In Intel settlement, FTC says computer buyers to get cheaper prices - but not right away

By Jordan Robertson, AP
Wednesday, August 4, 2010

FTC says computer buyers benefit from Intel deal

SAN FRANCISCO — The Federal Trade Commission is trumpeting its settlement with Intel Corp. as a victory for consumers who have overpaid for computer chips for a decade, though computer buyers shouldn’t expect a sudden drop in prices.

The deal announced Wednesday represents the end to the harshest antitrust lawsuit Intel has faced yet from government regulators, and it imposes the strictest set of changes onto the way Intel does business.

But any changes as a result of the FTC’s actions would likely be gradual, and possibly imperceptible, to most people.

One reason is that the prices for computer chips have steadily fallen anyway as technological advancements make it cheaper for companies such as Intel to make more powerful chips. Consumers have gotten used to getting more computer for less money every time they go shopping.

The FTC’s case is built on the argument that those prices haven’t fallen as fast as they could have. It has accused Intel of contributing to that by abusing its position as the No. 1 supplier of both central processing units (CPUs) and graphics processing units (GPUs) to box rivals out of the market and stifle competition.

CPUs are the “brains” of computers and are among their most expensive parts, often making up about 15 percent to 20 percent of a computer’s price. GPUs are chips that make graphics look good on computer screens.

FTC Chairman Jon Leibowitz said Intel’s behavior stepped well over the line — moving beyond “the type of aggressive competition on the merits that we all encourage and into the realm of unfair, deceptive and anticompetitive conduct.”

Intel has long denied the charges and has pointed to the industry’s falling prices as evidence that the market is functioning normally.

Its argument has supporters.

Last week, the “special master” appointed by a federal court in Delaware to oversee class-action lawsuits against Intel argued in Intel’s favor that consumers have benefited from the controversial discounts that Intel gives computer makers. The reason? Those savings are often passed along.

Intel’s general counsel, Doug Melamed, said the settlement “provides a framework that will allow us to continue to compete and to provide our customers the best possible products at the best prices.” Melamed added that the settlement puts an end to the “expense and distraction” of the litigation.

Investors appeared unmoved by the FTC settlement, which was expected. Shares fell just 2 cents to close Wednesday at $20.73.

“I think it’s more of a formality than anything else and don’t think it materially changes the game for anybody,” said Patrick Wang, a semiconductor analyst with Wedbush Securities. A settlement that didn’t have any major surprises “was never going to impact the stocks. If anything, it’s a relief.”

The settlement is a reminder that Wall Street cares less about Intel’s antitrust tussles than it does the company’s vulnerability to swings in the economy and changes in demand for computers.

Over the past five years, shares of Intel, a component of the Dow Jones Industrial Average, have mostly traded in the $20 to $25 range, except for the clobbering they took during the worst of the recession, when demand for the most expensive types of personal computers — and Intel’s most expensive chips — nosedived.

As part of the deal, Intel has agreed not to pay computer makers for avoiding rivals’ chips or retaliate against them when they do pick competing products — things Intel has long maintained it wasn’t doing anyway.

Those were essentially the terms of a $1.25 billion settlement Intel struck last year with Advanced Micro Devices Inc., a key rival whose complaints piqued regulators’ interest. The aftershocks of AMD’s campaign still reverberate: Intel is still contesting a $1.45 billion antitrust fine in Europe and separate cases in South Korea and New York state.

The FTC deal goes further than previous cases in mandating that Intel needs to be friendly to its rivals in other significant ways.

Those include modifying its intellectual-property agreements with AMD, Nvidia Corp. and Via Technologies Inc. so that those chip-makers can more easily do mergers and joint ventures with other companies without the immediate threat of a lawsuit from Intel.

That is important because AMD’s recent decision to spin off its factories into a separate company — which AMD needed to avert financial ruin — triggered a showdown with Intel over the legality of that move. Intel’s leverage over AMD in that matter was key to wringing a settlement out of AMD for far less money than AMD could have won at trial.

Jim McGregor, a semiconductor analyst with market researcher In-Stat, said technology companies have long used such agreements as weapons.

“We’ve seen that over and over again where they’ve used that as a hammer,” he said. The FTC’s case is a “huge statement to the industry that, ‘You’re reaching too far.’”

McGregor added that chip prices typically fall about 20 percent per year, and chip-makers try to counteract that by rolling out newer products that command higher prices. He said the FTC is “reaching a bit” with its argument that consumers would see better prices as a result of the settlement, adding that “we’ve seen dramatic decreases in prices over the past decade.”

Other parts of the settlement:

— Intel must now tell customers that its “compilers” — which are used in software development — aren’t in fact objective and are biased toward Intel’s chips. Software written using them performs better on Intel’s products than on rivals’. Intel has to reimburse customers up to a total of $10 million if they feel they were misled and want to fix their software.

— Intel has agreed to maintain a key type of technology in its chips, called a PCI Express bus, in a way that won’t degrade the performance of other types of chips that connect to Intel’s chips. That part of the settlement speaks to the growing animosity between Intel and makers of graphics chips. GPUs are increasingly taking over chores that CPUs have traditionally handled.

“The FTC is trying to spell out the rules of engagement for the high-tech industry,” McGregor said. “This is kind of a warning shot: ‘You guys have to play nice.’”

Associated Press Technology Writer Joelle Tessler in Washington contributed to this report.

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