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New chip could shut out rivals

The balance of power in the semiconductor industry is currently being determined by, of all things, a plug.

New chip could shut out rivals
By Mike Kanellos
September 4, 1997, 12:00 p.m. PT

special report The balance of power in the semiconductor industry is currently being determined by, of all things, a plug.

How a microprocessor connects to the rest of the Analysts weigh in - CNET Radiocomputer has become one of the crucial issues in the personal computer business. A processor's plug--or slot--largely dictates the design of a PC, and Intel is using its chip design as a vehicle to further tighten its grip on the market for processors and other components used to run personal computers.

Essentially, the processor giant could force others out of the business with a radically different chip design that only Intel knows how to build. This design, called Slot 1, Q&A: The antitrust maze will connect the chip to the computer through a slot instead of the traditional pin structure, making current processors obsolete--and possibly the competitors that make them--as computer makers choose its design over others.

"By the end of 1998, Intel will almost completely have converted to the Slot 1," according to Linley Gwennap, editor in chief of The Microprocessor Report. "There is no amount of money that would interest Intel in licensing it. The only way they might be interested is if there might be a violation of antitrust law."

That remains a very open question. Although the The Microsoft investigation Justice Department is investigating Intel's recent move in the graphics chip market with the acquisition of Chips and Technologies, its dominance in the processor market has not drawn similar scrutiny.

[Editor's note: On Wednesday, September 24, the Federal Trade Commission served a subpoena to investigate Intel for evidence of unfair competition in the semiconductor market. See related story.]

Even though Intel already owns over 80 percent of the microprocessor market for computers, legal experts say there may be little that antitrust regulators can do about it because unfair business practices are particularly difficult to prove in the processor industry. This leaves scarce protection for competitors, who say the consumer will ultimately suffer if Intel's expansion continues unabated.

Intel says the Slot 1 design is necessary to increase performance in a market that is forever demanding higher speeds and more complicated applications to process. But competitors say Intel's motives are not focused solely on customer improvement. (Intel is an investor in CNET: The Computer Network.)

"It doesn't technically add any benefit, but our real concern is that it is

The Pentium II's Slot 1: revolutionary design.
proprietary," said Stan Swearingen, director of product management at Cyrix. "If there is only one vendor and only one architecture, you know prices aren't going to go down as much as they have been."

Current pricing trends seem to bolster that point. Although Intel has been cutting desktop chip prices drastically, it's going the other way with server chips. The company recently released a new Pentium Pro, a server chip that sees no competition from Cyrix or AMD, at $2,675--more than three times the cost of the most expensive Pentium II chip, a desktop processor that remains competitively priced.

The Slot 1 design adopted by Intel uses a long, grooved-edge

The Pentium's Socket 7: Intel's past--AMD and Cyrix's future?
connector that stands the processor upright inside a sleek cartridge. The design also uses a new system bus, which determines how data flows to and from the processor.

Older Pentium and Pentium-compatible chips use a connector design called Socket 7, in which hundreds of pins in intricate rows connect the processor's base to the motherboard.

Analysts agree with Intel's assertion that the Socket 7 pin design is approaching a performance ceiling. "You run out of gas on the Socket 7 environment," said Roger Kay, senior analyst at International Data Corporation. Optimum performance for Socket 7 tops out at processors running at 300 MHz.

Competitors have aggressively copied the Socket 7 design, allowing them to develop chips that compete directly with Intel's. AMD (AMD) and Cyrix (CYRK) have used publicly released specifications, technology licenses, reverse-engineering techniques, and the court system to acquire information about Intel's chip-building techniques.

This time around, Intel has gone to great lengths to ensure that competitors do not get access to its designs.

"The processes underlying the Slot 1 and Slot 2 [Intel's next-generation chip technology] designs are protected under trade secret" as well as patents, Intel spokesman Chuck Mulloy said. Intel specifically excluded licensing Slot 1 bus designs to AMD when the two companies settled their long-standing disputes over Pentium patents this year, Mulloy acknowledged.

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New chip could shut out rivals
Using trade secret to protect its technology makes it extra difficult for the competition. Although trade secret rules actually provide less legal protection than patents, they do not require a company to disclose publicly how its technology was developed.

"It's like Coca-Cola. No one has ever known the exact mix outside the company," said Michael Barclay, a patent partner at Wilson, Sonsini, Goodrich & Rosati, one of Silicon Valley's leading law firms.

Barring an unprecedented industry rejection of Intel processor technology, Intel's new design could make the chip giant even more dominant as computer makers adopt Pentium II processors in desktop, notebook, and server computers as the new design is phased in over the next two years. The probable outcome: a de facto monopoly across many market segments. And the trend toward exclusivity will likely continue with Merced, the 64-bit chip that will follow as the next microprocessor standard bearer.

Moreover, few legal obstacles stand in Intel's way as it continues to expand its microprocessing empire. Patents and trade secrets, in fact, are designed to give their owners exclusive monopolies over that technology. To incur a violation, attorneys say, a company has to improperly use that monopoly power beyond simply not letting others have access to the information.

"You have to show that the monopoly power was obtained through bad acts?exclusionary conduct, predatory pricing, blowing up your competitor," said Charles Rule, partner of Covington and Burling and the former head of the Justice Department's antitrust division. "If there is nothing beyond not sharing your intellectual property with others, it would be inconsistent with patent law."

And proving violations has become increasingly difficult, according to Ray Hartwell, a partner at Washington's Hunton and Williams. To prove predatory pricing, for instance, the plaintiff must show that the company sold goods below cost with an intent of later raising prices to recoup losses. Not only do several definitions of "below cost" exist, but proving such a case implicitly involves waiting until competition is fairly wiped out.

Intel competitors like AMD and Cyrix could come up with an entirely new computer design to accommodate their chips, but then they would face the onerous burden of getting manufacturers to adopt it. Right now, most major computer makers aren't rushing to adopt processors from these companies even with the standard design.

A more effective weapon for competitors may be pricing. Price trends make sub-$1,000 Pentium II computers based on slot technology unlikely until sometime in 1998. And Cyrix has already said it will heavily concentrate its efforts on marketing integrated MediaGX chips for sub-$500 computers.

In the near term, the best thing the clone makers may have going for them is the fact that every computer maker already has designs for Socket 7-Pentium class computers. The Socket 7 design is estimated to remain the primary computer design for the next six to 12 months, though it will increasingly be associated with low-end computers.

Then there's always the foreign market. "The Intel brand name doesn't carry the same impact in Europe or Latin America," said Kevin Hause, an analyst at IDC. Both AMD's K6 and Cyrix's 6x86 chip have actually sold better overseas so far.

Still, many of these solutions constitute interim fixes. C.B. Lee, senior analyst at Sutro & Company, estimated that the bus improvements would only increase Socket 7 performance by 10 to 20 percent.

By 1999, AMD will come up with a new generation of microprocessors, the K7, which will not be based on the Socket 7, according to David Frink, a company spokesman. Whether the K7 will be based on a slot design or some other design is too early to tell, he added. Cyrix is on a similar calendar.

But until the new designs are out, and assuming they will be adopted, that leaves the industry in Intel's slot.  end

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