Archives For Intel settlement

FTC Chairman Leibowitz recently gave a speech in which he took on a number of issues, but one in particular caught my eye.  In a portion of the speech describing how antitrust has updated its procedures in order to become more efficient and avoid the problem of having decade-long cases focused upon technologies that are obsolete by the time the case is resolved, Leibowitz offers the following example of Commission success:

The best, recent example of the need to move quickly in the high-tech area is our recent Intel case.11 Our investigation of Intel started out very slowly and went on for quite some time, but once the Commission issued process and then a complaint, the litigation proceeded with alacrity and ended with a consent less than a year later.

We think the remedies in the consent do much to protect consumers while still allowing Intel to innovate, develop, and sell new products. And I am proud of the relationship that we have been able to maintain with Intel since then. Still, we might have gained more for consumers: much was lost in the years between the start of the investigation and the litigation’s conclusion, and competition for CPUs and other components in personal computers might have been different had we moved faster initially. And moving quickly might have been fairer to Intel too.

As a result of what we have learned from Intel and other cases, the Commission is no longer bogged down in outmoded procedures. Much of what we’ve done at the Commission in recent years has been to make us better at getting to the bottom of investigations and resolving them faster to ensure that businesses get certainty and consumers get protection quickly. That was at the heart of the changes to our Part 3 rules, you get an antitrust trial, and it is implicit in every effort we make to learn more about industries and develop our internal expertise. We have also pushed to make “go/no go” decisions on investigations earlier so that they don’t linger on. All this reduces expenses and, I believe, allows us to act with a lighter hand.

There is a lot about this strikes me as misguided.

First, lets start broadly.  Striking quickly and striking accurately are two different things.  As John Wooden famously says “never mistake activity for achievement.”  Bill Kovacic has emphasized that case counts alone (nor win rates alone) are not very informative regarding agency performance.   Claims of agency success based upon activity levels in extracting settlements and such should be viewed skeptically without evidence that the activity prevented anticompetitive activity and improved consumer welfare.  Doing things faster doesn’t mean doing them any better.

Second, so what about accuracy?  If Intel is the “best example” the Chairman can come up with of antitrust enforcement in high-tech industries, this is not a good sign for the Commission.  I’ve written quite a bit about the Intel complaint and settlement — and so won’t belabor the point here — but suffice it to say that the evidence does not support the claim that the settlement improved consumer outcomes.  In fact, consumers are probably worse off in my view.  Reasonable minds may differ on these points but it is difficult to evaluate the evidence and come away confident that the settlement is as successful as claimed.  And that’s not even counting the peculiar endorsement it gives Lepage’s, which has been overwhelming condemned a standard which threatens pro-consumer conduct.

Third, the Chairman writes: “And I am proud of the relationship that we have been able to maintain with Intel since then.”  Ugh.  Developing longstanding relationships with Intel and other companies is not something for the Commission to be proud of.  Its just not.  In this case, the relationship derives from the product design elements of the Intel settlement.  Remember this 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.

I’m sure Intel’s lawyers and engineers have a fine relationship with the FTC.  But lets not mistake that with agency success or something that consumers should celebrate.

Never mistake activity with achievement.

A Plug and Some Links

Josh Wright —  29 September 2010

I’ll be talking about the Intel Settlement in an ABA program, The Intel Settlement: A Perspective From the Trenches, today at lunchtime along with a great group of panelists with a wide variety of perspectives on the issue, Kyle Andeer (FTC Counsel), Ken Glazer (KL Gates), and Henry Thumann (O’Melveney & Myers).   If you’re interested, you can register and get call-in numbers at the link above.

And now, some links:

Talking About Intel

Josh Wright —  27 September 2010

I’ll be discussing Intel on a few occasions the next few weeks.  The first is an ABA teleconference on: The Intel Settlement: A Perspective From the Trenches, this Wednesday from 12-130 ET, along with Kyle Andeer (FTC Counsel), Ken Glazer (KL Gates), and Henry Thumann (O’Melveney & Myers).  The focus will be on implications of the settlement.  It should be fun.

The second is Friday October 22 at the Technology Policy Institute’s program on Antitrust and the Dynamics of Competition in High-Tech Industries, where I am thrilled to share the stage with Bob Crandall, Christopher Yoo, and Bruce Owen. My focus there will be on the economics of the underlying Intel case, as well as presenting some new empirical evidence on the likely effects of the case and the settlement.

Let me add on a few brief observations on the Intel settlement to Dan’s earlier comments, with which I largely agree.  There is a lot to say about the settlement: the predatory design aspects, Section 5, the (I found) quite odd self-congratulatory settlement press conference and webcast, and of course, what the settlement means for consumers.  I’m very interested in all of these issues, but perhaps none is more important than the last.   We cannot simply assume that the settlement equates to a victory for consumers.  Readers of this blog will be very familiar with the argument that merely counting cases, or agency activity, and of course settlements, are not reliable measures of the quality of agency performance or meaningful from a consumer welfare perspective.  But problems with this case make that warning especially appropriate here.  Thus, before delving into some first reactions based on language in the settlement over the days and maybe weeks to come, some perspective is in order.

