Wednesday, June 20, 2007

AMD vs Intel

The case for Smarter Choice

Over the past couple of years, starting with a blog post I made back in June of 2005 titled AMD sues Intel, I have followed the proceedings with a jaundiced eye.

Over the last year, especially as AMD seemed to slip in the marketplace, the network effects of Intel's monopoly position have become more apparent to all.

The extent of the illegalities of those network effects are up to a (US) Federal court and perhaps competition authorities in Europe and South Korea who are currently investigating the legality of Intel's business practices to decide. There is almost no doubt that Intel's behavior would be declared illegal, for example, in 2005 the Japan Fair Trade Commission ruled that Intel did indeed engage in illegal business practices that violated Japan's Antimonopoly Act, harming Japanese consumers.

Continuing their policy of open communications with the online community, AMD Executive Vice-President, Legal Affairs, and Chief Administrative Officer Tom McCoy spoke to several members of the online and blogging communities on June 12, 2007, about the state of the now nearly 2-year old antitrust lawsuit.

What the lawsuit is about is basically, choice.

Choice for the consumer, choice for OEMs, choice for the enterprise.

The exact magnitude of Intel's transgressions have not been made public, and unfortunately, Tom McCoy, as a member of the executive team at AMD, could not enlighten us further, since the discovery documents are under a protective (judicial) seal.

A summary of the original complaint find the following accusations:

  • forcing major customers such as Dell, Sony, Toshiba, Gateway, and Hitachi into Intel-exclusive deals in return for outright cash payments, discriminatory pricing or marketing subsidies conditioned on the exclusion of AMD;
  • forcing other major customers such as NEC, Acer, and Fujitsu into partial exclusivity agreements by conditioning rebates, allowances and market development funds (MDF) on customers' agreement to severely limit or forego entirely purchases from AMD;
  • establishing a system of discriminatory, retroactive, first-dollar rebates triggered by purchases at such high levels as to have the intended effect of denying customers the freedom to purchase any significant volume of processors from AMD;
  • threatening retaliation against customers for introducing AMD computer platforms, particularly in strategic market segments such as commercial desktop;
  • establishing and enforcing quotas among key retailers such as Best Buy and Circuit City, effectively requiring them to stock overwhelmingly or exclusively, Intel computers, artificially limiting consumer choice;
  • forcing PC makers and tech partners to boycott AMD product launches or promotions;
  • and abusing its market power by forcing on the industry technical standards and products which have as their main purpose the handicapping of AMD in the marketplace.

Just how nasty is this behavior?

Can you imagine if either Microsoft, in operating systems and applications, Google in search, or Boeing in aircraft pulls this kind of nonsense?

Let us go through each point in that summary:

  1. Cash payments. While not illegal per se, non-disclosure of those same monies should be. In fact, Dell, if I remember correctly, is the subject of a shareholder lawsuit alleging that the company (Dell) for years used the cash payments from Intel to prop up profits, up to the tune of about $1 billion US per year.
  2. Exclusivity agreements. The exclusivity covenants in those contracts require the companies involved to deal which Intel to the exclusion of other CPU manufacturers.
  3. Channel stuffing. Another form of exclusion, this insidious behavior makes sure that the vendor's warehouses are always full, of Intel products, thereby disallowing the purchase of product from other CPU manufacturers.
  4. Threats. This is an especially odious allegation. In jurisdictions where antitrust authorities and/or AMD prevailed, it was proven that Intel would threaten to either stop or slow product deliveries, cancel POs among others, in order to get vendors to toe the line.
  5. Quotas. Can you imagine being told what percentage of products to carry? That, essentially is what this illegal behavior is.

    For example, a retailer is told that in order to obtain market development funds, or MDFs, the retailer has to carry 90% Intel products.

    Since the kickback, and there should be no doubt about it, it is a kickback, is a large amount, retailers, who operate on razor-thin margins, become hooked on it.

    If the customer failed to adhere to those levels, not only did the MDFs shrivel, but the rebates vanished. Is that a financial headlock or what?

  6. Boycotts. Of product launches under threats! Just where were the adults minding the store at Intel?
  7. Exclusionary standards. Can anyone say 'Centrino'? 'Viiv'? Why should a standard be locked in to only one company's family of products?

In the several months since, the concerns of AMD seem more and more valid, especially in the light of current news of Intel gaining market share in several industry segments.

