Monday, February 5, 2007

Did Intel Bribe Dell to Exclude AMD?

Did Intel bribe Dell to use only Intel chips, even during a period of time when AMD's microprocessors were generally acknowledged to be technologically superior to Intel's?

According to an AP story, "A spokesman for Intel, which was also named as a defendant, says the company has done nothing wrong and that Intel's payments to Dell are legal." Dell declined to comment.

The lawsuit making this allegation was filed by William Lerach, a San Diego lawyer. It states that Dell received rebates from Intel of about $1 billion per year for several years.

Rebates in and of themselves, of course, are not illegal. But Intel and AMD are in a peculiar relationship, or at least were until the last couple of years. Back in the early 1980's IBM chose Intel's microprocessors for its IBM PC design that became the standard design for the industry. It was not that IBM could not design or produce such a chip, or that Intel's chips were supperior to others available at the time from Motorolla or Zilog. IBM did not want to use its own chips because it had already been accused of monopoly practices and suffered through a hairy anti-trust case. IBM even let other manufacturers copy its design and sell their "clones" for a lower price.

Once Apple knocked itself out of the game by overpricing its Macs in the mid-1980's, most of the microprocessor market belonged to Intel. That meant it had obtained IBM's enviable position: it looked like a monopoly, whether it was or not. So Intel began using the classic strategy for this kind of situation: it allowed a second source of microprocessors that were compatible with its own. More than one company competed for that sliver of the market, but AMD won it.

Intel needed AMD in order to not be a monopolist, but Intel had to take it into consideration when determining its prices. Which is precisely the idea of anti-trust legislation.

But then Intel fumbled the ball when the time came to switch from 32 to 62 bit microprocessors. AMD designed processors, the Opteron for servers and the Athlon for client computers, that computer manufacturers and end users really liked. AMD's market share began to climb.

Intel needed to buy time to re-engineer its processors and re-align its road map to meet this unexpected challenge. It did everything it could to convince computer makers to either not use AMD chips.

Dell is not known for its design innovation. It is, or was, a great business model for chugging out profits, but Dell never has had the legions of engineers available at, for instance, HP and IBM. That was one of its cost advantages, until too many IT professionals decided they needed to buy AMD Opteron and Athlon based machines. The failure to turn to AMD in a timely manner was one of several reasons Dell's profits dried up.

Whether they were bribes or legal rebates, properly accounted for or improperly accounted for, those billion dollar transfers from Intel to Dell were anti-competitive and hurt stockholders of all three companies. Intel's stockholders lost cash. Dell's got some cash, but lost more in opportunities. And of course AMD stockholders lost quite a bit of potential sales.

I don't know what the courts will decide. The lawsuit may have merit or not. But at least now we know more about how this game is played, and can adjust our portfolios accordingly.

For the record, I own AMD stock, but not Dell or Intel.

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