. Was it unethical for Intel to use its compilers and its
    libraries of software code in the way it did or is this
    permissible for companies in a free market economy?
    Explain your answer.
    4. Were Intels rebates unethical? Explain why or why not.
    5. In your view did Intel violate either of the two key
    sections of the Sherman Antitrust Act? Explain.

                                                                                                                                      Order Now