The FTC Gets in Intel’s Business

Josh Wright —  4 August 2010

One of the first reactions I had when reading the settlement is that it is quite striking how much and at what level of detail the settlement micro-manages Intel’s business decisions.  Lets consider a just a handful of provisions and look at the language in the settlement.  Again, I think these provisions should be read with the benefit of some perspective in market performance during the relevant time period.

First, Dan already noted this, but it is worth repeating.  The “predatory design” aspects of the settlement are incredibly problematic and I predict will cause more harm to consumers than good in the short, medium, and long-run. Here’s the language:

Respondent shall not make any engineering or design change to a Relevant Product if that change (1) degrades the performance of a Relevant Product sold by a competitor of Respondent and (2) does not provide an actual benefit to the Relevant Product sold by Respondent, including without limitation any improvement in performance, operation, cost, manufacturability, reliability, compatibility, or ability to operate or enhance the operation of another product; provided, however, that any degradation of the performance of a competing product shall not itself be deemed to be a benefit to the Relevant Product sold by Respondent. Respondent shall have the burden of demonstrating that any engineering or design change at issue complies with Section V. of this Order.

As Dan pointed out in his post, it really is hard to stomach this provision.   Note that the settlement provision requires Intel, upon any “engineering or design change” to have the burden of demonstrating that it does not degrade rival performance and that it provides “actual” benefits.  This provision gets the Commission into the chip design business.  But hey, the government can make a Cadillac…

A few more provisions caught my eye for the potential to micro-manage the competitive process.  Consider the restrictions on Intel’s distribution contracts.  In Section IV.A of the settlement includes a list of activities that Intel cannot engage in: “Respondent 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….” and proceeds down a long list of subjects, including use of exclusivity.  Section IV. B creates some exceptions.  Here is where things get interesting — and completely bizarre.

So, what can Intel do to compete for distribution?  Intel is not prohibited from:

offering a Benefit, including a price discount, reasonably similar to one Respondent reasonably believes is being offered by a rival supplier; provided, however, that in such circumstance:

Let’s stop there — “reasonably similar to one Respondent reasonably believes is being offered by a rival supplier”?  Quite a test.  And with lots of wiggle room for the Commission to determine whether Intel’s beliefs are reasonable or its discount is within the reasonable range of similarity to competitors.  But perhaps this could work — I mean, the Commission doesn’t really want to tie Intel’s hands behind its back vis-a-vis other competitors, right?  Well, maybe it does:

Respondent may not condition its Benefit upon receipt of exclusivity or a minimum Market Segment Share, regardless of whether or not the rival supplier has so conditioned its offer

So, the use of exclusivity or market share discounts are fair game for competitors but Intel may not use them even if it can demonstrate to the price-controller that its offer is reasonably similar to that offered by a rival.  The very fact that the settlement operates on the premise that Intel should not be able to use contracts that its rivals can informs how it is likely to interpret the “reasonable” requirements in the for the “meeting competition” exception excerpted above.

A few more provisions to do with competition for distribution caught my eye.  Here’s another one from the list of exceptions.  Intel is not prohibited from:

winning all of a Customer’s business, so long as Respondent has not bid for more business than a Customer has asked to be bid and so long as Respondent does not engage in conduct otherwise prohibited by this Order to win the business;

Notice that violation of this provision requires the Commission to oversee the discussions between Intel and customers to determine whether the customer asked for the bid, and how much they asked for.  And here is another one.  Intel is allowed to agree:

with a Customer that the Customer will not purchase Relevant Products or Computer Product Chipsets from an Intel competitor where: ….

Respondent has provided Extraordinary Assistance to the Customer; ….. and

Respondent does not (i) enter into more than ten (10) such agreements over the term of this Order (or such additional agreements as the Commission may approve); and (ii) enter into more than two (2) such agreements in any twelve month period (or such additional agreements as the Commission may approve).

Intel may also agree to provide:

a Customer or End User a discount as a flat or lump-sum payment of monies or any other item(s) of pecuniary value based upon a Customer’s sales or purchases of fewer than eleven (11) units of any Relevant Product (such as “buy ten, get one free”). This provision does not apply to sales of greater than 11 units to any one customer (for example, Intel may not use this provision to offer 10,000 free units to an OEM in return for a purchase of 100,000 units).

Fewer than eleven.  Got it?

More to come.  But I think these provisions demonstrate the extent to which the Commission has got itself into Intel’s business decision-making process and even aspects of product design.  My overall impression in light of these terms is that the settlement is more restrictive and, well, controlling, than I thought Intel would agree to.  But more serious analysis would need to be done to compare what is added here relative to the original AMD settlement, how costly compliance with this Commission regulatory oversight into Intel’s distribution, licensing and product design decisions is going to be, versus the expected value of litigation.   As I argue in this paper, I stand by the view that Intel would have likely ultimately prevailed (after appeal) on the Commission’s Section 2 and Section 5 allegations.  Of course, that is a very costly route.  But so is this.

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