David Balto (and the FTC) gets it woefully wrong on Intel

Geoffrey Manne —  14 April 2010

David Balto has penned a short apologia of the FTC’s Intel case (HT: Danny Sokol).  Unfortunately his defense (and, unfortunately, the FTC’s case) is woefully misguided.

Balto writes:

Intel has been clearly dominant in the market for central processing units (CPUs) with between 80 percent and 98 percent of the market. The practices at issue in the FTC litigation have been condemned by the Japan Fair Trade Commission in March 2005, by the Korean Fair Trade Commission in June 2008 and by the European Commission in May 2009. In the United States, Advanced Micro Devices Inc. (AMD), Intel’s sole significant rival, sued Intel for a broad range of exclusionary practices in 2005. The New York attorney general brought its own action in November 2009.

Intel has had its day in court in proceedings before the three foreign commissions—and lost. Each of those tribunals found that Intel engaged in severely anti-competitive practices that protected its central processing unit monopoly and excluded its only real CPU rival, AMD.

This is misleading.  First of all “day in court” is not the same as “proceedings before the three foreign commissions,” and it is well-accepted that conviction by a party acting as judge, jury and prosecutor is less than decisive.

Second, Intel has had judgments rendered against it by agencies–not by courts–without any adversarial process to support those judgments.  It has appealed its European Commission judgment to the European General Court (the court formerly known as the Court of First Instance), and it has appealed the claimed human rights violations inherent in the imposition of a $1.5 billion fine without due process to the European Court of Justice.  It has appealed its KFTC ruling to the Seoul High Court.  It acceded to the JFTC’s recommendations, while contesting its findings of fact.  Intel is, in fact, still awaiting its day in court.

Moreover, the practices at issue in the FTC litigation were either NOT before these other tribunals (more on this in a second), or they were evaluated under laws and jurisprudence that differ substantially from US law and jurisprudence–and in ways that many of us believe lead to outcomes that condemn practices that are not, in fact, anticompetitive. (In Europe, for example, the Commission’s decision, citing to EU case law (its Hoffmann-La Roche line of cases), essentially refused to acknowledge that there could be any pro-competitive justifications for Intel’s discounts.  We beg to differ.)

Balto continues:

As each enforcer concluded, Intel—through its exclusive rebate scheme—paid computer manufacturers to buy Intel’s more expensive, less technologically advanced CPUs, resulting in turn in consumers paying higher prices for computers.

Actually, this is not what even these other enforcers concluded.  While some translations of the Korean decision do seem to suggest that, as something of an aside, the KFTC did assert that consumer paid higher prices, the European decision says no such thing, and I doubt that the Japanese recommendation included such a conclusion, either–certainly its English press release indicates no such finding.

Of course this is not surprising.  The theory of the case is that Intel, by offering conditional discounts, induced OEMs to purchase such a large share of their chips from Intel that AMD was unable to reach the minimum sufficient scale required to compete effectively.  But this effect arises, if it does at all, by Intel offering lower, not higher, prices.  While the claim that consumers had “less choice” might follow from this argument, the claim that consumers paid higher prices does not (unless and until AMD is forced out of business and Intel is finally able to reap the rewards of its predatory strategy.  As I have noted, Intel’s shareholders sure must have a long time horizon).

In defending the FTC’s action here Balto adduces the following arguments:

First, the FTC complaint challenges exclusionary conduct in the emerging and critically important graphic processing unit (GPU) market, a market not addressed in the other actions.

Second, there are the important institutional advantages to a suit by the FTC.

Third, the FTC is not only bringing a traditional monopolization case under Section 2 of the Sherman Act; it is also challenging the conduct under Section 5 of the FTC Act.

Finally, the most straightforward reason why FTC enforcement is necessary is that, although AMD settled its long-running suit challenging the conduct condemned by the three foreign commissions, it was largely a monetary settlement.

None is persuasive, and each is wrong or misleading in some way.

First, if this is new conduct being addressed, “the practices at issue in the FTC litigation” were not before these other tribunals, in fact, and have not been condemned by them.  The FTC is, as it happens, litigating a quite different case, at least in part.  So much for the argument that there is no possible overreaching here.  Moreover, the FTC brought this action based on claims about the GPU market (coincidentally immediately following the AMD/Intel settlement) without actually having investigated the issue with anything near the thoroughness such claims merit.

Next, the fact that the FTC gets to sit as both prosecutor and judge in the case is not necessarily a ringing endorsement.  Surely due process in US administrative hearings is better than that in the other countries that have looked at the claims, but it is still the case that the FTC has a substantial thumb on the scale when it comes to cases it adjudicates itself.

We have dealt in great detail with the Section 5 issues on this blog and in writings elsewhere.  My overall take is available here.  Suffice it to say that Balto’s take on the issue is completely dismissive of error cost concerns and, combined with his praise for the FTC’s administrative proceeding and his belief that Intel has already had its day in court by having been investigated by competition authorities without trial, suggestive of his certainty that agencies don’t err in the cases they bring-only in the cases they don’t bring.

Perhaps Balto’s silliest claim is that the case is necessary because, although AMD and Intel settled their case, the settlement “was largely a monetary settlement.”  This is ridiculous.  In fact the settlement contains a laundry list of conduct terms that preempts any legitimate conduct remedies the FTC could have cooked up in its case.  There can be no doubt that this is why the FTC added claims against Nvidia at the last minute.

Balto finishes by praising the FTC’s focus on dynamic competition and by comparing the case to the DOJ’s Microsoft case–as if to highlight how perfectly off-base his assessment is.  The DOJ and the courts in Microsoft were so forward looking that they dismissed the threat to Microsoft from Linux and didn’t even realize that there was a threat from Google.  Larry Lessig has announced that he “Blew It on Microsoft” for failing to appreciate the dynamic market.  This case by the FTC is built on theoretical models of speculative harms and against copious evidence of present-day benefits to consumers.  If this is how the agency focuses on “dynamic” competition, count me out.

Balto’s essay, like the FTC’s own defense of its case, is a failed attempt at rationalizing a misguided case.  A thoughtful evaluator of the case does not have to “know” that Intel’s conduct is pro-competitive to denounce the case–he has to recognize only that there are limits to our knowledge about the competitive effects of this type of conduct, that there are costs to the economy from deterring innovation, and that the combination of new claims, Section 5, administrative proceedings, and an overly-aggressive agency (not content with a settlement between Intel and AMD that the agency itself could well have written) is insufficient to reflect these concerns.  Balto–and the other defenders of the FTC’s Section 5 case here–evidences no such recognition, and his attempted defense should not be taken seriously.

Geoffrey Manne

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2 responses to David Balto (and the FTC) gets it woefully wrong on Intel

  1. 

    The public choice story for the NY AG action is a bit easier to tell, given AMD’s relationship with the state. But as far as the FTC’s action, its a bit harder. No doubt your instinct that Intel is a great opportunity to bring a big-name case in an important industry that will get a lot of attention is correct. If bringing actions in big industries is reinvigorating (and perhaps it is?), I guess that is something, but I don’t think a loss does anything for the FTC or the administration. And as I’ve written here previously, I don’t think the Commission’s Section 2 claim has legs. And while the Section 5 claim might do well at the Commission level, the appellate courts loom…and a public loss of that magnitude is a lot of things, but not very reinvigorating.

  2. 

    Great post. I wonder what public choice insights you might have here, Josh (or anyone else). I mean, we know the Obama administration came in intent on reinvigorating antitrust scrutiny, and the cynic in me sees Intel as a great opportunity for the FTC to appease the administration. Am I out of line here?