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FTC investigating Intel

The FTC files a subpoena to investigate the chip giant for evidence of unfair competition in the semiconductor market.

The Federal Trade Commission has served a subpoena to investigate Intel (INTC) for evidence of unfair competition in the semiconductor market.

The subpoena was served on the company today, according to Chuck Mulloy, an Intel spokesman.

The subpoena states that the FTC will look into whether Intel "has engaged, or is engaging in Intel under scrutiny unfair or deceptive acting to monopolize, to attempt to monopolize, or otherwise restrict price or nonprice competition in the development or sale of microprocessors or other components or intellectual property."

Mulloy said the company will comply with the subpoena and cooperate with investigators.

Last month, the FTC filed a second request for information on Intel and Chips and Technologies regarding whether the proposed acquisition of Chips would affect the semiconductor market.

Second requests for information under the Hart-Scott-Rodino Act occur less than ten percent of the time, said Bonnie Jansen, a spokeswoman for the FTC, in an earlier interview. "It signals a closer look. The agency wants to see whether it [the merger or acquisition] would substantially reduce competition in one or more markets."

Although it is likely that the subpoena grew out of information uncovered in the requests for documents concerning the Chips acquisition, there is a good chance that the subpoena could extend beyond the scope of that deal. At least one Wall Street investor said that the FTC, according to other sources, was trying to use the investigation as a way to shoehorn in a larger investigation of Intel.

A number of companies recently have alleged that Intel's practices violated U.S. antitrust law, or have requested that the FTC or Justice Department investigate the company.

In June, Digital alleged that it believed Intel violated antitrust law in its nondisclosure agreement with computer vendors. Digital said in its court papers that Intel was "acting in bad faith and in violation of antitrust law" when it demanded the return of documents relating to Intel's next-generation Merced chip.

Digital also alleged Intel had a market share "approaching 90 percent" in the both the domestic and global markets for microprocessors, and was trying to "retain that market share and the power that market share gives it."

In this vein, Intel is believed to use hardball tactics with large customers in order keep them from using competitors' processors. Intel advertising budgets, which effectively act as a subsidy for PC vendors' advertising, are used in this way, according to industry observers. For instance, Compaq Computer alone is believed to receive an allocation of about $100 million a year from Intel, along with the stipulation that it use only Intel processors in certain lines of PCs.

In August, graphics chip maker S3 petitioned the Justice Department to investigate. "S3 is petitioning votes [in Silicon Valley] to stop the [Chips and Technologies] acquisition for antitrust reasons. They see this as detrimental to the competitive landscape," said Ashok Kumar, an analyst at Southcoast Capital, at the time.

An S3 spokesperson said at the time that she found this statement strange and believed that it was not based on anything from S3. But she added that S3 is always worried about new competitors. Intel did not comment.

S3 had, until recently, been a major supplier of chips for Intel motherboards. A motherboard is the main circuit board used in a PC that holds most of the core electronic components.

Intel dominates the market for computer microprocessors. Intel accounted for 88 percent of the total revenue derived from microprocessors sold into computers, laptops, servers, and workstations in 1996, or $14.6 billion dollars out of a total $16.6 billion, according to Dataquest analyst Nathan Brookwood. By units shipped, Intel accounted for 77 percent of the market.

Within the x86 market, Intel held a 95 percent market share, Brookwood said.

Intel?s march toward dominance of the core chips in a PC has been unrelenting--and unnerving for competitors. After locking down the processor market, the company advanced into chipsets and now dominates the market, at the expense of competitors. Chipsets are companion chips which work in tandem with the microprocessor.

VLSI stands out as a poignant example. "[Chipsets] were 50 percent of our business 18 months ago. It's now 5 percent. Intel started making motherboards and chipsets...Half of our chipset business went away," said a VLSI spokesperson recently.

Ironically, years earlier, Intel drove Chips and Technologies out of the chipset business, and now Intel is attempting to buy them out.

Which leads to Intel?s next target: the graphics chip, which is the last major PC chip market in which it has yet to participate. The graphics chip market is currently populated by a number of independent suppliers that are worried about Intel?s presence in this market. Both S3 and Cirrus Logic have expressed concern about the implications of Intel in this market. Graphics chips play a critical role in controlling the images that appear on PC screens.

Cirrus executives expressed concern over Intel's newfound enthusiasm for graphics at a seminar in San Francisco in July. "Over time, Intel has to be viewed as a serious competitor in the graphics chip business," said Tom Kelley, Cirrus's chief operating officer. "We want to reduce our dependency on the graphics chip market," he added.

Intel is an investor in CNET: The Computer Network.

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