Why Europe Hates Intel

The European Commission and Intel (Nasdaq: INTC  ) are slugging it out in public these days.

Earlier this year, the commission said that Intel was doing bad, bad things to push its only rival, Advanced Micro Devices (NYSE: AMD  ) , out of competition. This was hurting European consumers, and the commission slapped Intel with a $1.45 billion fine -- large enough to eclipse the nearly $750 million fine it originally imposed on Microsoft (Nasdaq: MSFT  ) in 2004. Intel filed an appeal, and now some of the supporting documents of the case are available to the public.

Point
The commission isn't kidding around as it lays some heavy charges at Intel's feet -- and backs them up with what looks like damning evidence. Here, have a taste:

  • An unnamed Hewlett-Packard (NYSE: HPQ  ) executive, in an email from 2002, wrote that "we are constrained to 5% AMD by pursuing the Intel agreement."
  • Between 2002 and 2005, Dell (Nasdaq: DELL  ) would have lost massive Intel rebates if it shipped any systems with AMD inside. So Dell stayed with Intel's "slower, hotter products that cost more across the board in the enterprise with no hope of closing the performance gap for 1-2 years," according to an email from 2004.
  • Pan-European retailer Media Saturn Holdings, which features 800 stores from Spain to Russia, had a non-exclusive agreement with Intel on paper, but an unnamed executive says that Intel's legal department requested that wording while rebate programs continued to require high percentages of Intel chips sold.

All of this happened back in AMD's Golden Age, when the Athlon was beating the pants off the Pentium 4 and Intel was scrambling to defend its throne.

This salvo of public scorn makes sense when you consider the nature of this case: The commission is defending a record-breaking $1.45 billion penalty and could come out looking ridiculous if Intel manages to overturn the charges.

Counterpoint
And of course, Intel is doing its best to counter the commission's attacks. In a written statement, the company calls this decision "wrong -- both factually and legally." Intel slams the commission's "prosecutorial bent" and says that with this mindset, facts that would support Intel's position may have been ignored and many ambiguous statements interpreted in AMD's favor.

For example, Intel says, "the Commission relied heavily on emotional exchanges and speculation found in emails if they favored the Commission's case." Intel specifically points to the commission relying on speculation from a lower-ranked employee, while it in turn points to evidence that all customers covered by the commission bought from AMD during 2002-2007, and none of them suffered disproportionate rebate reductions.

What does it all mean?
I am not a lawyer, nor do I play one on TV. Hence, it is not my place to say who's right and who's wrong in this scuffle.

But I can tell you that the final outcome is vital to the entire computer industry.

For AMD, the European decisions so far are setting up a fine framework of international precedents, and AMD could draw support from this in the case that really matters. That would be the antitrust suit in U.S. federal courts, where Intel might end up paying damages straight to AMD rather than to a faceless commission.

Intel obviously wants to keep or reclaim its cash. The company is big and rich enough that it can easily afford several billions of dollars in fines before taking any real damage. But that's hardly ideal, and investors don't like to see money going out the door.

Painting the big picture
On a grander scale, this is just the first of many antitrust cases against Intel. If the chip giant broke the law, then its business practices would need to change -- and probably have done so already. That means more choice for consumers and system builders -- although there are plenty of reasons to choose Intel chips anyway, at the moment. It could spark another all-out price war between AMD and Intel as the two attempt to stake out their territories on technical merits and pricing alone.

Or, Intel could win out in the end and everything will continue as before -- whatever that means.

I am a longtime AMD shareholder and would obviously love to see billions of Intel's dollars flowing into AMD's coffers -- but I also have tremendous respect for Intel and don't believe that it's evil. Competition gets cutthroat and messy in these fierce two-horse races, and Intel may or may not have overstepped the limits of law and good taste.

The AMD-Intel duopoly will remain in any case. It's much like the never-ending cola wars, except that Pepsi (NYSE: PEP  ) is a much stronger underdog than AMD ever was. And if AMD wins big, I might just take my profits from the newly rich AMD and invest in Intel, whose shares should be cheap that day.

Best Buy is a Motley Fool Stock Advisor selection. Microsoft, Dell, and Intel are Motley Fool Inside Value recommendations. PepsiCo is a Motley Fool Income Investor pick. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund owns shares in AMD, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (7) | Recommend This Article (11)

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  • Report this Comment On September 23, 2009, at 5:23 PM, tqn567 wrote:

    "Why Europe Hates Intel" ? - Do we think so?

    If the facts provided to us by EU are true then Intel is really wrong. Not just wrong, it's against the law (or rule of the game).

    We all know that during that period, Intel was actually behind AMD, it lost the 1G race, the 64-bit game, the dual core design, performance vs. cost... and AMD by then was really strong.

    What if Intel played clean during that time frame? - It would be a fraction of now Intel. Is it a good game plan? Just 1.4B fine but save the company of 100B.

