AMD vs. Intel: An Uphill Battle?

By many accounts, AMD should be on cloud nine. Its 64-bit Opteron server-based processors continue to sell like hotcakes two years after their debut, and it's way out in front with its new line of desktop and server-based dual-core processors. But apparently, AMD is not gaining the traction it thinks it should given its recent antitrust suit against No. 1 chip maker Intel.

While some see the lawsuit as an act of desperation, others say it will ultimately create a more level playing field. Either way, it still raises plenty of questions: Should AMD win, would it be a Pyrrhic victory where the casualties outweigh any benefits that would come from this action? How will the legal fight impact the product road maps of other vendors? Will it be a distraction, or business as usual? In a research note, Gartner analyst Martin Reynolds points to the latter, and that customers should not change direction in light of AMD's suit.

Even if AMD doesn't win the war, it could win some key battles, including the court of public opinion, Reynolds notes. AMD has crafted a filing that not only serves as a legal complaint but as a media campaign, Reynolds suggests. Meanwhile, the complaint makes a compelling argument about strong-arming and intimidation.

"Intel could argue in response that its market dominance is due to innovation and aggressive capital investment, rather than monopolistic behavior, and if PC technology did not advance, the market would be much smaller," Reynolds notes.

More specifically, AMD is accusing Intel of unlawfully maintaining its market-leading position in the x86 microprocessor field by coercing customers not to do business with AMD, violating the Sherman Antitrust Act as well as California law. The complaint identifies 38 companies that AMD says have been victims of Intel's alleged illegal business practices, including Dell, Gateway, HP, Sony and Toshiba, plus distributors, systems builders and retailers.

AMD's contention that Intel has shut it out of key markets is compelling, considering such major OEM partners as Dell, Gateway, Hitachi, Sony and Toshiba have either dropped AMD or never offered its processors, despite benchmarks that show its CPUs are more powerful, energy-efficient and less expensive than Intel's.

AMD argues that its case has merit based on the recent finding by the Fair Trade Commission of Japan that maintains Intel has stifled competition by refusing rebates to those companies unless they dropped competitors.

"Earned success is one thing. Illegal maintenance of a monopoly is quite another," Ruiz said in a late June conference call announcing the antitrust suit, which was filed in the U.S. Federal District Court in Delaware where both companies are officially headquartered. According to Ruiz, major OEM vendors, systems builders and even large retailers are forced to cap their purchases from AMD and, as a result, pay higher prices than they otherwise would. "Intel as a legal monopoly is hurting the entire industry," he said.

Underscoring that point, Ruiz pointed to the success of its Opteron processor line that's in key server offerings. AMD has made inroads in the server market because customers of OEMs have managed to put enough pressure on them, Ruiz said.

"We have had remarkable success in penetrating the server space, due to the fact that we have strong-headed CIOs and IT professionals who really understand the industry and are able to demand of our customers [HP, IBM, Sun and systems builders] to deliver the products they need," he said.

Act of Desperation?

Among the allegations in the 48-page suit is that Intel coerces companies to enter into exclusive or near-exclusive deals in order to receive preferential pricing. For example, AMD's share of Sony's business plummeted from 23 percent in 2002, to 8 percent in 2003, to zero today. Intel's share, meanwhile, is nearly 100 percent.

Also, when HP's mobile PCs that run AMD's processors sold well late last year, AMD says Intel retaliated by refusing to waive HP's failure to meet targeted rebate goals unless HP promised to base 90 percent of its desktop business in retail channels on Intel's CPUs. AMD says it does not expect vendors to willingly back such claims, but the company believes it will prevail through legal discovery of e-mail and documents.

Channel partners say proving Intel is a monopoly could be difficult.

"It strikes me as an act of desperation for AMD," says Jude Daigle, president of Computer Connections in Greensburg, Pa. "Never once has Intel pressured me or asked me not to carry AMD."

Ben Rinehart, operations manager at Computition in Lewisburg, Pa., hasn't seen any evidence of monopolistic behavior in his dealings with both companies, but thinks AMD is an important player in the market and that its efforts shouldn't be hampered by unfair business tactics.

"They're good for the market because they've been beating Intel with their new technologies, and that keeps Intel on its toes," Rinehart says.

AMD's complaint strikingly resembles a case back in 2000 when, prior to its merger with HP, Compaq constantly received threats from Intel when doing business with AMD. In one case, Intel withheld much-needed processors for Compaq's servers until it promised to stop doing business with AMD. Compaq CEO Michael Capellas, according to the suit, said he had no choice because "he had a gun to his head."

Still, experts say while AMD has come out swinging, it doesn't mean the company will prevail. Notably absent, at least for now, was any indication that the Federal Trade Commission, U.S. Justice Department or any of the state attorneys general intend to take any action.

"I don't think it will be easy for AMD to prove its case, despite its great confidence," says IDC analyst Roger Kay. "Intel can make arguments that the reason they do well is because they have economies of scale that they can amortize their fixed costs over larger periods of time."

The question that will come to light, Kay says, is whether Intel actually locked AMD out of the market through illegal tactics or whether it was just engaging in shrewd business tactics.

Given AMD's prediction that it won't go to trial before late 2006, Kay says he doesn't expect any short-term shift in Intel's policies. "My sense is Intel won't change its practice at all because doing so would be a tacit admission of guilt," he says.

Craig Walker, an independent antitrust attorney based in Pound Ridge, N.Y., points out that AMD's allegations could have the unintended effect of telling the market that it's struggling more than otherwise thought. "[AMD] should be fighting it out in the marketplace," Walker says. "They could win the battle, but still lose the war."

AMD doesn't see it that way, however, pointing out that its market share has held steady during the past three years, despite clear performance and price advantages. The key goal is to change Intel's business practices, says Chuck Diamond, the lead attorney representing AMD with the law firm of O'Melveny & Myers LLP. "No more secret deals, no more intimidations, no more fear of reprisals," he says. "Products will be sold on their merits. We will win." *