EC Charges Intel with Abuse of Dominant Power

This morning in Brussels, spokespersons for the European Commission confirmed that Intel was served yesterday with a formal Statement of Objections, charging the CPU manufacturer with paying for exclusivity with cash, incentives, and discounts in order to compel OEMs not to purchase AMD CPUs.

At present, the EC has not made public the names of OEMs with whom Intel allegedly made deals. However, according to spokespersons, the Statement does specifically name AMD as the sole party which Intel allegedly sought to harm.

In a public statement, the EC listed the three counts delivered to Intel:

1) Intel is said to have given or offered rebates to European OEMs in exchange for agreeing to purchase most or all of their CPUs from Intel.

2) Intel allegedly made payments to one OEM - not publicly named yet - for either delaying or canceling an AMD-based product rollout. (It isn't clear why the EC is uncertain whether the OEM delayed or canceled the product; theoretically, if it never debuted, it was probably canceled.)

3) In placing bids with selected customers, Intel is said to have offered CPUs in quantity at below cost.

Specifically, phrased in a more American fashion, Intel is being formally charged with three counts of violating Article 82 of the EC Treaty, which includes binding law that applies to member states. Since that part of the Treaty is brief and simply put, we excerpt it here in its entirety:

Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States.

Such abuse may, in particular, consist in:

(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;

(b) limiting production, markets or technical development to the prejudice of consumers;

(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

The European Union operates under a parliamentary system, in which the European Commission is the "upper house" - a counterpart to the US Senate. In a fashion similar to how a senator may chair a committee devoted to a particular branch of lawmaking, commissioners are appointed certain legislative departments, one of which is literally entitled "Competitiveness."

“We expect to demonstrate to the Commission that rebates and other forms of discounting are not illegal, and they had nothing to do with AMD's performance in the market as a company.”

Chuck Mulloy, Intel corporate spokesperson

But whereas in the US, prosecution of antitrust cases is handled by the Antitrust Division of the Justice Dept. - a service of the executive branch, which reports to the President - the EU system works quite differently. There, commissioners have the power to bring charges, and the accused individuals or companies defend themselves by bringing their cases directly to the accuser. Then the commissioners actually exercise judicial power; once they've heard the defense, they can impose fines and penalties. If the accused appeals, then the case enters the European judicial system, by way of the Court of First Instance, but not until then.

In Intel's case, it will have ten weeks to respond to the Statement of Objections, either in writing or in a formal, public hearing. But after that time, the EC may still decide to impose penalties. Though the EC has not stated this time the possible range of those penalties, if history is any guide, it may have the right under EU law to fine Intel as much as 10% of its worldwide profits.

How much would that be? Ten days ago, Intel reported its second quarter financial numbers. Its net income for the past three months was $1.3 billion, a 44% gain over the second fiscal quarter of 2006, on revenue only slightly up annually to $8.7 billion. Those are extremely healthy numbers, and the big profit gain measured against a slight revenue gain shows that structurally, Intel may be out of the woods. But think about $130 million per quarter as a possible fine. That's more than the company's recent restructuring costs on a quarterly basis.

How would the EC impose that fine? That seems to depend upon the attitude of the commissioners at the time. Technically, it should apply to the entire period of time in which the market was impacted by Intel's alleged abusive conduct. But if the EC determines that conduct is ongoing - as it has claimed in the case of Microsoft - its fine could resemble a quarterly toll booth. Did you make $1.3 billion? Hand over $130 million. (Do not pass Go.)

When would that fine take place? This is the start of yet another long, legal slog - maybe longer than the AMD v. Intel battle going on now in US courts. The EC delivered its famous Statement of Objections to Microsoft just before Christmas 2005, and while it has threatened Microsoft with new fines calculated on a daily basis, on top of old fines in the hundreds of millions of euro, the legal wrangling there still continues.

Next: Intel responds to BetaNews, and AMD jumps in

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