'Intel Inside' shackles PC makers - Part 1

Federal Trade Commission (FTC) investigators looking into allegations of Intel Corp.'s tight-fisted control over PC makers might want to follow the money -- specifically, the hundreds of millions of dollars Intel spends annually with PC makers for the Intel Inside program.

Federal Trade Commission (FTC) investigators looking into allegations of Intel Corp.'s tight-fisted control over PC makers might want to follow the money -- specifically, the hundreds of millions of dollars Intel spends annually with PC makers for the Intel Inside program.

The wildly successful program, which began broadly in 1994 as a way to create brand equity for the Pentium processor, has evolved into Intel's premier marketing vehicle, managed by an army of attorneys, accountants and administrators. Intel has deftly used the program to keep competitors at bay in the most profitable segment of its business: corporate PCs. That, in turn, has left corporate buyers with fewer options -- and higher prices -- when choosing business desktops, notebooks and PC servers.

A look at the Intel Inside program requirements, which Intel keeps under tight wraps, shows how fully the chip maker controls the marketing purse strings of PC makers that sign on. Interviews with numerous current and former executives at Intel's largest OEM customers -- all of whom declined to be identified, fearing reprisals from Intel -- add fuel to the fire. These executives call the program addictive and claim their companies can't compete without it. The stakes are enormous. Funding from the Intel Inside program covered about half of one top PC maker's $100m (£61m) 1997 advertising budget. Another licensee used the funding to pay for half of last year's $64 m budget for non-U.S. regions. Still another spent $1.6bn on Intel chips in 1997; as part of the program, the company was reimbursed about $50m for advertising. "You're not competitive if you're not on board," said an official at a top PC maker.

The marketing dollars are enough of a carrot to make PC vendors sign off on Intel's restrictive program requirements. Before PC makers are eligible for reimbursement, they must sign an OEM Trademark License Agreement that regulates everything from logo size and colour to branding. The eligible systems are added to a form called Attachment C, which Intel uses to keep track of qualifying Intel Inside products. OEMs must modify Attachment C every time they introduce a new Intel-based system.

Once a PC maker meets all Attachment C guidelines, Intel reimburses 6 percent of the total average selling price of each vendor's worldwide monthly microprocessor shipments. But Intel doesn't give the cash back to the PC makers to use as they wish. Instead, it deposits the money into an Intel-managed market development fund, or MDF, which the vendors must use to pay for print, Web, broadcast or radio advertising of their Intel-based systems. If they don't use the funding within 12 months, they lose it.

The restrictions don't end there. OEMs must submit every ad, regardless of medium, to Intel for approval. The Intel Inside Program Office checks on compliance for items such as size, colour and prominence of Intel's logo; accompanying taglines; and, in the case of Web ads, click-throughs to Intel Web sites. Intel also dictates the percentage of the funds that vendors must use for advertising in each medium.

If a vendor strays from Intel's guidelines -- even for an infraction as minor as using the wrong size Intel logo on their packaging -- Intel can freeze its eligible marketing funds. Since the funds come from the PC companies' chip payments, many customers believe Intel artificially inflates processor pricing to cover the costs. "They already have your extra money," said a veteran executive who retired last year from a top PC company. "They're charging you more money and then giving it back to you so you can advertise their products."

The MDF "almost certainly" is one of the factors Intel builds into its pricing schemes, added a former Intel employee who requested anonymity. "Intel bases its prices on a few similar metrics, such as overall value of the architecture, value of that architecture [relative to] alternative architectures and how much volume you can drive at any given price point."

Intel vehemently denies the allegation. "Look at chip prices," said Chuck Mulloy, a spokesman for the Santa Clara, Californian company. "They've historically come down." Citing the ongoing FTC investigation, Mulloy said no Intel executives could comment on the program. Without elaborating, he said Intel uses a "tried-and-true methodology" to determine pricing. Nevertheless, pricing in the corporate PC market, where Intel has little competition, has dropped at a lower rate than in the retail/consumer market, where Intel has healthy competition from Advanced Micro Devices Inc. and Cyrix Corp.

Some IT executives acknowledge the premiums they must pay for Intel-based systems. But large companies often can negotiate better pricing through volume purchase agreements, so they stay with Intel to maintain platform consistency. "We don't have an Intel-only mandate, but that's where we end up [because] we can negotiate pretty aggressive pricing [with our supplier]," said Ken Harris, vice president and chief information officer at Nike Inc., in Portland, Oregon.

Nike, Harris added, wants "the fewest amount of moving parts" as it establishes a more consistent hardware and software platform globally. In addition to its impact on pricing, the Intel Inside program also affects PC makers' product decisions. Although the guidelines don't prohibit use of non-Intel chips, they provide strong monetary disincentives for doing so, several OEMs said.

How strong? A licensee forfeits all MDF funding for a brand if it adds a non-Intel chip to the line. If it wishes to use another vendor's processor, it must establish an entirely new brand or sub-brand for that chip to retain funding for the existing brand. "There is no doubt that it's one of the major factors that influences [product] decisions," said a 20-year IBM PC executive who left the company in 1997.

Part 2