Business, Hardware

ANALYSIS: Why is Intel being sued by New York State Attorney General?

The attorney general of New York, Andrew M. Cuomo, filed a federal antitrust lawsuit Wednesday against Intel, the world?s largest chip maker. Cuomo is alleging that the world’s biggest microprocessor manufacturer conducted "an illegal campaign to deprive AMD of distribution channels."

Mr. Cuomo said in a statement, "Rather than compete fairly, Intel used bribery and coercion to maintain a stranglehold on the market," Intel?s actions not only unfairly restricted potential competitors, but also hurt average consumers who were robbed of better products and lower prices."

The detailed 83-page complaint [PDF download] alleges that Intel "engaged in a systematic worldwide campaign of illegal, exclusionary conduct to maintain its monopoly power and prices in the market for x86 microprocessors." The suit has sections explaining Intel’s supposed undue influence with Hewlett-Packard, Dell, and IBM.

Cuomo Smiles as he Sues IntelIn the press release, Cuomo’s office said they had examined millions of pages of email messages and documents since they opened their investigation in late 2007.

Intel spokesman, Chuck Mulloy, told the New York Times that "neither consumers, who have consistently benefited from lower prices and increased innovation, nor justice are being served by the decision to file a case now, Intel will defend itself."

As my grandfather used to say: "Where there is smoke there is fire." Intel has a long and checkered past when it comes to being accused of unfair business practices. At BSN*, we had the chance of reading through a large number of e-mails that offered devil’s deals if an Intel CPU would be selected to win the tender, for instance.

In 1993, the FTC dropped a two-year investigation into Intel?s business practices, saying it lacked evidence to back a lawsuit, and the agency ended a second investigation in 2000. In 1995, Intel settled a number of cases with AMD, including one involving antitrust charges.

In 2004, AMD filed suit in Delaware against Intel for anti-competitive kickbacks to manufacturers and integrators. That civil case is scheduled to go to trial in early 2010. Along the way, over 100 subpoenas have been served to firms in the US, including Acer, NEC, Fujitsu, Dell, Dixons Stores Group [DSG], HP, Fujitsu-Siemens, Averatec, Gateway, IBM, Lenovo, Sony, Sun, Supermicro, Toshiba, Fry’s, CompUSA, Circuit City, Best Buy, Ingram, Hitachi, Skype, and Microsoft.

In June 2008, the US Federal Trade Commission (FTC) opened a formal antitrust investigation into Intel, a move that brings mounting scrutiny on their pricing strategy and other business practices. Intel then acknowledged that the FTC served a subpoena related to Intel’s business practices with respect to competition in the microprocessor market. An Intel spokesperson said then, "Since 2006 Intel has been working closely with the FTC on an informal inquiry into competition in the microprocessor market and has provided the commission staff with a considerable amount of information and thousands of documents."

Intel?s problems don?t all originate on their home turf. In July 2005, as part of the EU investigation into the Intel’s alleged abuse of its market position at the expense of rival AMD, EU competition regulators raided Intel’s offices in Britain, Germany, Spain, and Italy. In May, 2009, Intel was fined a record $1.45 billion by the European Union for using strong-arm sales tactics in the computer chip market. Intel appealed the verdict but the company was forced to pay the fine, causing a loss in second quarter 2009 to the tune of 398 million USD.

Going back over Intel?s history, we found that in April 2004, Japan’s competition watchdog raided the Tokyo office of Intel. Japanese regulators were reportedly investigating whether Intel intentionally undercut competitors with large discounts and threatened to stop shipments unless PC makers used its chips. In March of 2005, Japan issued a warning to Intel for anti-competitive practices.

Intel failed to persuade the Japanese courts to keep evidence of alleged anti-trust behavior from being publicly available. The Tokyo District Court said that documentation collated by JFTC [Japan Fair Trade Commission] during its investigation into Intel Japan’s business practices may be used by AMD in the legal action it has begun against its arch-rival in Delaware. Thus, it was also available to New York?s attorney general as part of the millions of pages they have seen.

Korea has also been keeping an eye on Intel?s practices. In April, 2006, the Korean Fair Trade Commission [KFTC] made an unscheduled visit to Intel?s offices in Seoul, South Korea, as part of its investigation into possible violations of that country’s Monopoly Regulation and Fair Trade Act [PDF download]. The KFTC is looking into Intel’s business dealings with four South Korean PC makers. Last month, Intel took South Korea?s fair trade watchdog to court after it decided to fine Intel for undercutting its semiconductor rivals.

The EU has continued to monitor Intel. In February, 2008, Intel?s Munich office was again raided by the EU Commission, along with those of German Metro AG-owned Media Market and other unnamed PC retailers.

This is not the first time Intel is seeing a law suit over allegations and convictions for anti-competitive business practices. This suit is important because the New York Attorney general is accusing Intel of causing American customers to be overcharged because of their anti-competitive practices. Some of those customers being specifically
New York state public agencies, schools, municipals districts, and the Attorney General’s Office itself.

But with a vested relationship between AMD and NY State, this lawsuit is nowhere near being simple. In the interest of full disclosure and to clarify the relationship of AMD to New York State, here is an overview:

In 2006, AMD had serious problems, because the management lead by Hector J. Ruiz decided to delay the investment in 65nm process due to excellent sales of 90nm products. This resulted in a cascade of events resulting in products not arriving on schedule, nor delivering the expected performance. Yet, they announced a new chip fabrication facility in upper New York State. In 2007, AMD was hinting that they would spin off their chip fabrication business and become "Asset Lite".

In October 2008, AMD announced they were partnering with Advanced Technology Investment Company of Abu Dhabi [ATIC] to create what would eventually be called GlobalFoundries, out of AMD-Dresden’s Fab 36/38. GlobalFoundries was founded with $4.5 billion in cash, with future backing going up to $7 billion USD, to be spent on building a foundry in Saratoga County, New York, and continuously improving the Dresden site.

GlobalFoundries was talking specifically in May 2009 about their upcoming New York Fab product plans. There have been a great many incentives directed at GlobalFoundries by New York State including: the largest private-public investment in the history of the state included grants, tax credits, and other New York City Empire Zone benefits. In total, New York State invested around 1.2 billion dollars in getting the facility that is now called Fab 2. In accord with the investment, New York gave AMD a two-year window, from July 2007 to July 2009, to initiate the building of a new 300mm wafer fabrication facility in Saratoga County.

The fact remains that there is cumulative documentation which Intel will have a difficult time turning aside. In the meantime, Intel shares were holding their own, and were up 1.25%, to $18.59, by the end of trading on Wednesday. At the same time, AMD stock was up by 1.08% to $4.68, following a sharp 18% drop that occurred earlier this week, with Hector J. Ruiz being ousted from GlobalFoundries.