Justice Department Trustbusters Now Expected to Go After Intel

In the wake of the Justice Department move against Microsoft Corp., another huge antitrust action--against microprocessor titan Intel Corp.--looms. The company faces a broad-ranging probe by the Federal Trade Commission.

The investigation began last fall, and industry watchers say that the agency may be ready to present its case against Intel soon.

The FTC is looking into widely shared concerns that the chip maker has used its near-monopoly in PC central processors, and its influence over the creation of industry technology standards, to maintain a stranglehold on the chip business and to seize control over other lucrative markets. Such actions could be found to violate the Sherman Antitrust Act.

The logic of the FTC action is simple, said Nathan Brockwood, a chip industry analyst for Dataquest in San Jose: “Fundamentally, it’s hard to believe that Intel achieved its advantage through fair market practices and that you can’t achieve more competition through creating a more level playing field.”

But Intel spokesman Chuck Mulloy countered: “Our view is that we’ve achieved the success we’ve achieved by complying fully with all the applicable laws.”

Last year Intel took in nearly 80% of industrywide revenues for microprocessors--$18.9 billion, according to Dataquest. The closest competitor, Motorola, took in $1.1 billion.

According to Mercury Research in Scottsdale, Ariz., Intel sells about 82% of all central processors, the brains in PCs, and about 71% of all “chipsets”--processors that control subsidiary PC functions such as memory and communications pathways.

“You look at those numbers and say, ‘What’s wrong here?’ ” Brockwood said. “Especially if you’re someone in the government.”

Intel’s towering market share means that PC vendors have developed a dependence on Intel chips akin to their dependence on Microsoft’s Windows operating systems.

Like Microsoft, Intel has exploited its position to push hard into new areas, such as the markets for memory chips, graphics-acceleration and networking products and motherboards--the basic platform on which chips are housed within computers.

Now the FTC must decide whether this dominance constitutes an illegal monopoly that unfairly stymies competition.

Neither the FTC nor Intel would comment about the specifics of the agency’s investigation. But Intel acknowledges that the probe touches many aspects of its business.

One key issue involves the possibility that Intel pressures computer makers to shun the chips of competitors. Inducements may take the form of exclusive contracts, for example, or rebates for vendors that use only Intel products.

Some critics also suggest that the chip maker uses co-op advertising--in which Intel pays a portion of the cost of computer makers’ ads in exchange for displaying the “Intel Inside” logo prominently--to induce loyalty to Intel as the vendor’s sole chip supplier.

Intel denies any improper actions. And a number of computer makers--including IBM Corp. and Compaq Computer Corp.--use both Intel processors and those produced by competitors Advanced Micro Devices Inc. and the Cyrix subsidiary of National Semiconductor Corp. IBM even manufactures and sells Cyrix-designed chips. Yet IBM and Compaq receive normal treatment from Intel.

Some smaller PC companies, however, privately say that they would not consider an alternative supplier of central processors for fear of endangering their relationship with Intel.

Intel also regularly develops new technologies that later become industry standards. Some critics have suggested that Intel withholds information that would enable competitors to quickly build products based on such new standards. The most prominent example involves a new way of attaching the central processor to the PC.

“In the past, alternative suppliers could make processors that fit into Socket 7, an open industry standard and the same socket the Pentium fit into,” said Mike Feibus, principal analyst at Mercury Research.

This changed with the Pentium II, the latest in Intel’s flagship series of central processors. Pentium II requires a new connection method known as Slot 1, as well as new supporting chipsets. Unlike Socket 7, Intel kept Slot 1 as proprietary, leading critics to suggest the company was attempting to move the PC industry into a direction that only it could control.

It later became clear--albeit after Intel seized a decisive jump on Pentium II product development--that many competing companies can gain access to the Slot 1 technology through a variety of cross-licensing agreements, some of which date back decades. Among key competitors, only AMD appears to be frozen out of Slot 1.

But Intel may have greater vulnerability on another front. In November, Intergraph Corp., a maker of advanced computer workstations, filed a lawsuit charging that Intel improperly withheld technical information required to create competitive products based on Pentium II processors. Intergraph also charged that Intel improperly blocked the supply of Pentium II chips themselves.

Intergraph alleged that Intel acted in reprisal after Intergraph refused to give Intel a free license for a technology that Intergraph had developed. This claim gained credence on April 10, when the U.S. District Court for the Northern District of Alabama granted an injunction sought by Intergraph.

Intel’s Mulloy denied that allegation and said that Intel is open to a settlement while it appeals the ruling.

For PC buyers, however, Intel’s aggressive tactics may seem beside the point, some analysts say.

“It’s hard to see how a consumer has been harmed by Intel’s success,” Dataquest’s Brockwood said. “They realized a long time ago that the only way they could grow is to grow their market.” That has meant cheaper, faster microprocessors year after year.

And AMD and National Semiconductor can blame themselves for some of their troubles. In the last year, sales of low-cost PCs--which those companies specialize in creating chips for--surged dramatically. But manufacturing problems at both companies prevented them from capitalizing fully on their opportunities.

While he supports the FTC probe, National Semiconductor’s vice president for corporate marketing, Steve Tobak, does not view it as “a critical juncture.” Instead, he plans to compete more effectively to supply chips for low-cost PCs.

“If I have to rely on the federal government to enable my business to succeed, then I’ve got a real problem,” Tobak said. And he notes that Intel has maintained a vigilant posture about its antitrust vulnerabilities.

“We try to conduct our business to be fully accordant with the law and provide training to our people to make sure that this is the case,” said Intel spokesman Howard High.

That training seems apparent in the company’s FTC track record. The agency conducted a similarly broad investigation of Intel from 1991 to 1993 but took no action. And earlier this year it allowed Intel to take over two competing chip companies--Chips & Technologies and the chip division of Digital Equipment Corp.--with few restrictions.

Digital completed the sale of its chip division on Monday.

Still, the FTC may view Intel’s growing power as sufficient cause for alarm.

“The lack of viable competition is what paves the way for strong-arm tactics,” said Mercury Research analyst Feibus. “If you have a healthy, competitive industry, the possibility of muscling out your competition goes away.”

Intel shares lost 94 cents to $79.38 on Nasdaq on Monday.