Intel versus the European Union

The European Union’s investigation into Intel’s business practices may be coming to a head, the Wall Street Journal reported yesterday. The Journal report (a link to which can be found here, although it requires a subscription to read) says that EU investigators have recommended that Neelie Kroes, EU antitrust commissioner, levy formal charges against the chipmaker for stifling competition. The Journal report goes on to say the Kroes is likely to move carefully, particularly given that that case is likely to be equally as complex as that of the EU versus Microsoft, and has asked for additional information before making a decision to charge the chipmaker.

The Journal says that the main area of focus for the EU is Intel’s rebate program and how it may (or may not) not use the program to stifle competition. But instead of looking into whether or not Intel is using its rebates to motivate PC makers to not buy chips from Advanced Micro Devices—something that the Japan Fair Trade Commission found Intel at fault for in its investigation—the Journal report says the EU is looking at how Intel employed rebates to motivate customers to buy versus delivering them technical innovations.

The story, in part, reads as follows:

"At the heart of the EU case are AMD's allegations that Intel withholds rebates from computer makers when they buy too many AMD chips. "It is simply a coercive tactic," Tom McCoy, AMD executive vice president for legal affairs, said this month. European regulators, however, have debated internally about whether such rebates by dominant companies are good or bad for consumers. One argument says rebates help consumers by leading to lower prices. In the Intel case, EU investigators have embraced the flip side of the argument: The rebates are restricting competition, which can harm consumers by giving Intel less incentive to innovate."

Based on the story, the EU appears to be looking at whether Intel is using its marketing muscle to motivate purchases of less feature-packed chips versus using its engineering talent to build more feature-packed chips. Those chips, the argument follows, would be more beneficial to customers.

Given Intel’s most recent product lines, such as its Core 2 Duo and the efforts it went to make their underlying Core Microarchitecture more power efficient while also increasing performance, it’s difficult to believe that Intel is being intentionally lazy about innovation, right now. (One might make a case that Intel could have more active in bringing innovations to its chips during the 2000 to 2005 timeframe, its Pentium 4 era.)

Clearly, innovation matters for chipmakers. But price matters for customers. It’s a balance. AMD, for its part, has brought numerous innovations to market. It was the first to introduce a 64-bit x86 processors in just one example and that has served it well. But I’d argue that the company used both innovation and price as tools to win market share and acceptance among PC makers and end-customers. If you look at the fourth quarter 2006 results of both companies, which show reduced profitability due to price competition, it doesn’t appear that either company intends to vary its approach to the market.