FTC Antitrust Probe Focuses on Intel Pact

Sharpening its antitrust investigation of Intel Corp., the Federal Trade Commission staff has found serious antitrust problems with the computer chip maker’s $700-million settlement of a patent infringement suit brought by rival Digital Equipment Corp., according people close to the probe.

The FTC staff, which believes October’s settlement would limit competition to Intel’s market-leading Pentium chip, is now building a case against the commission approving the deal. In addition, the FTC staff is mulling whether to restrict Intel’s efforts to extend its dominance of microprocessors to other computer components, the sources said.

The 6-month-old FTC investigation of Intel is not expected to be completed until later this year. And the preliminary staff proposal could ultimately be rejected by an FTC commission that in the early 1990s declined to pursue a staff recommendation to impose antitrust sanctions on software giant Microsoft Corp.

The deepening investigation of Intel is a surprising turn of events. Most antitrust experts had expected the probe to reach a dead end, since they believe Intel faces more competition in the computer chip-making business today than in 1993, when the FTC ended a two-year probe of Intel’s business practices without taking any action.

Intel spokesman Chuck Mulloy said his company has no specific knowledge about the course of the FTC’s investigation, but remains optimistic that the settlement will be approved: “We are confident that after a review by the FTC, we will receive a clean bill of health.”

Gail Smart, a spokeswoman for Digital, said her company has been contacted by the FTC and is cooperating with the agency’s investigation, but she would not otherwise comment on the probe.

Asked about the Intel investigation, FTC spokeswoman Victoria Streitfeld said, “That’s not something anyone here can talk about. “We make decisions when we announce them.”

Digital filed its patent lawsuit against Intel last spring, accusing Intel of stealing Digital’s technology for use in Intel’s Pentium brand of microprocessors. The settlement provides that Digital will receive licensing fees and discounts on Intel products. It was structured with the intention of not increasing Intel’s estimated 80% control of the microprocessor market.

Intel is obligated to continue making Digital’s Alpha chip for seven years. But Intel could then mothball the Alpha chip and use Digital’s state-of-the-art manufacturing facility to make Intel processors.

Digital Chairman Robert B. Palmer has been so confident his deal with Intel would pass antitrust muster that last month he reportedly began looking to make new acquisitions of software and hardware companies using his Intel cash.

But according to people familiar with the investigation, the FTC staff believes Intel’s agreement to buy Digital Equipment’s chip production operations for $700 million is anti-competitive.

The purchase would place Digital’s super-fast Alpha chip--which some experts consider the only serious high-end rival to the Pentium--into the hands of Intel.

James Love, director of the watchdog group Consumer Project on Technology, said FTC officials “are concerned that Intel is slowly taking over the box,” meaning it has growing dominance over the entire set of hardware inside personal computers.

“Just like Microsoft is bundling more and more things into the computer operating system software, Intel is doing the same thing” with hardware, Love said.

In addition to reviewing Intel’s settlement with Digital, sources say, agency officials are focusing on the chip maker’s wildly successful “Intel Inside” marketing campaign. The strategy was designed to give PC makers an incentive to buy more chips from Intel.

Partly embracing a theory advanced by Digital in its now-settled lawsuit against Intel, the FTC is examining whether Intel has effectively become the personal computer industry’s digital gatekeeper--using marketing strategies, legal agreements and technical prowess to block out competitors.

Since the personal computer is made up of a myriad of devices that must work in harmony, Intel and other chip makers often let computer manufacturers examine their advanced chips so they can design compatible components. In return, the computer makers sign agreements not to disclose essential elements of the chip’s design.

But Digital and some other rivals have accused Intel of using those nondisclosure agreements to deny other chip makers access to “essential” computer technology.

According to Scottsdale, Ariz.-based Mercury Research Inc., Intel’s market share of logic chips in computer circuit boards, for example, has grown to an estimated 83% from only 5% four years ago. Intel is also the leading manufacturer of computer circuit boards and is charging into the burgeoning computer graphics chips market.

Intel has also agreed to acquire Chips and Technologies Inc., a San Jose maker of computer graphics cards. The FTC has already contacted Chips officials about the proposed deal. Besides Digital, some other computer companies have complained of alleged unfair competition from Intel.

Some Intel rivals say they don’t understand why the FTC is investigating the company.

Steve Tobak, vice president of corporate marketing for National Semiconductor, maker of the Cyrix chip, a Pentium rival, said he has no problems competing with Intel. Tobak maintains that smaller firms, like Cyrix, can more effectively compete in the market for low-cost computers.

“I think competition in the industry has been good for consumers [who] have benefited from lower prices and better technology,” Tobak said. “We don’t have any problem with them [Intel].”