Intel Is Likely to Keep Pace
Despite Expected FTC Action
5-29-98
By LEE GOMES and BRYAN GRULEY
Staff Reporters of THE WALL STREET JOURNAL
The expected move by the Federal Trade Commission against Intel Corp. may hearten some of the smaller companies with complaints about the chip maker but isn't likely to slow Intel down.
The FTC's staff is expected to recommend, as early as Friday, that the commission file suit to prevent Intel from withholding technical information about its Pentium microprocessors from competitors and from companies with which it has a business dispute, according to people familiar with the matter.
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Smaller companies that produce chip sets or circuit boards say they have been hurt by the practices, and an Intel customer, Intergraph Corp., won a temporary restraining order from a federal judge last month preventing Intel from withholding technical information because of a patent dispute.
But overall, many analysts say the Intel practices in dispute are incidental to the company's success at attaining a nearly 90% market share for its Pentium family of microprocessors. They also say that a much bigger challenge to Intel these days is not any federal legal maneuver, but instead the dramatic marketplace shift to low-priced personal computers, and renewed competition from Advanced Micro Devices Inc. and National Semiconductor Corp. in that market segment.
With PCs today costing $1,000 rather than the $2,500 common a few years ago, Intel has been forced to slash its chip prices to remain competitive. Because of the resulting drop in Intel's profit margins, investors have grown cautious about the company's stock, which has fallen nearly 30% since last summer. Shares Thursday fell 81.25 cents to $73.50 in Nasdaq Stock Market trading.
In that regard, Intel is in a vastly different position than Microsoft Corp., facing a federal antitrust action filed last week by the Justice Department. Microsoft is encountering few of the profound marketplace challenges confronting Intel, including new competition and declining prices. For example, Microsoft is expected to sell its new Windows 98 operating system this summer for essentially the same price as Windows 95, which came out three years ago.
Gray Areas of Law
The expected FTC action involves one of the many gray areas of antitrust law. Intel doesn't deny that it withholds information from companies that are potential competitors or that have filed suits against it. Lawyers for the chip maker say the company is well within its rights in doing so. But antitrust officials believe that because of Intel's vast market power, as well as the crucial role of its chips in the computer industry, certain options that would be available to smaller suppliers are foreclosed to Intel.
Still, an FTC legal challenge on the disclosure issue "would just not be a big deal for Intel," said Jonathan J. Joseph of NationsBanc Montgomery Securities. "The FTC has been circling around for a while about this." Added Joe Sims, with the law firm of Jones, Day, Reavis & Pogue in Washington: "It's probably not very important. If [Intel has] disputes with every potential competitor, I suppose it's significant, [but] if they have disputes with a few people that might compete with them someplace with something, it probably doesn't mean much."
Drew Peck, an analyst with Cowen & Co., said that selectively releasing technical information has been one of Intel's "favorite tools" for rewarding friends and punishing enemies. But he agreed that there would be only a "minor" impact on the company's financials if it were forced to abandon the practice.
Indeed, Intel is already complying with the April order of a federal judge to share information with Intergraph, of Huntsville, Ala. The computer maker had its supply of Intel technical materials cut off after challenging Intel on patent issues. The Intergraph case is expected to loom large in any FTC suit against Intel.
"Our relationship with Intel is not quite as warm as it once was, but they have adhered to the judge's order," said Jeannie Robison, an Intergraph spokeswoman. "It shouldn't affect their business at all."
Geoff Bellow, analyst with Dataquest in San Jose, Calif., said Intel might actually be helped if it was forced to share information with competitors in such fields as high-performance computer graphics chips. That's because these companies might be sources of innovation that could increase the overall demand for PCs.
"Intel has a vested interest in making sure the PC platform keeps moving forward," he said.
Procedurally, the steps toward a move against Intel by the FTC will take many weeks, and will give the two sides ample chance to reach an out-of-court settlement.
And before a formal vote, Intel will be able to argue its own case privately before each of the commissioners and their staffs. In the process, Intel will learn more about the case and the commissioners' feelings about it; that could help the company decide whether it wants to settle the charges and avoid a trial.
Patented Designs
Besides looking at the issue of information-sharing, the FTC is believed to be also investigating a wide range of other Intel business practices. One of them is presumed to be Intel's big push to get PC makers to use proprietary technologies that AMD and National Semiconductor can't copy. Intel is using patented designs for a so-called bus that links its microprocessors to other parts of a computer system, and a new Intel-designed microprocessor socket.
Mike Feibus, an analyst with Mercury Research in Scottsdale, Ariz., said a federal move against the new socket would "throw a wrench into Intel's plans for restoring its long-term profitability."
But not everyone agrees. Mr. Peck, for example, said that even with the new design, Intel won't be able to turn the clock back on microprocessor prices. "It will be very hard for Intel to move the world back to $300 microprocessors," he said. "Once people have tried $800 PCs with $100 microprocessors, they aren't going to want to go back."
Ad Campaign
People in the industry say the FTC is also looking at the company's "Intel Inside" advertising campaign. As part of that campaign, Intel gives millions of dollars to PC makers to help in their advertising efforts. In the PC business, with its razor-thin margins, those payments sometimes can make a difference between a profit and a loss. The FTC is believed to be investigating whether Intel uses the threat of lower "Intel Inside" payments to prevent PC makers from switching to rival suppliers.
One antitrust lawyer suggested that the FTC might be envious of the Justice Department. "Intel's a very attractive target for a prosecuting agency, particularly for one still stinging that it lost the Microsoft case," said Daniel Wall of the San Francisco law firm of McCutchen, Doyle, Brown & Entersen. In 1993, the FTC closed its own investigation of Microsoft without bringing charges; the Justice Department then picked up the probe.
"I think [the FTC] still thinks the computer industry is their turf, and [Intel] is a big prize if you can bring a case. Chairman [Robert] Pitofsky and a lot of staff seem anxious to show they can bring a Section 2 case just like the Justice Department, but they seem to be stretching." Adds Mr. Wall: "This strikes me as a real stretch as an antitrust theory. It hardly passes the straight-face test that Intel is truly worried that its position in the microprocessing market would be challenged by Intergraph. It just strikes me as a pretty mundane commercial dispute that shouldn't be twisted into an antitrust case."
Copyright c 1998 Dow Jones & Company, Inc. All Rights Reserved.
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