When evaluating the FTC settlement is good for consumers, or reading triumphant FTC claims or press coverage along these lines, or the American Antitrust Institute press release that should come out any second now,  I want you to think about these three pictures (taken from my analysis of the Intel complaint):

The first is a picture of AMD’s financial performance over the relevant time period when Intel was engaged in the allegedly anticompetitive conduct.  Remember, the exclusion theory is that Intel’s discount contracts raised AMD’s costs of distribution, which would ultimately lead to harm to consumers.  The big advantage of monopolization cases from an economic perspective, relative to mergers where the analysis is inherently predictive, is that the disputed conduct has been in the marketplace for some period of time and left its competitive fingerprints.  In this case, the conduct in the complaint had been in the marketplace for about a decade.  That seems long enough.  So — lets take a look at AMD’s sales and operating income:

While the data are not dispositive, they are informative and certainly should give some pause to those who are eager to accept the Commission’s theory.  But forget about AMD, what about Intel’s performance during the relevant time period.  Again, the theory is that during this ten year stretch, Intel’s contracts increased barriers to entry and allowed it to increase its monopoly power to the detriment of consumers.  One place to look for evidence in support of that story is Intel’s financial performance.  Again from the paper — here’s a picture of Intel’s cumulative abnormal returns plotted over time.  Its not a full event study — and you can download the paper for the relevant details, but just look at the picture and try to find evidence supporting the hypothesis that Intel was earning abnormal returns from its distribution strategy (if you look really hard, there is a trend line and an equation that will give you the answer in short order):

Finally — well, this one doesn’t really require any explanation:

More to follow.  Now, I’m not arguing that these three pictures are sufficient to conclude with certainty that Intel’s conduct was pr0-competitive and that the FTC settlement will chill competition and harm consumers.  Though I believe both of these to be true (and I make a more detailed case in the paper linked above).   But certainly, the facts on the ground should give one pause on the issue of whether the settlement is going to help or harm consumers at the end of the day.   That analysis will require looking not only at the settlement itself, which I intend to do in posts to come, but also some real world data on how the market was working for participants and consumers during the relevant time frame.   So lets start there for now.

I just finished watching the FTC webcast announcing the Intel settlement and did a quick read over the agreement itself. Some quick high-level reactions:

  1. The tone of the press conference was triumphant, of course. Leibowitz claimed that the FTC got 22 out of 26 of the remedies proposed in the complaint and that Intel, which had previously criticized the proposed remedies as unprecedented, was suddenly making the remedies “precedented.” Further study required here, but it’s far too glib to count victory based on 22 out of 26. Many of the proposed remedies contained suggestive, open-ended language which, if interpreted reasonably expansively, would have gone far beyond this settlement.
  2. To my ear, there was a big change in emphasis from the theory of the complaint. The complaint was predominantly about Intel’s exclusivity and rebating practices with customer with some deception theories thrown in to make it sound like a proper FTC case. The settlement is much more about intellectual property restrictions that prevent AMD and Via from outsourcing manufacturing when they become capacity constrained.
  3. Section 5 of the FTC Act: Leibowitz made a special point of reiterating his view that Section 5 is “a penumbra around the Sherman Act.” I happen to agree with that view, but it’s an open question whether this settlement really advances this view. It’s notable that the FTC has brought several Section 5 cases in the last few years and hasn’t chosen to litigate any of them all the way. Not saying it’s a bad decision, just pointing out that the status of Section 5 remains open after this settlement.
  4. Predatory design: This is an aspect of the settlement that I really can’t stomach. It makes me nervous to think that the FTC is going to have an open-ended right to decide that Intel’s design changes are predatory because they do not provide “any actual benefit” to the product. Benefits, like beauty, are often in the eye of the beholder.

More to follow.

The settlement is here.  Somewhat oddly, the details of the settlement are to take place tomorrow at a press conference at 10 am.  Here’s the FTC announcement:

Federal Trade Commission Chairman Jon Leibowitz will be joined by Bureau of Competition Director Richard Feinstein at FTC Headquarters on Wednesday, August 4, 2010, at 10:00 a.m. ET to detail the terms of the Commission’s order settling charges that Intel Corporation used anticompetitive tactics that stifled innovation and harmed consumers in the market for computer microprocessors, graphics processing units, and chipsets. The FTC’s complaint, filed in December 2009, charged Intel with waging a systematic campaign to shut out rivals’ competing microchips by cutting off their access to the marketplace, and harming consumers.

There will also be a webcast.

