Are Intel’s Ultrabook subsidies a rotten apple?

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?

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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

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55 comments
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  • Let's see if I can follow this logic

    What you are suggesting is that Intel should not be allowed to help manufacturers keep the prices of Intel powered MacBook Air clones at the same price as the MacBook Air because this is bad for consumers and for AMD.

    So let's pretend Intel is not allowed to offer subsidies. What would the market look like?

    We would have the Intel powered MacBook Air with approximately 99% of the ultrabook market. We would have Intel powered other Ultrabooks with 0.5% of the market. We would have AMD powered other Ultrabooks with 0.5% of the market. After all, why would anyone buy a plasticky Dell with many times slower vector graphics for more money than the original Ultrabook, the first laptop ever that was thin and powerful: the MacBook Air?

    Oh. Now I see why you are so upset. When you said this was bad for "the competition", I thought you meant that this was bad for AMD. Now I understand. You are against the subsidies because they are bad for Apple because they increase competition in the Ultrabook market.
    toddybottom
    • RE: Are Intel??????s Ultrabook subsidies a rotten apple?

      @toddybottom

      I can't help it, toddy. After reading your post, I was reminded of a conversation that the Man in Black had with Vizzini in the movie, The Princess Bride.

      After listening spell bound to Vizzini's train of logic during their battle of wits, the Man in Black remarks, "Truly, you have a dizzying intellect."

      Grin.
      kenosha77a
    • Man you are delusional

      You'll twist any logic to fit your delusion.

      @toddybottom
      GoPower
    • And yet neither of you could argue the point

      Which means that both of you know I'm right.

      Intel's subsidies are all about increasing competition in the Ultrabook market. This is not for alruistic reasons, of course, but the end result is that consumers have many choices at the same price point when they are looking to buy an ultrabook.

      Without this subsidy, the only ultrabook worth buying would be the MacBook Air. Like I said, why would anyone pay more for a plasticky Dell with many times slower vector graphics and no glue between its screen layers?

      What is intellectually dishonest is for the Apple Core to write a blog stating that Intel is hurting AMD with these subsidies. That isn't true. Intel is hurting Apple with these subsidies and beneffiting consumers who are open to the thought of buying things from companies other than Apple (so unlike the 2 who replied to me). The Apple Core should be honest about why this whiny blog was written.
      toddybottom
      • RE: Are Intel????s Ultrabook subsidies a rotten apple?

        @toddybottom

        I see the problem in your thinking.

        Assuming Intel was prohibited from subsidizing anyone "to be more competitive", the mere act of doing so is a crime.

        Apple, AMD or not, Intel is in trouble by applying a method to avoid competition that they have expressly been prohibited to follow.

        Simple as that.

        Nothing to do with Apple or AMD.
        danbi
    • I don't understand the point of the subsidies...

      I don't understand the point of the subsidies. If Apple products are supposed to be overpriced, then why do the ultrabook manufacturers need a subsidy to compete?
      olePigeon
      • Apple has ultra competitive prices on some products

        @olePigeon
        The iPad specifically is priced at a point that no one in the entire world can compete with. It is one reason with the iPad has a 95%+ marketshare. Apple can do this because they use their monopoly power to buy up all the supplies in a market at a price that isn't offered to anyone else.

        Good for Apple. Good for consumers in the short term until all the other tablet makers go out of business. Then watch the price of iPads shoot up.
        toddybottom
      • Intel is cheating precisely because they can't compete

        It looks like Intel is doing everything it can to help non-Apple manufacturers cheat in their copycat battle with Apple. Why is Intel attacking their own customer? Maybe we'll never know, but that theory about Apple testing AMD and getting punished by Intel makes sense.
        RichardEich
      • Now there's true logic for you!

        Congratulations, olePigeon.
        Laraine Anne Barker
      • RE: Are Intel????s Ultrabook subsidies a rotten apple?

        @toddybottom,

        If Apple can make the iPad at that price, considering that Apple is all, but cheap company, then so can anyone else.

        You buy all too much into the "Apple get's it cheap" legend.

        Besides, why would Intel, in their sane mind create trouble for Apple, when Apple has abandoned PowerPC for the Intel architecture? Then, Apple begged Intel many, many times to create custom chips for them -- no.
        What do you think, would AMD refuse to create chips by Apple design?

        Perhaps Intel are simply scared and they try to find another niche for their 'ultra book' chips.
        danbi
    • RE: Are Intel??????s Ultrabook subsidies a rotten apple?

      @toddybottom
      am an amd user for the last ten years, and i believe that without serious product competition coming from amd and other manufacturer, intel will always behave the way it does. amd products are as good as intel's (they even snag the top dog slot for a couple of years). they share the same architecture, and the only difference with them are in the implementation. intel has more resources that they leverage to get ahead of the competition (i believe nothing is wrong with that - until intel abuse it.) and as for the bait, let intel spearhead the ultrabook mania and let amd and others create a competing product. apple spearheaded the ipad mania, and look how vibrant the competition in that space!!!
      kc63092
    • RE: Are Intel??????s Ultrabook subsidies a rotten apple?

      @toddybottom
      dude, you seriously need to take a day off.
      oneleft
      • RE: Are Intel????s Ultrabook subsidies a rotten apple?

        @oneleft Only a day? We all need a much longer vacation from him than that :-)
        non-biased
    • RE: Are Intel????s Ultrabook subsidies a rotten apple?

      @toddybottom You make no sense whatsoever. If you think this is about bias, it's you who have bias.

      You write "You are against the subsidies because they are bad for Apple because they increase competition in the Ultrabook market."

      You're telling me it's okay? Forget Apple, if you manipulate the market by charging someone more because they happened to even speak to your competitor, you are WRONG.

      What's really pathetic is no one can seem to beat the MacBook Air. Not on price, not on the performance/portability ratio, not in design. Pretty sad. I'm sure that really eats your lunch, doesn't it.
      lelandhendrix
      • Time to Split Intel Like the Telecoms

        @lelandhendrix@... Toddybottom apparently supports illegal business behavior if he likes the company.
        RichardEich
  • How is it a fake category?

    Did any of the netbook turds look or perform like a MacBook Air? Come up for some air yourself!<br>@Ididar
    GoPower
  • RE: Are Intel??????s Ultrabook subsidies a rotten apple?

    @Ididar

    So you are saying that Intel did break the consent decree.
    Jesster
    • RE: Are Intel????s Ultrabook subsidies a rotten apple?

      @Jesster

      It seems so. So what? Is this new?
      danbi
  • RE: Are Intel??????s Ultrabook subsidies a rotten apple?

    @Ididar
    So if Intel is just moving into this "fake" category, then all they have to do is relabel their netbooks as ultrabooks and they've got their sub-$1000 ultrabook, no?
    anono
  • Apple labels it a "notebook"

    @Ididar
    Apple calls the Macbookair a 'notebook', and they always have. That's hardly a new category. If anyone wants to challenge Intel on the whole Ultrabook thing, then they could pose the argument that if the "original ultrabook" is just a Notebook, why wouldn't all ultrabooks be notebooks?

    http://www.apple.com/macbookair/
    use_what_works_4_U