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To read comments to this article, go here
Intel, Antitrust, and the EU Commission: AMD Told the Truth - Updated
Wednesday, May 13 2009 @ 01:13 PM EDT

This isn't a good time for monopolies to bully the market. I wonder how Microsoft is feeling today, now that Intel has been told to stop its anticompetitive rebates programs? From the EU Commission's press release:
Intel awarded major computer manufacturers rebates on condition that they purchased all or almost all of their supplies, at least in certain defined segments, from Intel...

Certain rebates can lead to lower prices for consumers. However, where a company is in a dominant position on a market, rebates that are conditional on buying less of a rival's products, or not buying them at all, are abusive according to settled case-law of the Community Courts unless the dominant company can put forward specific reasons to justify their application in the individual case....

As a result of Intel's rebates, the ability of rival manufacturers to compete and innovate was impaired, and this led to reduced choice for consumers....Intel also interfered directly in the relations between computer manufacturers and AMD. Intel awarded computer manufacturers payments - unrelated to any particular purchases from Intel - on condition that these computer manufacturers postponed or cancelled the launch of specific AMD-based products and/or put restrictions on the distribution of specific AMD-based products.

The $1.4B fine is record-breaking, so Microsoft no longer holds that dubious crown. You know what this means? It means AMD told us the truth since at least the year 2000, when it first filed a complaint with the Commission, according to this ruling. I invite you to look back at the media coverage of AMD's complaints, and ask yourself: how well did most of the mainstream media cover what was happening to AMD? Of course, Intel can appeal, and it says it will.

It's so significant a turn of events, I will place the press release on Groklaw, as part of our permanent record of this part of antitrust history. And should you ever, ever, hear of anything like this happening again in Europe, you know who to tell. The EU Commission even has a form you can fill out, should that day ever come.

Of course, such conduct isn't done out in the noon day sun. So how did Intel get caught? Here's the kind of evidence that convinced the Commission:

The Commission obtained proof of the existence of many of the conditions found to be illegal in the antitrust decision even though they were not made explicit in Intel’s contracts. Such proof is based on a broad range of contemporaneous evidence such as e-mails obtained inter alia from unannounced on-site inspections, in responses to formal requests for information and in a number of formal statements made to the Commission by the other companies concerned. In addition, there is evidence that Intel had sought to conceal the conditions associated with its payments.
Intel has issued a statement:
EC Ruling: Statement by Intel President and CEO Paul Otellini

SANTA CLARA, Calif., May 13, 2009 – Paul Otellini, Intel Corporation president and CEO today issued the following statement regarding the European Commission decision on Intel’s business practices:

“Intel takes strong exception to this decision. We believe the decision is wrong and ignores the reality of a highly competitive microprocessor marketplace – characterized by constant innovation, improved product performance and lower prices. There has been absolutely zero harm to consumers. Intel will appeal.”

“We do not believe our practices violated European law. The natural result of a competitive market with only two major suppliers is that when one company wins sales, the other does not. The Directorate General for Competition of the Commission ignored or refused to obtain significant evidence that contradicts the assertions in this decision. We believe this evidence shows that when companies perform well the market rewards them, when they don’t perform the market acts accordingly.”

“Intel never sells products below cost. We have however, consistently invested in innovation, in manufacturing and in developing leadership technology. The result is that we can discount our products to compete in a highly competitive marketplace, passing along to consumers everywhere the efficiencies of being the world’s leading volume manufacturer of microprocessors.”

“Despite our strongly held views, as we go through the appeals process we plan to work with the Commission to ensure we’re in compliance with their decision. Finally, there should be no doubt whatsoever that Intel will continue to invest in the products and technologies that provide Europe and the rest of the world the industry’s best performing processors at lower prices.”

Microsoft at first swore it was not guilty too, but its threat to appeal was eventually dropped. According to lawyers quoted in this article in the Wall St. Journal, Intel's may not work out either:
"There is nothing in the commission's decision that pushes the established law," said Thomas Vinje an antitrust partner at law firm Clifford Chance.

Ultimately the case will come down to Intel's word against that of the commission on whether or not the rebates were tied to excluding the competition or just used as a regular sales practise, lawyers said.

"Usually when it comes to contesting the interpretation of facts at the European Court of First Instance, the commission has the upper hand," said Stephen Kinsella, a partner at lawfirm Sidley Austin.

The only way Intel can win this appeal is if the commission is wrong about the facts, Vinje added.

