Are Intel’s Ultrabook subsidies a rotten apple?

Summary:What’s in a name? Intel slapped Digitimes for reporting that it's paying OEMs a "marketing subsidy" to keep prices on its MacBook Air clones ultra-low. Intel insists that its Ultrabook payments are just "incentives." Could Intel’s semantic vigilance signal antitrust concerns?

What’s in a name?

Shakespeare’s Juliet would have certainly given kudos to Intel for rapidly correcting the use of a name in a recent Digitimes report. Digitimes reported that Intel is paying every manufacturer a “marketing subsidy” for Ultrabooks. Within one day, Intel nobly came out to declare that a rose is not a rose and Intel’s Ultrabook payments to manufacturers are “marketing incentives as a normal course of business,” not “subsidies."

So, why did Intel get all fussy and declare that Ultrabook payments are "normal?" Besides Intel's apparent passion for literary excellence and semantic accuracy, is there an important semantic difference between a "normal" marketing payment versus a "subsidy" that warranted a rather frantic clarification from an apparent 24-hr news monitoring team at Intel? Has Intel adopted an altruistic new literary hobby of correcting journalists discussing Intel's "subsidies," or is Intel's semantic vigilance actually related to antitrust concerns?

Here at The Apple Core, we recently speculated that Intel’s $300 million Ultrabook Fund (a sizable chunk of change to blow within 3-4 years) is actually an ingenious way for Intel to continue its anticompetitive legacy while narrowly steering clear of antitrust law and the Federal Trade Commission’s recent Consent Decree.

If Intel is, in fact, reviving its long legacy of anticompetitive practices, Intel must succeed in the the tricky business of paying manufacturers to limit market access for Intel's primary competitor, AMD, and punishing manufacturers who dare defy Intel’s demands for exclusivity. Most importantly, Intel must carefully and cleverly steer clear of the Federal Trade Commission and Department of Justice, and navigate the gray area between what is legal versus illegal, competitive versus anticompetitive. And that may be precisely why Intel is carefully monitoring how Digitimes and other journalists define Intel’s "subsidies," or rather "normal marketing payments."

Due to the Federal Trade Commission (FTC)s Consent Decree (PDF) issued to Intel in 2010, a lot can matter in a name - especially to convicted monopolist, Intel. Intel must carefully tiptoe between two major restrictions, and one loophole.

The first major Consent Decree restriction is:

(Intel) shall not...enter into...any condition, policy, practice, agreement, contract, understanding, or any other requirement that:...conditions any Benefit to a Customer or End User on that person’s agreement to limit, delay, or refuse to purchase (a) Relevant Products or Computer Product Chipsets from a supplier other than Intel.

In a mouthful of words, Intel’s Consent Decree basically says that Intel can be subject to civil penalties if Intel are caught bribing manufacturers to illegally exclude or limit the market share of Intel’s competition.

The second major restriction is:

(Intel) shall not invite, enter into, implement, continue, enforce, or attempt to enter into, implement, continue or enforce, any condition, policy, practice, agreement, contract, understanding, or any other requirement that ....denies any Benefit to a Customer or End User because of that person’s design, manufacture, distribution, or promotion of products incorporating a Relevant Product or a Computer Product Chipset from a supplier other than Respondent.

This second mouthful or words forbids Intel from implicitly punishing manufacturers for using processors from Intel’s competition.

The loophole is perhaps the most fascinating part of the FTC's Consent Decree.

Apparently, Intel is not restricted from excluding Intel’s competition if the exclusivity is limited to a "new segment, channel or product" developed by Intel. At first glance, this seems to be a reasonable loophole. If Intel hypothetically helps manufacturers develop a new technology, such as holographic computer screens powered by Intel processors, then Intel should be allowed to lock those manufacturers into exclusivity for a period of time to recuperate R&D costs.

Sorry, holographic computer monitors for the masses aren’t coming any time soon, but Intel’s army of lawyers likely recognized that this loophole in the Consent Decree could be manipulated and stretched into a gaping chasm. Thus, this loophole is Intel’s ticket to trampling all over the principles of fair play set forth in the two restrictions.

As revealed by subpoenaed internal Intel emails (PDF), the New York Attorney General discovered that Otellini’s monopolistic strategy was to "pigeonhole" Intel’s main competitor, AMD, into a low-end, low-margin segment. To that end, Otellini’s is quoted as saying:

...there is really no question that in the long run, I would like to see amd [sic] output spread round the world as a low cost/low value, unbranded brand…

Intel’s objective throughout was not to eliminate AMD entirely, but to crush an unprecedented threat to its monopoly power. Apparently, nothing has changed.

