Intel Paying the Price - Analyst Blog

Intel Corp (INTC) has paid Advanced Micro Devices (AMD) the agreed $1.25 billion to settle long-standing disputes between the two chipmakers. This takes care of the AMD lawsuit that was slated to come up for trial early next year, does away with the x86 dispute, imposes restrictions on Intel regarding its competitive behavior and seeks arbitration in the event the companies are unable to resolve any issue mutually.
 
The payment to AMD follows the $1.45 billion in fines paid to the European Commission as penalty for anti-competitive practices. Of course, Intel is appealing the case.
 
We are a bit concerned about the amount of cash Intel is dishing out. While parting with these amounts may not cramp its style (the company generated over $4 billion in the last quarter itself), it adds to the negative publicity.
 
Further, regulatory pressures continue to increase. Intel is now under scrutiny by the Federal Trade Commission (FTC), has been sued by the New York Attorney General and is in the middle of an ugly dispute with long time partner NVIDIA Corp. (NVDA).
 
While all the three could lead to significant cash drain, we are particularly concerned about the company’s falling out with NVIDIA.
 
The problem with NVIDIA originates in a cross-licensing agreement between the two companies back in 2004. The agreement provided Intel some NVIDIA technology and enabled NVIDIA to build graphics chips and chipsets for Intel’s microprocessors. However, Intel changed the chip architecture in 2008 and is now integrating the chipset into its own microprocessor (Nehalem).
 
The dispute is related to the new microprocessor, with Intel claiming that NVIDIA needs a fresh license to build GPUs based on the integrated chips and NVIDIA stating that the company’s previous license covered the current situation. Both companies have now sued each other, although Intel has charged for breach of contract while NVIDIA has charged for anti-competitive practices.
 
This is a sore point for Intel and it automatically attracted the attention of the FTC. If the situation goes against Intel, it will have to pay another hefty fine.
 
To top it all, Intel’s own graphics chip (based on the Larrabee platform) is dependent on technology licensed from NVIDIA. If the companies go their separate ways, Intel would be forced to re-build its graphics chip from scratch, which would be both challenging and time consuming. If it is unable to do so, the company would not have a competing product for AMD’s soon-to-be-launched “Shrike", which marries the CPU to the GPU.
 
A graphics chip is essential for penetrating the more consumer-type markets, so it is essential for the company’s growth strategy going forward. Moreover, there is a growing demand for general purpose graphics chips, which are extremely good at performing repetitive tasks.

The launch of the Larrabee graphics chip has been postponed indefinitely, although we expect the company to come out with a solution some time in 2010. Timing would be the key here and we fear that too much delay would lead to market share gains by AMD.

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