Here, then, is the EU Commission's press release. Update: And to answer many of your questions, I am adding, after the double row of stars, the EU Commission's FAQ, linked from the press release. It tells you things like where the money goes:

***********************

Antitrust: Commission imposes fine of €1.06 bn on Intel for abuse of dominant position; orders Intel to cease illegal practices

The European Commission has imposed a fine of €1 060 000 000 on Intel Corporation for violating EC Treaty antitrust rules on the abuse of a dominant market position (Article 82) by engaging in illegal anticompetitive practices to exclude competitors from the market for computer chips called x86 central processing units (CPUs). The Commission has also ordered Intel to cease the illegal practices immediately to the extent that they are still ongoing. Throughout the period October 2002-December 2007, Intel had a dominant position in the worldwide x86 CPU market (at least 70% market share). The Commission found that Intel engaged in two specific forms of illegal practice. First, Intel gave wholly or partially hidden rebates to computer manufacturers on condition that they bought all, or almost all, their x86 CPUs from Intel. Intel also made direct payments to a major retailer on condition it stock only computers with Intel x86 CPUs. Such rebates and payments effectively prevented customers - and ultimately consumers - from choosing alternative products. Second, Intel made direct payments to computer manufacturers to halt or delay the launch of specific products containing competitors’ x86 CPUs and to limit the sales channels available to these products. The Commission found that these practices constituted abuses of Intel’s dominant position on the x86 CPU market that harmed consumers throughout the EEA. By undermining its competitors’ ability to compete on the merits of their products, Intel’s actions undermined competition and innovation. The Commission will actively monitor Intel’s compliance with this decision. The world market for x86 CPUs is currently worth approximately €22 billion (US$ 30 billion) per year, with Europe accounting for approximately 30% of that.

Competition Commissioner Neelie Kroes said: "Intel has harmed millions of European consumers by deliberately acting to keep competitors out of the market for computer chips for many years. Such a serious and sustained violation of the EU's antitrust rules cannot be tolerated".

The computer manufacturers concerned by Intel's conduct in the Commission’s decision are: Acer, Dell, HP, Lenovo and NEC. The retailer concerned is Media Saturn Holding, owner of the MediaMarkt chain.

Conditional rebates and payments

Intel awarded major computer manufacturers rebates on condition that they purchased all or almost all of their supplies, at least in certain defined segments, from Intel:

  • Intel gave rebates to computer manufacturer A from December 2002 to December 2005 conditional on this manufacturer purchasing exclusively Intel CPUs
  • Intel gave rebates to computer manufacturer B from November 2002 to May 2005 conditional on this manufacturer purchasing no less than 95% of its CPU needs for its business desktop computers from Intel (the remaining 5% that computer manufacturer B could purchase from rival chip maker AMD was then subject to further restrictive conditions set out below)
  • Intel gave rebates to computer manufacturer C from October 2002 to November 2005 conditional on this manufacturer purchasing no less than 80% of its CPU needs for its desktop and notebook computers from Intel
  • Intel gave rebates to computer manufacturer D in 2007 conditional on this manufacturer purchasing its CPU needs for its notebook computers exclusively from Intel.
Furthermore, Intel made payments to major retailer Media Saturn Holding from October 2002 to December 2007 on condition that it exclusively sold Intel-based PCs in all countries in which Media Saturn Holding is active.

Certain rebates can lead to lower prices for consumers. However, where a company is in a dominant position on a market, rebates that are conditional on buying less of a rival's products, or not buying them at all, are abusive according to settled case-law of the Community Courts unless the dominant company can put forward specific reasons to justify their application in the individual case.

In its decision, the Commission does not object to rebates in themselves but to the conditions Intel attached to those rebates. Because computer manufacturers are dependent on Intel for a majority of their x86 CPU supplies, only a limited part of a computer manufacturer's x86 CPU requirements is open to competition at any given time.

Intel structured its pricing policy to ensure that a computer manufacturer which opted to buy AMD CPUs for that part of its needs that was open to competition would consequently lose the rebate (or a large part of it) that Intel provided for the much greater part of its needs for which the computer manufacturer had no choice but to buy from Intel. The computer manufacturer would therefore have to pay Intel a higher price for each of the units supplied for which the computer manufacturer had no alternative but to buy from Intel. In other words, should a computer manufacturer fail to purchase virtually all its x86 CPU requirements from Intel, it would forego the possibility of obtaining a significant rebate on any of its very high volumes of Intel purchases.

