EU hits Intel with $1.45 billion antitrust fine

Updated at 6:57 a.m. PDT with AMD's response.

Intel has been fined more than 1 billion euros by the European Commission for violating antitrust legislation, following a lengthy investigation prompted by complaints made by its chipmaking rival Advanced Micro Devices.

Intel is being fined 1.06 billion euros ($1.45 billion) for engaging in illegal anticompetitive practices to exclude competitors from the market for computer chips called x86 central processing units (CPUs), the Commission said in a statement Wednesday.

"Intel has harmed millions of European consumers by deliberately acting to keep competitors out of the market for computer chips for many years," competition commissioner Neelie Kroes said in the statement. "Such a serious and sustained violation of the EU's antitrust rules cannot be tolerated."

Between October 2002 and December 2007, Intel held more than 70 percent of the worldwide x86 CPU market. The Commission found that during the period in question, Intel engaged in two illegal practices. The first was that it gave wholly or partially hidden rebates to computer manufacturers on the condition that they buy all or almost all of their x86 CPUs from Intel. This illegal practice also included Intel's making direct payments to a major retailer so that it would stock only computers with Intel x86 CPUs.

The second illegal practice was that Intel made direct payments to computer manufacturers to halt or delay the launch of specific products containing competitors' x86 CPUs and to limit the sales channels available to these products.

The computer manufacturers named by the Commission as being involved in the rebates and payments included Acer, Dell, Hewlett-Packard, Lenovo, and NEC. The retailer was Media Saturn Holding, the parent company of the MediaMarkt chain.

Intel has been ordered by the Commission to stop any of the anticompetitive practices in which it may still be engaged. The EU commissioners said these practices had harmed consumers throughout the European Economic Area and undermined competition and innovation.

The 1.06 billion euro fine is the largest antitrust penalty the Commission has ever imposed, beating the 497 million fine levied on Microsoft in 2004 for abusing its market dominance. In February 2008, Microsoft's failure to pay that fine resulted in a further 899 million euro penalty, a decision that Microsoft is appealing.

However, the Commission noted that at 4.15 percent of Intel's 2008 turnover, the fine was less than half of the allowable maximum of 10 percent of a company's annual turnover. Intel has to pay the fine within three months, the Commission said, adding that the money would go to the EU's central budget, "thus reducing the contributions that Member States pay to the EU."

According to the Commission's statement, Europe accounts for around 30 percent of the 22 billion euro global x86 CPU market. The x86 chip architecture underpins the vast majority of modern PCs.

The rebate game
The Commission acknowledged in its 542-page decision that rebates can lead to lower prices for consumers, but said making rebates conditional on buying less or none of a rival's products was abusive.

"Intel structured its pricing policy to ensure that a computer manufacturer which opted to buy AMD CPUs for that part of its needs that was open to competition would consequently lose the rebate (or a large part of it) that Intel provided for the much greater part of its needs for which the computer manufacturer had no choice but to buy from Intel," the Commission said. "The computer manufacturer would therefore have to pay Intel a higher price for each of the units supplied for which the computer manufacturer had no alternative but to buy from Intel."

The Commission described how AMD had offered an unnamed manufacturer a million free CPUs, but the company had taken only 160,000 CPUs for free because to take more would have meant losing Intel's rebate on many millions of CPUs.

Intel also paid computer makers to postpone or cancel the launch of certain AMD-based products or limit the distribution of AMD-based products, the Commission said. In one case, a company was paid to sell its AMD-based business desktops only to small and medium enterprises and only via direct distribution channels. It was also paid to postpone the launch of its first AMD-based business desktop in Europe by six months.

Although many of Intel's violating conditions were not made explicit in the company's contracts, the Commission found proof of their existence in e-mails obtained through unannounced on-site inspections, formal requests for information and evidence submitted by other companies involved in the case. "In addition, there is evidence that Intel had sought to conceal the conditions associated with its payments," the Commission noted.

Response from Intel, AMD
Intel said in a statement Wednesday that it did not believe its practices had violated European law and that it would appeal the fine.

"Intel takes strong exception to this decision," the chipmaker's chief executive, Paul Otellini, said in the statement. "We believe the decision is wrong and ignores the reality of a highly competitive microprocessor marketplace--characterized by constant innovation, improved product performance and lower prices. There has been absolutely zero harm to consumers. Intel will appeal."

Otellini said it was "the natural result of a competitive market with only two major suppliers...that when one company wins sales, the other does not."

He added that the Commission had ignored or refused to obtain significant evidence that contradicts the assertions it made in its ruling. This evidence would show that "when companies perform well, the market rewards them; when they don't perform, the market acts accordingly," he said.

However, Otellini pledged that Intel would cooperate with the Commission's sanctions while it fights the ruling.

"Despite our strongly held views, as we go through the appeals process, we plan to work with the Commission to ensure we're in compliance with their decision," Otellini said, adding that Intel "never sells products below cost."

AMD, meanwhile, cheered the European action.

"After an exhaustive investigation, the EU came to one conclusion--Intel broke the law and consumers were hurt," Tom McCoy, AMD's executive vice president for legal affairs, said in a statement. "With this ruling, the industry will benefit from an end to Intel's monopoly-inflated pricing and European consumers will enjoy greater choice, value and innovation."

David Meyer of ZDNet UK reported from London.

See also:
• FAQ from the EU on its decision