Intel got a huge wake up call when it realized, late in the game, that Apple just turned ultralight notebooks into the future.

Just returning from an embarrassing antitrust episode with the FTC and New York Attorney General, Intel had to find a new way to block AMD out of this high end market segment. Intel’s clever lawyers probably realized that the loophole in the Consent Decree opened up a wonderful world of new exclusionary possibilities. How could Intel take full advantage of this loophole to evade the two main consent decree restrictions to "pigeon hole" AMD out of the future high-end segment, while operating under antitrust radar?

Simple. Ultrabooks.

By falsely claiming that thin, powerful laptops are a new segment or product, Intel effectively gains the right to "provide extraordinary assistance" to the customer, and thus gains the right to exclude Intel’s competitor from this important, premium "Ultrabook" segment. Ingeniously, Intel has reversed the logical order of their historical anticompetitve activities. In Intel’s anticompetitive past, manufacturers earned their "payments" from Intel in exchange for exclusivity. This time, Intel is earning the right to exclude by subsidizing the manufacturers.

By engaging all the major non-Apple manufacturers into making these MacBook Air clones and distorting the costs of Ultrabooks to establish irrationally low retail prices, Intel can essentially revive its anticompetitive practice of making manufacturers dependent on Intel's subsidies, I mean "normal incentives" - especially since Intel plans on Ultrabooks taking 40 percent of the market in 2012.

Naturally, Intel may very well allow manufacturers to produce a few AMD-based thin and powerful laptops - to mitigate the government's antitrust concerns. This would be similar to Intel's strategy of limiting AMD's market share at HP to only 5 percent. In this way, the market looks competitive, but Intel is controlling the market like a marionette.

Additionally, by taking advantage of the Consent Decree’s loophole, Intel may have found a brilliant way to punish Apple for testing or planning for AMD’s fusion processors. Intel's Ultrabook subsidies will allow manufacturers to artificially undercut the MacBook Air on pricing.

For Intel, everything's in a name.

Intel seems to be walking a tightrope of semantics - taking full advantage of weaknesses in the Consent Decree (the lack of prohibition against creating an artificially low-priced worldwide premium-product category to punish a manufacturer, and the loophole that allows Intel to "assist" manufacturers and demand exclusivity for it), and that is why Intel is working so hard to make sure nobody talks about their Ultrabook program in a way that reveals monopolistic intent.

Intel’s exclusionary Ultrabook contracts, the resulting dependence of manufacturers on Intel’s payments for their margins and Intel’s artificially low Ultrabook prices to undercut the Macbook Air are all resting on one important linchpin, a word. All this may help to explain why Intel is obsessively promoting Ultrabooks as a "new" product or segment, and why Intel needs to vigilantly prevent the media from defining Intel’s payments as "subsidies" rather than "normal marketing incentives."

Intel must quickly discredit any free speech that redefines their "marketing" payments as "subsidies," and that is likely why Intel will continue to churn out news media claiming that Ultrabooks are a "new" product. Sadly, the end result is that Intel may be influencing and/or suppressing free speech for their own nefarious purposes.

The fact that Intel may be silently engaging in anticompetitive warfare may also explain why Intel formally requested dismissal of the New York Antitrust lawsuit on October 27, 2011, precisely one month after making a multi-billion dollar joint investment in New York on September 27, 2011 - curiously announced by the now Governor Cuomo who was the then Attorney General of New York who sued Intel for antitrust damages a few years ago.

Oh, Federal Trade Commission, New York Attorney General and Department of Justice, where art thou?

Aside: Ironically, if Intel hadn't stilfed innovation by controlling manufacturer's margins for the last decade, the PC industry might have kept up better with the Mac explosion.

Cartoon: Inside Intel

Related:

Topics: Intel, Enterprise Software, Government, Government : US, Security

About

Jason D. O'Grady developed an affinity for Apple computers after using the original Lisa, and this affinity turned into a bona-fide obsession when he got the original 128 KB Macintosh in 1984. He started writing one of the first Web sites about Apple (O'Grady's PowerPage) in 1995 and is considered to be one of the fathers of blogging.... Full Bio

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