Intel Sued by the FTC - Analyst Blog

The Federal Trade Commission (FTC) has finally charged Intel Corp. (INTC) for anti-competitive practices. The agency has reportedly been studying the case for the past year and has found Intel guilty on many counts.

The list of Intel’s misdemeanors included an attempt to cut off its rivals’ access to the microprocessor market; an attempt to monopolize the graphics processor market; and an attempt to smother competition, thereby slowing down the pace of innovation and reducing customer choices.

In the core microprocessor market, Intel was charged with purposefully redesigning key software (called compiler) that would not work well with CPUs from competitors, and then misrepresenting the reason for the poorer performance. According to the FTC, this encouraged users to stay away from competing products.

The company also is accused of making arrangements with key hardware makers, such as Hewlett Packard Company (HPQ), Dell Inc. (DELL), International Business Machines (IBM) and Seagate (STX), among others, and paid billions of dollars to these companies to make them stay away from Advanced Micro Devices (AMD) processors.

The emerging graphics processor market has so far been largely dependent on interoperability, since the central processing unit (CPU) and graphics processing unit (GPU) have been developed by different companies. Intel has allegedly started developing products that are creating interoperability problems, thus discouraging users from buying competing products. According to the FTC, Intel has also made a concerted effort to thwart the development of general purpose graphics chips (GPGPUs), which are very likely to eat into its CPU market share.

The FTC has also alleged that Intel’s new Atom processors that bundle a graphics chipset are a further underhanded tactic. Intel has supposedly priced the bundled product in a way that makes it uneconomic to purchase a separate GPU from NVIDIA Corporation (NVDA). OEMs that bought the bundled product, removed Intel’s graphics chipset and replaced it with a superior quality NVDA graphics chipset have allegedly been penalized with significantly higher prices.

It is the FTC’s contention that even Intel’s current position in the CPU market was not built alone. Therefore, it should be forced to continue sharing its technology the way it has been sharing others’. This would be protection for competing products that are of superior quality and/or sold at lower prices.
 
The FTC intends to bring an order that would prevent Intel from threatening, bundling its products, offering exclusive deals, hindering competition in any way, or manipulating prices with respect to its CPU or GPU offerings. The hearing will be held in Sept. 2010.

Intel has stated that the FTC’s allegations were misguided, not properly investigated and not based on existing law. Moreover, it described its pricing tactics as lawful and stated that the inability to protect its intellectual property rights would make it impossible for Intel to conduct business.
 
We currently have a Neutral rating on the stock. We expect the shares to be range-bound in 2010, given the negative overhang related to these issues.
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