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FTC will attack Intel's motive

The Federal Trade Commission's case against Intel, set to start March 9, in many ways will boil down to motive, FTC director William Baer says.

Did Intel use monopoly power to settle intellectual property disputes, or did it play a legitimate game of hardball?

That is the central question in the FTC's upcoming action against the chipmaker.

The FTC's case against Intel in many ways will boil down to motive, FTC director William Baer said in an interview with CNET At a hearing set to start on March 9, the agency will try to prove that Intel unfairly withheld products and product plans from customers in good standing to force them to give up intellectual property claims against the chipmaker.

"You can't use the cessation of an ongoing customer relationship solely as the basis to resolve an unrelated intellectual property in your favor," Baer said. "These disputes ought to be fought on the merits and not on the invocation of the weapon that is unique to Intel."

For its part, Intel will argue that its actions against Intergraph, Digital Equipment, and Compaq Computer were perfectly legal. The world's largest chipmaker will also tell the court that it is not a monopolist, even though its microprocessors serve as the brains for more than 75 percent of the world's personal computers.

"We're the sole arbiters for the proper price of our [intellectual property], not the FTC," Intel vice president and assistant general counsel Peter Detkin said, adding that "even a monopolist has the right to control its intellectual property."

In an antitrust action filed last June in a Washington administrative court, the FTC alleges that Intel illegally wielded its monopoly power when it cut off chip supplies and technical information to Intergraph, Digital, and Compaq. Intel ceased relationships with those companies after they asserted patent and other intellectual property rights against the chip giant.

Detkin and other critics of the FTC action say it is out of sync with established law. The FTC's case, they argue, seeks to protect three companies that are customers--not competitors--of Intel in the market for personal computer chips. That is inconsistent with the purpose of antitrust statutes, which are designed to protect competition in a given market.

"We think [the FTC is] extending the law beyond where it needs to be," Detkin said.

The comments of the two opposing generals point out a fundamental difference between the FTC's case against Intel and the antitrust battle the Justice Department (DOJ)and 19 states are waging against Microsoft.

In the latter case, Microsoft is denying key factual allegations in the case, such as whether it coerced companies to harm rival browser maker Netscape Communications. The dispute has led to the introduction of explosive evidence, such as a memo from an America Online executive claiming Microsoft chief executive Bill Gates asked: "How much do we have to pay you to screw Netscape?"

By contrast, witnesses from Intergraph and Advanced Micro Devices are expected to make a few colorful allegations against Intel, but they are likely to be largely steeped in archaic principles based on antitrust and intellectual property law.

To try to meet this burden, FTC lawyers will argue that Intel's actions harm competition and innovation in the market for microprocessors because it robs potential competitors of one of their chief assets: their intellectual property. To shore up the claims, high-ranking executives from Intel foe AMD and Exponential, a potential Intel rival that went bankrupt, are expected to testify that Intel's IP strategy harmed their companies' ability to compete.

Another bone of contention--the question of what exactly constitutes a monopoly--will likely be a significant and heavily argued issue in the case. Intel will allege that it does not have a monopoly and will likely cite AMD, IBM, and Cyrix as examples. All three companies threaten to make inroads, or already are, into Intel's business.

The role of contract manufacturing
Barriers to competing with Intel have never been lower because of contract manufacturing. Companies such as IBM are contracting to build microprocessors for other companies, Detkin argued. As a result, he argued, becoming a microprocessor manufacturer requires only a design team.

"If you want to get into the microprocessor business, you have 30 microprocessor designers like Cyrix did and hire IBM to manufacture it," Detkin said.

Baer, by contrast, states that Intel's existing market share is still well within the legal definition of a monopoly and that barriers remain "sufficiently high" because of the huge capital investment required.

The FTC will also likely point out that AMD's growth has only occurred in the low end of the PC market. Intel still holds a much larger share of the market for microprocessors in computers costing over $1,000 and has a virtual hammerlock on the workstation and server market based around the "x86" architecture.

The FTC will also argue that a remedy in this regard will be easy to fashion. The FTC is essentially asking that Intel treat like customers in a like manner. The baseline for behavior for compliance therefore is Intel itself.

Still a monopoly?
And, while Intel will claim that their market share losses in the past year mean they are no longer a monopoly, Baer strongly disagrees. The company still commands well over 70 percent of the market, a market share that some courts have claimed constitutes a monopoly, and wields considerable power.

The witness lists produced last Friday indicate in fact that a number of companies will come forward to describe how Intel has forced them to forgo a legal claim. Left unchecked, Intel's bargaining techniques will stifle innovation in the marketplace, it will be argued.

The distinction is crucial because Intel is expected to trumpet the rise of AMD in the cheap computer market as evidence that a monopoly does not exist. To the FTC, however, the danger is far from passed.

"Over time, there is some risk to the marketplace," Baer said. "Their concern is really that, over time, Intel will face less competition."