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Full text of FTC complaint against Intel

The following is the Federal Trade Commission's complaint against Intel, charging antitrust violations.

The following is the Federal Trade Commission's complaint against Intel, charging antitrust violations:

In the Matter of Intel Corporation - Docket 9288 - Complaint

UNITED STATES OF AMERICA
BEFORE FEDERAL TRADE COMMISSION

COMMISSIONERS:
Robert Pitofsky, Chairman
Sheila F. Anthony
Mozelle W. Thompson
Orson Swindle

In the Matter of INTEL CORPORATION, a corporation. DOCKET NO. 9288 COMPLAINT

Pursuant to the provisions of the Federal Trade Commission Act, and by virtue of the authority vested in it by said Act, the Federal Trade Commission, having reason to believe that Intel Corporation (“Intel”) has engaged in a pattern of conduct, as described herein, that violates Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. ? 45, and it appearing to the Commission that a proceeding in respect thereof would be in the public interest, hereby issues its complaint, stating its charges as follows:

A. The Respondent

1. Intel Corporation (“Intel”) is a corporation organized, existing, and doing business under and by virtue of the laws of the State of Delaware, with its office and principal place of business located at 2200 Mission College Boulevard, Santa Clara, California 95052. For the fiscal year ended December 31, 1997, Intel reported revenues of approximately $25 billion and profits of approximately $6.9 billion.

2. Intel designs, develops, manufactures, markets, and sells a variety of semiconductor products, including microprocessor devices. A microprocessor is the central processing unit of a computer system. Often described as the “brains” of a computer system, the microprocessor serves the essential functions of processing system data and controlling other devices integral to the system. Intel’s microprocessor products include a family of devices that are marketed and sold under the trade names Pentium, Pentium with MMX, Pentium Pro, and Pentium II (the “Pentium microprocessors”).

3. At all times relevant herein, Intel has been, and is now, a corporation as “corporation” is defined in Section 4 of the Federal Trade Commission Act, 15 U.S.C. ? 44; and at all times relevant herein, Intel has been, and is now, engaged in commerce as “commerce” is defined in Section 4 of the Federal Trade Commission Act, 15 U.S.C. ? 44.

B. Intel Has Monopoly Power

4. One line of commerce relevant to Intel’s conduct is the manufacture and sale of all general-purpose microprocessors, including current-generation microprocessors. The relevant market also includes future-generation microprocessors and technologies for current-generation and future-generation microprocessors. In addition, narrower markets may be contained within the market for general-purpose microprocessors.

5. The relevant geographic market is the world.

6. Intel has monopoly power in the market for general-purpose microprocessors. Intel’s market dominance is reflected in its own market studies, which indicate that sales of Intel microprocessor products have accounted for approximately 80 percent of the total dollar sales of general-purpose microprocessors worldwide for each of the last five years.

7. Entry is difficult and unlikely to correct Intel’s monopoly power.

8. A new entrant would need to develop a relevant microprocessor product, requiring substantial capital expenditures and several years of engineering work. The entry cost required for developing a new high-performance microprocessor would likely exceed $250 million. The development of a high-performance microprocessor product comparable to Intel’s current Pentium II device or the Alpha microprocessor products currently sold by Digital Equipment Corporation (“Digital”) would likely require at least four years. For example, although Intel began development of its new 64-bit Intel microprocessor architecture (known as “IA-64") in 1994, the first generation IA-64 device known as Merced is not expected to be commercially available until the year 2000.

9. New entry is also deterred by the minimum viable scale requirements for a modern semiconductor fabrication facility. The cost of developing, building and equipping such a facility is approximately $1.6 billion. An entrant could not expect to begin shipping revenue microprocessor products for at least four to five years after starting the construction of such a facility. A new entrant could avoid significant fixed costs in buildings or equipment by contracting with an existing microprocessor producer to provide manufacturing and development services, but even such “fabless” entry would require approximately six months and a commitment of approximately 30 staff to the manufacturing area at a cost of approximately $200,000 per person per year, in addition to significant costs for foundry services.

10. A new entrant would also have to establish both product reputation and technical compatibility with a computer operating system and the applications software desired by a significant number of computer users. Buyers of computer systems and microprocessor components demand highly reliable products, and regard product reputation to be an essential purchasing criterion. Consumers also demand computer systems and microprocessor components that are capable of running the computer operating systems and applications software programs that are desired by computer end-users. Accordingly, a new entrant must attract support from software developers, who are generally reluctant to devote development resources to an unproven microprocessor product for which there is no demonstrated demand. Furthermore, consumers typically have many existing software applications that were written for a particular microprocessor architecture; thus, it would often be costly for consumers to switch to a new and incompatible microprocessor architecture and computer systems manufacturers to switch and risk alienating such consumers. The need simultaneously to secure a large number of users in order to make the product attractive to software developers and to secure the efforts of software developers in order to make the product attractive to users is often referred to as “network effects.” The importance of these network effects is illustrated by Intel’s success in obtaining commitments from many computer manufacturers and software vendors to build computers and write software for Intel's new 64-bit Merced microprocessor, even though the product will not be available for nearly two years.

C. Intel Refused to Deal With Certain Customers as a Means of Coercing Licenses to Their Rival Microprocessor Technology

11. As more fully set forth below in paragraphs 15-37, Intel has entrenched, and threatens to continue entrenching, its monopoly power in the relevant lines of commerce by, among other things, denying or threatening to deny technical information about Intel microprocessor products to Intel customers who have developed and patented innovations in microprocessor technology, as a means of coercing those customers into licensing their innovations to Intel.

