Intel Prepares to Do Battle With the Trustbusters

With the Microsoft trial in recess, the second round of high-tech’s antitrust double-header begins Tuesday in Washington when the Federal Trade Commission takes on Intel Corp.

The microprocessor giant faces charges of illegal monopolistic behavior--similar to the claims leveled by the Justice Department against Microsoft. But the Intel suit could have far-reaching effects on the ways large corporations share intellectual property and form partnerships, and on who controls innovation.

Intel is expected to be more deft in its legal presentation than Microsoft has been. But some experts say the FTC may benefit from the simplicity of its case against Intel.

The Microsoft case involves a broad mix of allegations, ranging from exclusionary contracts with personal computer makers meant to stifle competition, to illegally combining the firm’s Web browser into its Windows operating system that comes preloaded on nearly all new PCs. Microsoft is also accused of predatory pricing and deliberate suppression of competing technologies.

In contrast, the Intel case revolves around just two questions: Does Intel hold a monopoly in PC microprocessors? If so, did the company illegally use that power to coerce Compaq Computer Corp., Intergraph Corp. and Digital Equipment--now a division of Compaq--to grant it favorable terms in intellectual property disputes?

“In many ways, Intel is a more important case than Microsoft,” said William Kovacic, a professor of antitrust law at George Washington University. That’s because it could change the rules for how sometime competitors can form alliances of convenience.

“That has great significance for large companies planning collaboration with actual or potential rivals,” Kovacic said.

The FTC, in a legal brief, argued that “in effect, Intel established its own privately administered compulsory licensing regime by which it can acquire at reduced cost any technology that it perceives to be a competitive threat.”

Such actions, the agency says, give Intel an effective lock on innovation in the microprocessor industry--harming competitors and consumers alike.

This alleged coercion strongly resembles actions Microsoft has been accused of--using monopoly power to dictate terms to partners or customers.

Not surprisingly, Intel disagrees. “This bizarre theory is easily shown to be contrary to the evidence,” the firm’s lawyers said in a pretrial brief.

But even if it loses this case, the chip giant would not face the severe consequences that could await its software counterpart.

Despite a modest incursion from the Linux operating system and a renewal in popularity for Apple Computer’s Macintosh, most analysts view Microsoft’s domination of the all-important PC operating system market as impenetrable.

Such dominance means Microsoft could ultimately see itself forcibly split into separate companies--akin to the breakup of AT&T; in 1983 or Standard Oil in 1911.

But for Intel, the penalty would more likely involve a directive to change the way it manages patents and relationships with customers and partners. This can be explained partly by the rapidly changing character of the chip market.

For example, since the FTC filed suit last June, a key Intel competitor has seen its sagging fortunes substantially improve. For the first time, Advanced Micro Devices’ microprocessors outsold Intel’s in the surging retail PC market in January, according to the Reston, Va.-based market analyst PC Data. Nine of the top 11 PC makers now use some AMD chips.

Although Intel still overwhelmingly dominates the larger and more lucrative business market and other sectors, the company will argue in the trial that gains by AMD demonstrate robust competition.

“Intel’s eroding share is an outward sign of a significant degree of instability in the whole [chip] sector,” threatening the company’s market position, Kovacic said.

That market-share vulnerability could also hamper the FTC’s case. The agency must show that Intel actually holds a monopoly or the rest of its accusations fall apart: If there is no monopoly, there cannot be illegal protection of it. But if the FTC can prove its case, the decision would break critical legal ground in the high-tech marketplace.

Still, legal experts say it is risky to build a case that appears to go beyond what previous antitrust cases have established.

“[The FTC lawyers] are not dumb people and they are not fanatics,” but they are overreaching, said Rick Rule, a legal consultant to Microsoft and a former antitrust official in the Reagan administration. “The Intel and Microsoft cases both reflect a troubling approach to antitrust law” based on “distrust of commercial or economic success,” he said.

The FTC also faces the legacy of the Microsoft case--Intel’s legal team has received an object lesson in how not to run a trial. Microsoft’s performance has been riddled with embarrassing miscues, retractions and smoking e-mails.

Intel’s detractors hope the FTC, which is conducting a broad, ongoing investigation of the company’s business practices, will expand its charges. But they predict the agency can win its case even if Intel performs with characteristic finesse.

“The Microsoft case has been a ‘who’s-lying’ case. With Intel the facts of the case are not in dispute,” said an industry executive. “Intel says, ‘We shot the gun. But we think we have a license to kill.’ ”

Charles Piller can be reached via e-mail at charles.piller@latimes.com

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Microsoft and Intel: Two Case Studies

Key issues

*Monopolist?

Microsoft: Holds 85% of the market for PC operating systems and giant shares of other software types.

Intel: Holds 80% of market for PC processors and commanding shares in other PC components.

*Market power

Microsoft: Sets standards in many realms of software, including the lucrative office productivity category.

Intel: Progenitor or gatekeeper for many new PC technologies and system designs.

*Scope of case

Microsoft: Broad and expensive; Microsoft is accused of predatory business practices, tying products together to lock in buyers and attempting to collude with competitors to divide the market.

Intel: Tightly focused; Intel is accused of illegally obtaining or withholding intellectual property to maintain a lock on chip innovation.

*Public perception

Microsoft: Unparalleled power and wealth, plus periodic statements widely viewed as arrogant have harmed company’s image.

Intel: Despite wide-reaching “Intel Inside” ad campaign, many consumers don’t understand the company’s core product.

*Trial performance

Microsoft: Competing factions and loose controls on e-mail created an incriminating record. Embarrassing trial missteps, including retracted testimony, have damaged credibility.

Intel: Internal antitrust training and tightly controlled corporate practices make courtroom bombshells less likely.

*Maximum remedies

Microsoft: Microsoft would be restructured or forced to provide competitors with the basic computer code for Windows.

Intel: Intel would be forced to change the way it forms partnerships and shares information with customers and partners.

Sources: PC Data, Mercury Research