EC's evidence shows Intel paid HP for 95% exclusivity

When the European Commission delivered its first evidence against Intel last May, in papers that were only released this week (PDF available here), it argued that Dell Computer's belief that Intel could penalize it for purchasing AMD's CPUs was as good as Intel actually making the threat. But other evidence later in the 517-page document collected from both Intel and Hewlett-Packard suggests that HP was under the clear impression from the very beginning of its agreement with Intel that if it were to purchase more than 5% of its CPUs from AMD, HP would not only disentitle itself to Intel rebates but also possibly forfeit rebates it would have already received.

But the evidence also shows that HP may not have been under any coercion to agree to these terms. In fact, HP may have been instrumental in stipulating the nature of the rebates, in an effort to streamline its purchasing costs following its just-completed merger with Compaq.

The Commission's formal statement on its May decision against Intel, whose public version was heavily redacted, includes an unnamed HP executive's own summary of the terms of an October 2002 agreement termed "HPA1," which was to last for a twelve-month initial term with options to extend every six months thereafter.

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The HP executive's summary of the HPA1 agreement reads as follows:

Intel granted the credits subject to the following unwritten requirements:

a) that HP should purchase at least 95% of its business desktop system from Intel;

b) that HP's distribution (…) model for AMD-based business desktops should:
(i) direct HP's AMD-based business desktops to SMB [Small and Medium Business] and government, educational and medical (GEM) customers rather than to mainstream (or "enterprise") business customers; and

(ii) preclude HP's channel partners from stocking the AMD-based business desktops, so that these desktops would only be available to customers by ordering them from HP (either directly or via HP channel partners acting as sales agent). This is known within HP as a direct/"top config" go-to-market model;

c) that HP would defer the launch of its AMD-based business desktop in the EMEA [Europe, Middle East and Africa] region by six months.

The HP executive told the EC that the terms of Intel's rebates were unwritten, though Intel did comply with its side of the agreement, making rebate payments to HP after the first seven months of HPA1's initial term. Curiously, the business model the two companies agreed to appears to have been designed to intentionally lessen the perceived value of AMD-based PCs among prospective customers, by characterizing their buyers as in the public and medical sectors of the economy rather than "real enterprises."

A later negotiation between the two companies, according to HP's evidence, clarified these terms with a promise that any HP PCs with AMD processors be marketed only to SMBs, only in response to a specific request for proposal from customers (and thus not marketed for general sale), and not branded using the same terms as a computer marketed toward "real enterprises."

As the HP executive described the terms of the clarified agreement, probably citing language from the agreement itself, Intel's right to retribution against HP was explicitly negotiated and agreed to: "If Intel can reasonably demonstrate that HP is not fulfilling the above commitments then a joint-HP Intel executive escalation session will be held to review and discuss this disagreement. If the HP and Intel executives agree that HP has not met its requirements, HP will be given a reasonable time period to cure the problem. If HP fails to remedy the problem then Intel has the option to terminate the agreement. If this termination occurs, no further payment will be due to HP beyond the quarter prior to which the unremedied problem occurred. Payments made to HP for quarters after this point will be refunded to Intel."

In a September 2004 incident, one unnamed HP executive sent an e-mail to another asking whether it would be possible to sell AMD-based PCs in emerging market countries such as Poland and Turkey, under the Compaq Presario brand name. Perhaps the Compaq brand didn't fall under the HPA1 agreement terms; and perhaps this would also be a good test case to see if Intel would possibly blow up about anything, the sender suggested.

But the recipient -- obviously the sender's senior -- responded with an absolute no: "You can NOT use the commercial AMD line in the channel in any country, it must be done direct. If you do and we get caught (and we will) the Intel moneys (each month) is gone (they would terminate the deal). The risk is too high."
The EC acknowledges Intel's defense that there was no implied conditionality in the HPA1 agreement, and that if HP felt threatened by it, it certainly didn't share those feelings when negotiating an HPA2 agreement using new conditions that HP itself requested. But the Commission says that defense contradicts the facts as presented by HP.

Further evidence shows that while HP did negotiate with AMD and that AMD did offer extensive discounts, the possibility of Intel's retaliation under the terms of HPA2 -- terms which HP executives warned each other not to reveal to AMD at any time -- forced them to decline AMD's offers. However, citations from HP's testimony in the case suggests that HP's executives may have also been using the very existence of its negotiations with AMD as a way to extract even more favorable terms from Intel. When explicitly asked whether Intel insisted on terms such as restrictions on the channels into which HP could sell AMD-based PCs, an HP executive (again, one whose name was redacted) suggested that HP would not have voluntarily offered to restrict its own channels unless it could "receive something else in return" from Intel, and then added that HP did expect "some advantaged pricing and potentially ECAP [Exception to Customer Authorized Price] funds."

"ECAPs" are the same class of transactions that whose classification as either discounts or rebates, was a matter of some confusion in the Dell affair.

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