12. Intel promotes and markets its microprocessors by providing customers with technical information about new Intel products in advance of their commercial release. Intel regards such advance technical information to be proprietary and provides it subject to formal nondisclosure agreements, which prohibit recipients from disclosing such information to any unauthorized person or from using it for any unauthorized purpose. Subject to such restrictions, however, Intel makes such information widely available to customers, including manufacturers of personal computers, workstations, and servers. Such relationships have substantial commercial benefits for both parties: Intel’s customers benefit because the advance technical information enables them to develop and introduce new computer products incorporating the latest microprocessor technology as early as possible, and Intel benefits because those customers design their new computer systems so as to incorporate, and effectively endorse, Intel’s newest microprocessor products.

13. On at least three occasions, however, Intel suspended its established commercial relationships with particular customers, refusing to provide technical information about Intel products for the purpose of forcing those customers to grant Intel licenses to microprocessor- related technology developed and owned by those customers. Intel’s conduct threatened to injure, and did injure, the ability of those targeted customers to remain competitive in developing and bringing to market in a timely manner computer systems based on Intel microprocessors.

14. A natural and probable effect of Intel’s conduct is to diminish the incentives of those three Intel customers -- as well as other firms that are Intel customers or otherwise commercially dependent upon Intel -- to develop new innovations relating to microprocessor technology. Intel’s coercive business tactics effectively undermine the patent rights of such firms and reduce their incentives to develop new technologies relating to microprocessors. The nature and effects of Intel’s conduct are illustrated, but not necessarily exhausted, by three cases described below in paragraphs 15-37.

1. Intel’s Conduct Toward Digital Equipment Corporation

15. Digital Equipment Corporation (“Digital”) is a corporation organized, existing, and doing business under and by virtue of the laws of the Commonwealth of Massachusetts, with its principal executive offices located at 111 Powdermill Road, Maynard, Massachusetts 01754. Digital designs, develops, manufactures, and sells computer hardware and software systems, including personal computers, workstations, and servers. For the fiscal year ended June 30, 1997, Digital reported worldwide sales of approximately $13.7 billion.

16. Digital designs, develops, manufactures, markets, and sells computer system products that incorporate Intel microprocessors. Sales of Intel-based computers constitute a substantial part of Digital’s business, accounting for approximately $2 billion of Digital’s revenues for 1997. Accordingly, Digital is a significant customer of Intel, having purchased approximately $250 million worth of Intel microprocessors for each of the last few years. Intel also expects Digital to increase the volume of its microprocessor purchases over the next few years.

17. Digital also designs, develops, manufactures, markets, and sells some semiconductor products, including microprocessor products that are generally known, marketed, and sold under the trade name Alpha. Although they have only a small share of the market, Digital’s Alpha microprocessors are technologically significant. Alpha microprocessors are widely regarded to be the highest performing general purpose microprocessors available, having performance superior to any of Intel’s products in terms of accepted industry benchmarks for processor performance. When Intel engineers confirmed the performance of Digital’s third generation Alpha product, they declared a “strategic emergency” and undertook to analyze the “miracles” of Alpha performance. Alpha also provides the only alternative microprocessor platform that competes with Intel’s microprocessor architecture in running the Windows NT operating system. A current major goal for Intel is the development of its IA-64 microprocessor architecture to compete with Digital’s current 64-bit Alpha architecture, and the development of Merced and other IA-64-based microprocessors to compete with Digital’s Alpha devices.

18. In 1995 Intel introduced the Pentium Pro microprocessor, which closed some of the substantial performance gap between Intel’s Pentium microprocessors and Digital’s Alpha microprocessors. After examining the Pentium Pro device, Digital concluded that Intel was using Digital microprocessor technology in violation of Digital’s patent rights. On May 12, 1997, Digital sued Intel for patent infringement, alleging that Intel’s Pentium microprocessors infringed ten Digital microprocessor patents.

19. Intel responded to Digital’s lawsuit by publicly denying Digital access to any of the Intel technical information needed to continue developing in a timely and efficient manner new computer systems incorporating new Intel microprocessors. Among other things, Intel:

  • Demanded return of technical information and refused to supply any additional technical information needed by Digital to design computer systems products incorporating Intel’s newest microprocessors, even though that information was available to similarly situated computer manufacturers that buy microprocessors from Intel, and even though Intel had no reasonable belief that Digital had ever misused, could misuse, or would misuse that information;
  • Demanded return of microprocessor prototypes and refused to supply additional prototypes, even though such prototypes were available to similarly situated computer manufacturers that buy microprocessors from Intel, and even though Intel had no reasonable belief that Digital had misused, could misuse, or would misuse Intel’s prototypes;
  • Acted to create uncertainty about Digital’s future source of supply of Intel microprocessors, including the orchestration of a scene in which a Digital employee was publicly ejected from a widely attended industry meeting sponsored by Intel without any advance warning; and
  • Otherwise engaged in conduct to create a perception in the computer industry that Digital was no longer capable of bringing to market in a timely manner new computer system products that incorporate Intel’s latest microprocessor technology. Because product life cycles for computer systems can be as short as six months, any delay in the introduction of a new product can have a significant adverse effect on the commercial prospects for that product.