New York: Intel's agreements to lower CPU prices led to overcharges

This morning, the State of New York filed an antitrust suit against Intel, joining its voices with those of the European Commission, Korea, and other countries in alleging that its ability to make exclusivity deals was illegal. The claims made this morning by the State Attorney General's office were not at all unprecedented. Essentially, A-G Andrew Cuomo focused on two of the issues already central to the EC's existing case against the company: its CPU purchasing deals with major PC makers Hewlett-Packard and Dell, the existence of which is no longer truly disputed.

But the theory of damages in the case may be difficult to prove, and the lawsuit complaint makes a calculated move in not really arguing damages at all, beyond the fact that they exist. While presenting more evidence than the general public has seen to date of negotiations between Intel and its leading OEMs, clearly suggesting they conspired to keep CPU maker AMD at a safe distance, that evidence also supports the notion that PC prices were rendered lower as a result of those deals, not higher.

While evidence continues to show, for example, that AMD offered HP free CPUs for entering into a deal, and that HP rejected that deal for fear of Intel retribution under its existing purchasing agreement, the complaint offers no evidence of what HP's prices for those AMD-based PCs might have been. And new evidence sheds only more light on the fact that Intel's customers used their own leveraging power to keep their buying prices low, in exchange for promises of exclusivity or near-exclusivity with Intel.

So the complaint attempts a kind of "leap of faith," a way of saying, imagine what might have happened if Intel had used that same monopoly power to raise prices instead of lower them.

Under the theory that the State of New York purchased certain PCs from OEMs (not necessarily HP and Dell), and that the contracts of those purchases assigned to the State the sole right to sue anyone for overcharges, the State is suing Intel claiming it was overcharged, specifically by whatever amount it might have saved had no such exclusivity deals been made...even though those deals led to discounts.

Once again, as was the case with the EC's Statement of Objections last May, A-G Cuomo's evidence comes from e-mails from Dell and HP, many of which suggest that although they were certainly fearful of Intel retribution should they sell more computers with AMD chips than previously agreed, that fear comes from their perception of how Intel could react, rather than what how it may have threatened to react.

For example, in a section of today's suit (PDF available here) entitled, "Intel Conveyed Threats to Dell," e-mails between Dell executives were cited, though not containing words from Intel executives.

"In preparation for upcoming funding negotiations with Intel in 2002, a Dell executive, who regularly acted as an informal liaison between Dell and Intel, explained that Intel would not tolerate a Dell shift to AMD CPUs," reads the A-G's lawsuit complaint. "Specifically, this Dell executive wrote to Michael Dell and others: 'If [Dell starts to use] AMD [CPUs], [Intel] would just give a [competitor] MOAP type dollars to match whatever we're getting -- they won't sit around and let us transfer share to AMD…'"

"MOAP" in this case referred to an early acronym for the purchasing deal then under negotiation between Dell and Intel: "Mother Of All Programs." It was later changed to "Meet Competition Program" (MCP), and was designed to be a way for Dell to specify in advance how Intel should respond to competitive offers made to Dell by another CPU supplier. Of course, there was only one of those. As evidence brought forth by the European Commission made clear, the terms of the MCP were kept oral between the two parties, under a mandate specified by Dell.

In fact, Cuomo's complaint this morning only shed more light on the degree to which Dell exercised its own leverage in the negotiations. The suit alleges that MCP was constantly renegotiated in order to determine legal -- or legal-sounding -- ways to "structure" rebates from Intel to Dell for maintaining its purchasing quotas, and for excluding AMD. But as the suit states explicitly: "As Dell's lead negotiator with Intel put it in a December 7, 2004 e-mail to his Intel counterpart, explaining that Michael Dell wanted an additional $400 million rebate payment from Intel: 'This is really easy... MSD [Michael Dell] wants $400M [million] more. I've been trying to figure out the structure...'"
The suit does reveal, however, where Intel was willing to throw its weight around. For example, internal Intel e-mails cited in the suit show where, in late 2002, Sony was in purchasing negotiations with Intel. As with many major OEMs, Sony had market share target goals it wanted to meet; but so did Intel, which saw each OEM as contributing certain numbers of points to its market share segment [MSS] in consumer and business segments.

The "value" segment of the market (the low end, or "entry level") has always been where AMD has made its biggest inroads. So at this time, Intel wanted Sony to commit to exposing Intel to more MSS points in the value segment, to catch up with AMD. Citing internal Intel executive e-mails without naming the correspondents, the complaint reads, "The first executive inquired: 'Can [another Intel representative] discreetly hint to Sony that the Corp Marketing dollars are at risk if Intel's MSS with Sony in the value segment does not improve?' The second responded: 'We should not be shy about our unhappiness with our current MSS. Intimating that the program is in jeopardy if they don't get their act together and work with us on this is clearly ok.'"

Intel would be willing to co-market Sony's notebook computers, if Sony made purchasing commitments on its end. Those commitments were called "alignment," as referred to in this internal Intel e-mail: "I also told him [the Sony negotiator] that Intel…would really have to make sure Sony and Intel are well 'Aligned' before we commit to doing this kind of comarketing program…If we can get [Sony] to agree on better alignment (MSS recovery in US NB [United States notebook computers], No more surprises), then, we can move forward with co-marketing discussion. If not, we may have to think about alternatives."

"Intel forced OEMs to choose between having a 'strategic' or a 'transactional' relationship with Intel," explained the State of New York's lawsuit complaint. "In Intel's parlance, a 'strategic' relationship was one with a high degree of exclusivity or 'alignment.' An OEM which opened itself to a relationship with another microprocessor supplier -- AMD -- was regarded as desiring only a 'transactional' relationship with Intel, and Intel made clear in such cases that this would not be in the OEM's own best interest."

E-mails detailing how to explain to OEMs the virtue of "strategic" relationships with Intel -- long-term agreements with benefits dispensed over time -- imply that the Intel executive responsible for coining that phraseology was Paul Otellini -- at the time of these negotiations, Intel's Chief Operating Officer.

In a statement to Betanews this afternoon, Intel spokesperson Chuck Mulloy reiterated his company's position: "We disagree with the New York Attorney General," he told us. "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."