Moreover, in order to be able to compete with the Intel rebates, for the part of the computer manufacturers' supplies that was up for grabs, a competitor that was just as efficient as Intel would have had to offer a price for its CPUs lower than its costs of producing those CPUs, even if the average price of its CPUs was lower than that of Intel.

For example, rival chip manufacturer AMD offered one million free CPUs to one particular computer manufacturer. If the computer manufacturer had accepted all of these, it would have lost Intel's rebate on its many millions of remaining CPU purchases, and would have been worse off overall simply for having accepted this highly competitive offer. In the end, the computer manufacturer took only 160,000 CPUs for free.

As a result of Intel's rebates, the ability of rival manufacturers to compete and innovate was impaired, and this led to reduced choice for consumers.

Rebates such as those applied by Intel are recognised in many jurisdictions around the world as anti-competitive and unlawful because the effect in practice is to deny consumers a choice of products.

Payments to prevent sales of specific rival products

Intel also interfered directly in the relations between computer manufacturers and AMD. Intel awarded computer manufacturers payments - unrelated to any particular purchases from Intel - on condition that these computer manufacturers postponed or cancelled the launch of specific AMD-based products and/or put restrictions on the distribution of specific AMD-based products. The Commission found that these payments had the potential effect of preventing products for which there was a consumer demand from coming to the market. The Commission found the following specific cases:

    For the 5% of computer manufacturer B’s business that was not subject to the conditional rebate outlined above, Intel made further payments to computer manufacturer B provided that this manufacturer:
  • sold AMD-based business desktops only to small and medium enterprises sold AMD-based business desktops only via direct distribution channels (as opposed to through distributors) and
  • postponed the launch of its first AMD-based business desktop in Europe by 6 months.
  • Intel made payments to computer manufacturer E provided that this manufacturer postponed the launch of an AMD-based notebook from September 2003 to January 2004.
  • Before the conditional rebate to computer manufacturer D outlined above, Intel made payments to this manufacturer provided that it postponed the launch of AMD-based notebooks from September 2006 to the end of 2006.
The Commission obtained proof of the existence of many of the conditions found to be illegal in the antitrust decision even though they were not made explicit in Intel’s contracts. Such proof is based on a broad range of contemporaneous evidence such as e-mails obtained inter alia from unannounced on-site inspections, in responses to formal requests for information and in a number of formal statements made to the Commission by the other companies concerned. In addition, there is evidence that Intel had sought to conceal the conditions associated with its payments.

x86 CPUs are the main hardware component of a computer. The decision contains a broad range of contemporaneous evidence that shows that AMD, essentially Intel's only competitor in the market, was generally perceived, by computer manufacturers and by Intel itself, to have improved its product range, to be a viable competitor, and to be a growing competitive threat. The decision finds that Intel's practices did not constitute competition on the merits of the respective Intel and AMD products, but rather were part of a strategy designed to exploit Intel's existing entrenched position in the market.

Intel’s worldwide turnover in 2007 was €27 972 million (US$ 38 834 million). The fine in this case takes account of the duration and gravity of the infringement. In accordance with the Commission's 2006 Guidelines on Fines (see IP/06/857 and MEMO/06/256) the fine has been calculated on the basis of the value of Intel's x86 CPU sales in the European Economic Area (EEA). The duration of the infringement established in the decision is five years and three months.

The Commission’s investigation followed complaints from AMD in 2000, 2003 and 2006 (the last having been sent to the German competition authority and subsequently examined by the European Commission). The Commission's decision follows a Statement of Objections sent in July 2007 (see MEMO/07/314), a Supplementary Statement of Objections sent in July 2008 (see MEMO/08/517) and a letter sent to Intel in December 2008 setting out additional factual elements relevant to the final decision. Intel's rights of defence have been fully respected in this case.

See also MEMO/09/235.

****************************************
****************************************

MEMO/09/235

Brussels, 13 May 2009

Antitrust: Commission imposes fine of 1.06 billion euros on Intel for abuse of dominant position; orders Intel to cease illegal practices - questions and answers
(see also IP/09/745)

What must Intel do to comply with EU law?

The Decision sets out how Intel has breached EU antitrust law by engaging in two types of practices which have harmed competition. First, Intel gave wholly or partially hidden rebates to computer manufacturers on condition that they bought all, or almost all, their x86 central processing units (CPUs) from Intel. Intel also made direct payments to a major retailer on condition it stock only computers with Intel x86 CPUs. Second, Intel made direct payments to computer manufacturers to halt or delay the launch of specific products containing a competitor's x86 CPUs and to limit the sales channels available to these products. Intel is obliged desist from the specific practices identified in this case and not to engage in these or equivalent practices in the future.