While Intel Corporation nears its settlement deadline with the Federal Trade Commission, it received good news from a federal district court in Delaware evaluating the evidence of alleged consumer harm from the discounts Intel offers to buyers.  It is also very important to note that this pass from a US court applying standards of consumer harm embedded in US Section 2 case law — that is, actual harm to consumers and the competitive process rather than allowing harm to competitors to serve as a sufficient condition for proof of the former — is the first to evaluate the consumer welfare effects of Intel’s conduct from this more rigorous perspective.  One has to wonder whether this ruling will shift settlement negotiations in favor of Intel.   Its true that the FTC can use Section 5 to evade this Section 2 competitive effects analysis.  But not without eventually testing their interpretation of Section 5 in front of a panel at the D.C. Circuit.

From today’s WSJ:

Intel Corp. won a key ruling in a suit against the company on behalf of computer buyers, which found no evidence that consumers have been hurt by the company’s discounting practices in the market for computer chips. …

The case had proceeded in parallel with a private antitrust suit brought in June 2005 by Advanced Micro Devices Inc., which Intel agreed to settle in November along with a $1.25 billion payment to AMD. Both cases alleged that Intel used improper discounts and other tactics to deter computer makers from buying microprocessor chips from AMD, with the proposed class-action case focusing on alleged harm to consumers from Intel’s behavior.

Intel’s tactics have also been challenged by antitrust agencies on three continents, including a suit by the U.S. Federal Trade Commission that is in settlement negotiations. Throughout the process, Intel has denied wrongdoing and argued that its discounting practices represented a lawful form of competition that has helped bring PC prices down.

Special Master Vincent Poppiti appeared to give support to that argument. In a 112-page opinion, he wrote that PC makers had discretion about how to use Intel discounts. In some cases, he wrote, they passed the benefits on to consumers in the form of lower prices—undercutting the idea that all members of the proposed class of consumers suffered a “common impact” from Intel’s action. Mr. Poppiti based his conclusions on what he called the “unreliable analyses” of an expert witness for the plaintiffs, who argued that consumers had been overcharged as a result of Intel’s tactics.

I’ve not read Special Master Poppiti’s analysis.  However, as readers of TOTM will know, I’ve been very critical of the Federal Trade Commission’s Complaint against Intel primarily on two grounds: (1)  the wobbly intellectual underpinnings of the Commission’s attempt to expand its FTC Act Section 5 authority to evade (see also here) the more stringent monopolization standards under Section 2 of the Sherman Act, and (2) that the economic merits of the Commission’s anticompetitive theory are questionable when laid against the available data.  Poppiti’s analysis, as reported, appears to be consistent with the second line of attack.

For more analysis of both, please see, An Antitrust Analysis of the Federal Trade Commission’s Complaint Against Intel, combines these two themes.  The paper will be released as the first installment of the International Center for Law and Economics Antitrust & Competition Policy White Paper Series.  The paper considers the economic merits of the Commission’s anticompetitive theory, evaluates the testable implications of that theory against the available data, and offers a critique of the Commission’s proffered justifications for the Section 5 allegations.

Here is the abstract:

The Federal Trade Commission’s recent complaint targets the Intel Corporation for antitrust scrutiny under Section 5 of the Federal Trade Commission Act and Section 2 of the Sherman Act. The Commission alleges that, through the use of loyalty discounts offered to microprocessor purchasers, Intel unlawfully excluded rivals and harmed consumers in the microprocessor and graphics processor markets. This article analyzes the Commission’s claims. The Commission’s reliance on Section 5 should be viewed with suspicion because it allows the Commission to evade the more stringent standards of proof that have been emerged in the Supreme Court’s Section 2 jurisprudence. Furthermore, the Commission’s actions surrounding its prosecution of Intel reflect an adversarial attitude that undermines the Commission’s stated comparative advantages over private litigants. Moreover, the Commission’s allegations form a weak case when evaluated under the conventional Section 2 standard. Unlike many Section 2 cases alleging speculative future consumer harm, the disputed conduct in this case has been in the marketplace for nearly a decade, and its competitive footprint is readily observable. The available data do not support the Commission’s theory that Intel’s behavior harmed consumers. To the contrary, it is almost certain that Intel’s distribution contracts led to tangible, demonstrable consumer welfare gains in the form of lower prices. Accordingly, the Commission’s complaint against Intel threatens to harm consumers directly in the computer industry as well as indirectly by undermining the stability and certainly which longstanding Section 2 jurisprudence has afforded the business community by requiring the plaintiffs offer rigorous proof of competitive harm.

Readers might also be interested in TOTM guest-blogger Dan Crane and Herbert Hovenkamp on the FTC’s case against Intel.

Intel Settlement Watch

Josh Wright —  21 July 2010

The settlement deadline has been extended from this Friday until August 6th.

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). Continue Reading…