According to Intel, AMD is whining about nothing. The Intel comeback is centered around these two positions:

  1. AMD is complaining about discounting. How untrue is this? Everywhere you go, the lowest-priced system is always an AMD-based system. In fact, Intel has always been able to maintain margins even in the hotly contested CPU space by dint of pricing threats. ?

    In other words, if a customer agrees to give a specified amount of shelf space to Intel products, or better yet, go exclusive with Intel, the customer would realize better margins by keeping competitors out and reducing customer choice.

    It is particularly telling that AMD couldn't even give away CPUs! Since the customer would suddenly be subject to increased prices and zero market-dev funds, most customers declined offers of free CPUs.

  2. AMD has zero capacity. Not true, in fact, I was informed that AMD has more than enough capacity, captive or external to feed any requirements that they might need.

Due to my ineptness with the WebEX teleconferencing unit, I was unable to ask further questions before the session ended. However, an email to Scott at AMD for answers enabled me to get another crack at Tom (McCoy), this time telephonically.

In our phone call on Monday, June 18, 2007, I had three questions for Tom (my questions in italics, Tom McCoy's answer boldfaced and italicized):

  1. A public instance of Intel requiring a lockout of other CPUs is the Skype situation, where Skype and Intel entered into an agreement whereby Skype would create VOIP software that would work exclusively with Intel products, to the detriment of consumers who had alternative CPU systems, of which the largest rival is AMD.

    Apart from the Skype case, are there more overt or subdulous contractual agreements to modify software to both exclude non-Intel CPUs and customer choice that are public?

    Since it delved into matters under litigation, Tom declined to answer.

    However, I seem to remember Intel's infamous compilers, which, due to their CPU-ID schemes were optimized (read that as rigged) for Intel CPUs; the end results being that results of tests using those compilers had results dishonestly skewed in favor of Intel microprocessors.

  2. Does AMD use MDFs, and if so, do they contain either similarly restrictive covenants as Intel's or contain sufficiently vague language as to be misconstrued as being the same as Intel MDFs?

    The emphatic answer: NO!

    Tom actually said, "…we DO have an MDF program, but it is highly collaborative with our customers and bears no resemblance to Intel's."

    Tom explained that

    1. that was not the AMD way,
    2. AMD wanted design and product wins based on the products, and
    3. AMD did not have the market share power to even attempt such a move.
  3. In addition to legal/contractual restraints, are you also asking for financial redress from Intel?

    As part of the filing, yes.If a jury finds Intel guilty in the U.S. antitrust suit we would be entitled to damages. However, AMD would prefer to have a level playing field to compete rather than money.

    I got the feeling that AMD seeks the following:

    1. A level playing field
    2. An opportunity to collaborate with vendors and OEMs
    3. No restrictions on competitions, no elevation of status among CPU vendors by judicial fiat
    4. A restriction on Intel's abuse of monopoly power.

All of Tom's answers, especially that about not using MDFs since it was not the AMD way, spoke directly to why AMD is really highly regarded amongst the smaller system OEMs around the world.

It is not their way!

Which is true.

Looking back at AMD over the years, you would find that Intel fired the first salvo when AMD's x86 clones totally decimated Intel in the eyes of 2nd-tier OEMs.

The AMD way: compete.

In closing, I would see that choice, especially consumer choice, is the real reason behind AMD's lawsuit. It further validates the decision we made at Logikworx nearly eighteen months ago to recommend Opteron as the price/performance server CPU to our clients, and the Athlon as our recommended desktop CPU.

I would like to thank Tom for taking the time on both days, June 12 in the web conference, and on the phone with me yesterday, June 18, to inform me, and by proxy, all of you, about the status of this lawsuit.

I hope that AMD prevails in this lawsuit, and sanity returns to the executive at Intel, getting them to compete where it matters most to consumers: the design, production, and pricing of microprocessors.

One thing AMD has in its favor is goodwill. Goodwill from 2nd-tier OEMs, vendors, and the enthusiast community. They have come through for us several times with their CPUs and extremely attractive pricing. We laud them for that.

AMD also reaches out to non-mainstream media in a very unconventional way, giving us unprecedented access to C-level executives at the firm, even though we do not represent media networks with 3-letter acronyms.

In closing, I would like to thank Scott Carroll, his team at AMD, and indeed, AMD for not only giving us access, but also making it timely and unfettered.

John Obeto II

Editor-in-Chief, SmallBizVista.com, and The Interlocutor

John Obeto is also Managing Partner & Chief Technology Officer of Logikworx and blogs at www.absolutevista.com.


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