What is the geographic scope of the remedy?

This is a worldwide market. Within this context, Intel is obliged not to engage in any abusive practices that have an effect within the European Economic Area (EEA).

How will this Decision help innovation in the market?

Intel limited consumer choice and stifled innovation by preventing innovative products for which there was a consumer demand from reaching end customers. Such practices deter innovative companies which might otherwise wish to enter and compete in the market. By ordering Intel to end its abusive practices, competition on the x86 CPU market will play out on the merits with the effect that innovation to the benefit of the consumer can flourish.

Does the Commission seek to limit companies' ability to provide customers with discounts?

No. This case is about the conditions associated with Intel's rebates and payments, not the rebates and payments themselves. What is at stake here are loyalty or fidelity rebates, granted on condition that a customer buys all or most of its requirements from the dominant undertaking, thereby preventing that customer from purchasing from competitors. Intel also paid clients to delay or not launch computers incorporating a competitor's CPUs, a conduct which is not linked at all to a company's ability to provide customers with discounts.

Does the Commission’s Decision seek to protect competitors?

No, the Commission acts in the interests of consumers. The Commission does not look at the specific interests of individual companies, but is charged with ensuring that competition on the merits is safeguarded. This creates an environment where consumers can benefit and where innovation can flourish.

What is the case-law underpinning the Commission’s case?

The legal underpinning of the Commission’s case is based on a consistent pattern of Court jurisprudence, including Case 85/76 Hoffmann-La Roche v Commission, Case T-203/01 Michelin v Commission, Case C-95/04 British Airways v Commission, Joined Cases T-24/93 and others, Compagnie Maritime Belge v Commission and Case T-228/97, Irish Sugar.

Has the Commission applied its Guidance Paper on its enforcement priorities in applying Article 82?

Formally, the Guidance Paper does not apply to this case since proceedings were initiated before it was issued. The Decision is nevertheless in line with the orientations set out in the guidance paper, and includes a rigorous, effects-based analysis which has demonstrated that Intel's conduct has reduced consumer choice and limited innovation in the market.

Intel is a US company. What gives the European Commission authority to decide whether its behaviour is legal or not?

Intel sells its products inter alia in the European Union, which is one of its main markets in the world. It must therefore respect EU antitrust rules in the same way that European companies must respect US law when operating on the other side of the Atlantic.

Did the Commission co-operate with the United States on this case?

The Commission and the United States Federal Trade Commission have kept each other regularly and closely informed on the state of play of their respective Intel investigations. These discussions have been held in a co-operative and friendly atmosphere, and have been substantively fruitful in terms of sharing experiences on issues of common interest.

Does Intel have to pay the fine immediately?

The fine must be paid within three months of the date of notification of the Decision.

Where does the money go?

Once final judgment has been delivered in any appeals before the Court of First Instance (CFI) and the Court of Justice, the money goes into the EU’s central budget, thus reducing the contributions that Member States pay to the EU.

Does Intel have to pay the fine if it appeals to the European Court of First Instance (CFI)?

Yes. In case of appeals to the CFI, it is normal practice that the fine is paid into a blocked bank account pending the final outcome of the appeals process. Any fine that is provisionally paid will produce interest based on the interest rate applied by the European Central Bank to its main refinancing operations. In exceptional circumstances, companies may be allowed to cover the amount of the fine by a bank guarantee at a higher interest rate.

What percentage of Intel's turnover does the fine represent?

The fine represents 4.15 % of Intel's turnover in 2008. This is less than half the allowable maximum, which is 10% of a company's annual turnover.

How was Intel able to exercise its rights of defence?

Intel has been provided full access to the Commission's file, with the exception of legitimate claims relating to business secrets of other companies and internal Commission documents. Intel has been able to fully comment on the evidence on which the Commission has based its Decision. The file in this case comprises several hundred thousand pages and the Decision is based on a broad range of contemporaneous evidence from a variety of sources.

How long is the Decision?

The Decision is 542 pages long.

When is the Decision going to be published?

The Decision in English (the official language version of the Decision) will be made available as soon as possible on DG Competition’s website (once relevant business secrets have been taken out). French and German translations will also be made available on DG Competition’s website in due course. A summary of the Decision will be published in the EU's Official Journal L series in all languages (once the translations are available).


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