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FTC approves Digital-Intel deal

The Federal Trade Commission gives conditional approval to the patent infringement settlement between Intel and Digital Equipment.

The Federal Trade Commission today gave conditional approval to the $700 million patent infringement settlement between Intel and Digital Equipment.

Under the settlement, Digital agreed to sell its chip plant to Intel, cross-license patents, and develop systems based on Intel's 64-bit microprocessors. Today's approval asks for a slight modification in the original agreement, requiring Digital to use other licensees to supply the chips, in addition to Intel.

FTC regulators are requiring Digital also to license its Alpha technology to Advanced Micro Devices, Samsung Electronics, and other commission-approved licensees. In addition, Digital would be required to begin the process of certifying IBM or another commission-approved company as an alternative manufacturer of Alpha chips.

The settlement has raised concerns that the deal would reduce competition, given Intel's plans to ship its Merced chip soon. The Merced chip would compete with Digital's Alpha.

"The commission's order is designed to ensure that Alpha remains a viable competitive alternative to Intel's chips--by sending a strong message to the market that other major chipmakers are now committed to Alpha's future," FTC chairman Robert Pitofsky said in a statement.

Bill Baer, director of the FTC bureau of competition, said the order does not vastly change the terms of the agreement between Digital and Intel, but it does require Digital to do several things that it had not initiated prior to the FTC investigation.

Under the order, Digital has agreed to form a joint company with Samsung, buy at least 50 percent of its Alpha chips from the company, and provide technical and marketing assistance to promote Alpha, Baer added.

Without such a mandate, he noted it's questionable how much of its manufacturing capabilities Samsung would have been devoted to Alpha.

Howard Morse, former assistant director of the FTC's competition bureau, said: "The FTC was clearly concerned this [Intel-Digital] deal would have meant the death knell to the Alpha technology. With this relief, it makes it more likely that Digital or AMD or Samsung will develop Alpha technology used to compete with Intel."

Morse, a partner with Washington, law firm Drinker, Biddle, & Reath, said the order also puts it on the record that the FTC considers Intel a "market power."

Samsung is already licensing the Alpha chip and AMD has a memorandum of understanding to license and produce the chips. Intel will still get the chip plant in the Digital deal.

"The FTC seemed to approve the whole deal and the fact that they require this licensing arrangement is largely irrelevant," said Michael Slater, principal analyst with the Microprocessor Report. "The problem with Alpha has not been supply--it's been demand. I would question whether AMD would be interested in supplying Alpha processors."

Digital manufactures and sells computer systems and software solutions based on its proprietary Alpha architecture. The FTC alleged that Alpha technology represents the most significant threat to the chip giant's market dominance. Intel accounts for 90 percent of microprocessor sales, or 85 percent of unit sales, according to the FTC.

Digital spokesman Dan Kaferle said the company is pleased that the FTC not only cleared the settlement agreement with Intel but also endorsed its plans to make the Alpha chip available and at volume. He added that by eliminating concerns about the long-term availability of the Alpha chip, computer system makers can "embrace" the technology.

When Digital and Intel initially announced their settlement agreement last October, PC manufacturers expressed some concern that the Alpha chips would eventually fade away. But Kaferle noted that those concerns were somewhat alleviated once Digital explained Intel would only serve as a foundry for the chips.

Despite the FTC's actions, the $700 million price tag for the transaction will remain intact, said Chuck Mulloy, an Intel spokesman.

"It doesn't change the transaction at all. The foundry agreement Digital had with Intel was a nonexclusive deal, so they could have gone anywhere to have their chips made," he added.

Mulloy said the chipmaker hopes to close the transaction with Digital within 30 days. "We're happy that the FTC allowed the transaction to go forward."

Meanwhile, the FTC is conducting a broader antitrust investigation into Intel. (Intel is an investor in CNET: The Computer Network.)

But with this FTC latest action and a decision by the agency last January not to block the $420 million acquisition of Chips & Technologies, Mulloy said Intel believes it will be successful in showing it has been compliant with federal antitrust laws.

Although the C&T merger was allowed to go through, FTC regulators said it continue its investigation into the "lawfulness of the acquisition" in terms of its broader investigation and would retain the right to possibly ask Intel to divest itself of the company if the agency determines some type of enforcement action is needed.

The Digital case will have no effect on the ongoing antitrust case that the FTC is conducting against Intel, sources said. In addition, the FTC will likely take action against the chipmaker in the next couple of months in a broader case, they added.

As for Compaq Computer's pending acquisition of Digital, the FTC still has an investigation into that merger, Baer said. One source noted, however, it's unlikely federal regulators will oppose that deal.