    Should we respect/accept the game they play as in basketball the players of losing team commit faults in last few minutes or in soccer the defender tackles the striker to get penalty shoot rather than let him to score a goal!

  • Report this Comment On September 23, 2009, at 6:11 PM, Huayra wrote:

    Europe doesn't hate Intel, it's just more forceful when it comes to anti-competition. In the last two years we've seen issues with Microsoft, Intel and now Oracle.

    You have to properly regulate companies and apply the rules you have in place, because companies will do whatever they can get away with to make a buck.

    May be good for the shareholders, but not necessarily the broader market.

    And as we've seen the big picture does matter in the end, because we all pay the price when there is insufficient oversight.

  • Report this Comment On September 23, 2009, at 7:42 PM, 5114 wrote:

    Is it easier to ask for forgiveness, than permission? Perhaps, but Intel is doing neither. This sets the stage for a good old street fight with AMD in spring 2010. AMD went on a fishing expedition throughtout the world and netted itself some really big fish to send to market. Fines and evidence to backup the fines from all the players in the field.

    I agree, AMD stock should be a good buy now. Ya just have to wait a few days before Intel reports it's quarterly earnings to sell what's left in the portfolio, and then buy AMD.

  • Report this Comment On September 23, 2009, at 7:53 PM, Suaveghost wrote:

    A strategic reshaping of the Semiconductor Industry is taking place right under the nose of the industry’s recent sleeping Giant.

    In play is a marriage of necessity combining capital strapped AMD strength as a World class engineering solutions (the brains) meet (the brawn) Abu Dhabi's

    Sovereign Wealth Fund. The benefit of a partner with an abundance of zero cost funds is the partners money allows one the ability to do a lot of things fast. As fast as money can buy it.

    AMD has a new strategic plan.

    1. Form a Strategic Partnership to tap the zero cost beneficial cash wealth of a friendly Sovereign Wealth Fund.

    2. Convince your capital unconstrained Fund Partner to make an initial investment in your capital intense excess Fab manufacturing capacity.

    3. Convince your Funding partner to Continue to invest in a string of Fab acquisitions at historically low valuations depressed prices designed to accumulate capacity muscle for pennies on the dollar of replacement costs.

    4. Sufficient capacity Continue buying growth until you control sufficient

    capacity to meet the world demand for cheap semiconductors.

    5. Utilize AMD’s world class engineering and production

    solutions among under utilized Fabs to ramp up production of products in sufficient quantities of cheaper chips to meet world demand. Abu Dhabi’s investment in AMD and ATIC now has achieved the FAB power of an Intel for a third of the sunk cost.

    A strategic reshaping of the Semiconductor Industry is taking place, but one name consciously absent in the

    equation is Intel.

    Consider this Sept 7, 2009 news story said “Toshiba is in talks with Chartered and Global Foundries - the two foundries in an IBM-led (NYSE:IBM - News) consortium to

    develop next-generation system chips, used in a wide range of electronics from game consoles to digital cameras.

    The two contract chip makers may soon come under7 the same roof after

    Abu Dhabi's state fund Advance Technology Investment Co's (ATIC), which

    owns 55.6 percent of Globalfoundries, offered to buy Chartered Semiconductor for $1.8 billion.” Globalfoundries is a joint venture with Advanced Micro Devices (NYSE:AMD - News).

    Abu Dhabi’s is ATIC’s investment arm, GlobalFoundries & Chartered Semiconductor are the brawn.

    The larger point, one which is not being covered by the financial media, is in a short six months AMD thanks to the well moneyed Abu Dhabi’s formation of ATI

    and recent acquisition now has the manufacturing muscle of an Intel. This a rather stunning achievement.

    AMD end game goal is to squeeze competitor profit margins. The applied competitive pressure eventually

    causes your competitor to restrict his Cap-X and R&D spending which stagnates or shrinks Fab capacity. Ultimately prolonged results cause a relinquishing

    market share. Intel strategy in reverse, turnabout is a fair game in the chips wars.

    Given the recent Industry shaping events, two questions come to mind.

    Can Intel using the higher cost of Public Capital compete against Sovereign Capital.

    Why is AMD selling below seven bucks given the recent beneficial overnight change in competitive advantage.

  • Report this Comment On September 24, 2009, at 12:19 AM, SoSoY wrote:

    "Abu Dhabi’s investment in AMD and ATIC now has achieved the FAB power of an Intel..."

    Uhh, not exactly. What in the world are you smoking?

  • Report this Comment On September 24, 2009, at 12:53 PM, jpanspac wrote:
  • Report this Comment On September 25, 2009, at 5:13 PM, taishiba wrote:

    Europe does not hate Intel. The consumers of Europe, USA, Asia have been wrong by Intel's illegal abusive strong arm tactic behavior. With a loss of appeal by Intel in the EU, AMD is open for billions in damages. So Intel will have to fork it over in 2010 or 2011 taking a nice write down for conscious acts to keep consumers lacking choice on products they want from OEMs and other producers!

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