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
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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.