Comment & Analysis

Things are heating up in Brussels for the world's largest chipmaker, U.S.-based Intel (INTC). In a case with far-reaching implications for the technology sector and global antitrust enforcement, the European Union's top brass will probably decide on May 13 to find the dominant maker of computer processors guilty of violating EU monopoly rules. The penalty could include a large fine in excess of 1 billion [$1.36 billion] and restrictions placed on Intel (NASDAQ: INTC - news) 's marketing practices. Spokespeople for both the European Commission and Intel declined to comment on the case or the news reports leaking out about it.

The long-running antitrust case, first launched in 2000 at the request of semiconductor rival Advanced Micro Devices (NYSE: AMD - news) (AMD), hinges on Intel's use of rebates to computer makers and retailers to encourage the purchase of its microprocessors or PCs containing them. While it's perfectly legal for companies to offer sales incentives, the law takes a more jaundiced view of rebates offered by companies with dominant market positions, because the payments may serve to lock in a monopoly. Intel currently enjoys nearly 80% global market share in PC processors. EU law also forbids companies from selling products at below cost to exclude competitors, which AMD claims Intel did in some cases.

In its original complaint to the EU's Competition Directorate -- then headed by Italian academic Mario Monti and now led by Dutch businesswoman Neelie Kroes -- AMD alleged that Intel's rebates [also known as the "Intel Inside" program] were anticompetitive because they encouraged PC makers to buy Intel chips instead of AMD's. The case was expanded in 2008 to encompass PC retailers, after AMD claimed that Germany's Media Markt and others had been paid by Intel not to stock PCs built on AMD processors.

Confiscatory Fines

Although the size of the potential penalty hasn't yet been announced, it could top 1 billion, based on a 2006 formula that fines companies up to 30% of their revenue from allegedly infringing practices, multiplied by the number of years the violation occurred. The maximum amount the EU could fine Intel is 10% of its total annual revenues, which were $37.6 billion last year.

It's unlikely, though, that the Commission would order a penalty as large as $3.8 billion. Its largest-ever fine to date was the 497 million [$675 million at current exchange rates] it ordered Microsoft (NASDAQ: MSFT - news) (MSFT) to pay in 2004 after finding the software company's business practices violated European antitrust laws. That fine eventually grew to $1.16 billion last year after the Commission accused Microsoft of noncompliance with its executive order.

The big question, of course, is what this could mean for Intel and other antitrust authorities in the future. Intel, which will undoubtedly appeal the expected ruling, argues strenuously that its rebate program is legal and helps consumers by lowering prices for computers. But one of the key differences in European and American antitrust law is that while both examine the competitive impact of company behavior on consumers, Europe also considers its impact -- real or potential -- on rivals. AMD claims that Intel's rebates hurt its sales and reduced consumer choice in Europe, but Intel generally responds that AMD's rising and falling market share historically has owed more to internal issues such as product design or manufacturing problems.

The differences between European and American antitrust rules and enforcement have been a source of trans-Atlantic friction in recent years, especially after Mario Monti scotched General Electric (NYSE: GE - news) 's (GE) attempted takeover of Honeywell (HON) and then dropped the hammer on Microsoft. Even as the Europeans were aggressively pursuing the software giant on charges of illegal product bundling and failure to disclose key technology standards, the sweeping antitrust case against Microsoft brought by the U.S. Justice Dept. under President Clinton was settled with little in the way of punishment under the more laissez-faire Bush Administration.

Getting Strict

Now, under President Obama and his new antitrust chief, Christine Varney, U.S. antitrust enforcement could ratchet up again. The Federal Trade Commission [FTC] launched a formal investigation of Intel's business practices in 2008, and Europe's expected ruling against Intel could add fuel to the fire. Intel also faces probes by the New York State Attorney General and a U.S. civil suit filed by AMD in 2005 that raises similar concerns about rebates and marketing practices. Intel has lost antitrust cases brought against it in South Korea and Japan, though the impact on the company has been limited.

It's impossible to know without seeing the EU's ruling -- which reportedly runs to hundreds of pages -- the legal basis on which the Commission makes its case. But several past rulings in Europe have found dominant companies in violation of antitrust rules when they used rebates to exclude competitors. In a 2001 case against Michelin (Paris: FR0000121261 - news) (MICP.PA), the EU found that the tiremaker had improperly used sales incentives to encourage dealers to sell more Michelin products. The ruling was upheld in 2003 by the European Court of First Instance. In a 1999 case against British Airways (LSE: BAY.L - news) (BAY.L), affirmed in 2003, the Commission found that its sales incentives to travel agents were anticompetitive.

Legal experts say both of the precedents are flawed, especially because the incentive programs didn't lift the fortunes of the companies that used them. What's more, consumers were more helped than hurt by both programs -- at least, from the standpoint of prices -- although arguably the programs restricted choice in the marketplace.

If the EU case against Intel relies heavily on these precedents, Intel will most likely argue in its appeals that its sales incentives lowered prices for buyers and didn't measurably harm AMD's market share. But it's possible that Neelie Kroes and her team have pioneered new legal interpretations of EU statutes -- much as Monti did in the Microsoft case -- because the tech sector operates under different rules.

Whatever happens, the rules for Intel look to be changing. Whether that leads to more legal challenges in the U.S. or to an improvement in the fortunes of struggling AMD won't be known for years to come.