Posted by Written By : Peter S. Kastner
Exclusive to The Portlander
December 28, 2009
The U.S. Federal Trade Commission’s (FTC) antitrust and competitive complaint has already faded from the 24×7 news cycle. In an announcement December 16th entitled ‘FTC Challenges Intel’s Dominance of Worldwide Microprocessor Markets,’ the FTC stated it has sued Intel, charging that it has “illegally used its dominant market position for a decade to stifle competition and strengthen its monopoly.”
A close reading of the FTC’s contemplated relief for Intel’s alleged conduct shows the government mandating the most sweeping changes ever proposed as to how the Intel-compatible computer market works. No surprise that Intel would be hurt badly by these mandates and have to adjust. But these industry changes would also dramatically change the computer ecosystem, and the consequences would not be good for PC consumers.
The nub of the case is how Intel, AMD, and nVidia will compete in the increasingly integrated microprocessor and graphics processor (GPU) market. Both Intel and AMD are over the next year integrating the functions of the GPU into the microprocessor itself, eliminating the “chipset” that today runs integrated graphics in Core 2 and other Intel products.
That hurts nVidia, which makes chipsets with graphics, as well as making discrete graphics cards that compete with AMD’s ATI graphics unit. As in the childhood game of musical chairs, nVidia finds the music has stopped and it lacks a money-making chipset-technology chair to sit on. Meanwhile, AMD and Intel are, as usual, banging head to head bringing new microprocessor architectures to market in 2010 that will have better performance, energy savings, and new technology features.
So let’s take a look at what the FTC proposes, ordered by my assessment of the impact on the industry.
In Paragraph 8, the FTC seeks to prohibit Intel from manufacturing or distributing computer software, hardware, or other products that impair the performance, or apparent performance, of non-Intel microprocessors or GPUs. This remedy is game-changing, and with totally foreseeable consequences. First, more than half of all PCs lack discrete graphics cards with GPUs made by AMD and nVidia. These are mainstream PCs bought by the tens of millions by consumers and businesses. Those buyers do not need, or choose not to pay for, the added graphics capabilities from GPUs. All mainstream Intel PC designs today allow a buyer to add a non-Intel graphics card should they want to do so. However, AMD and nVidia each support multiple graphics cards in one, typically high-end, PC.
Second, to support multiple graphics cards requires a motherboard with considerably more robust electrical power, support chips, and circuit traces — all of which add to PC costs. Intel only supports multiple, full-speed (i.e., PCIe x16) graphics cards with products built around the X58 chipset and sold to enthusiasts. Mainstream and value market PCs cost less partly because they do not support multiple graphics cards running at full x16 speeds. The FTC’s Paragraph 8 would force Intel to the highest common denominator, adding approximately $100 retail to every desktop PC, in supporting multiple, full-speed graphics cards.
Paragraph 8 is also aimed at forcing Intel to make its compilers, which take human-written programs and turn it into computer instructions, able to generate optimum code for AMD microprocessors. Problem is, Intel doesn’t know exactly how AMD’s existing let alone forthcoming computer architectures optimally work. One reason that Intel cannot collaborate with AMD is … antitrust, the FTC’s domain. Note that AMD’s developer site gives explicit instructions for how to use Intel’s compiler to generate code for AMD microprocessors. What more is needed?
This remedy will likely force Intel out of the compiler business or to dumb down the compiler-generated code to suboptimal levels across all platforms. The effect will be computers that run slower, a shame when they can run faster and are crippled for legal reasons alone.
In paragraph 2, the FTC seeks to limit pricing based purchases that exceed 60% of a resellers’ historical purchases during the period the pricing is offered will be presumed to have that effect (of foreclosing rivals from all … of that resellers purchases). As AMD over the past decade has had a 15% to 25% market share, the FTC wants to be the referee of purchases by big OEMs like Dell, HP, and Lenovo if AMD’s market share is less than 40%. That’s likely to slow down new product introductions by OEMs, and create a class of AMD affirmative action products that OEMs will build to satisfy the FTC. And it’s problematic that AMD could double its microprocessor production to the 55 million chips per year level without a glitch. For consumers, it means buy more AMD computers whether you like it or not. The Detroit small car success for the past two decades is an analogy of what I foresee.
Paragraph 17 requires Intel to make available technology … to others, via licensing or other means, upon such terms and conditions as the Commission may order, including but not limited to extensions of terms of current licenses. As the NY Times Bits blog wrote, “For those of you keeping score at home, this remedy could pave the way for a chip war the likes of which we’ve yet to encounter.” Together with Paragraph 18, the Times thinks the FTC would likely grant nVidia a license to manufacture Intel-compatible microprocessors. Adding another X86 chip designer would definitely shake up the PC market, especially if the FTC establishes chip market share quotas per Paragraph 2.
Paragraph 5 prohibits Intel from producing or distributing software or hardware that has the purpose or effect of unreasonably excluding or inhibiting competitive microprocessor or GPU products or complementary products. This would forestall Intel from delivering its discrete graphics Larrabee product, which uses Intel-developed software specific to Larrabee and which will not operate on competing AMD and nVidia graphics cards. It would also keep Intel from delivering an innovative architecture in Larrabee that uses X86 cores to run graphics software instead of the proprietary cores used by AMD and nVidia. While Larrabee is no sure technology winner (and product introduction has been delayed indefinitely), it deserves a fair shot in the competitive marketplace.
Paragraph 6 is a complicated prohibition on pricing practices so that the resulting pricing is well above Intel’s average variable cost plus a contribution to Intel’s fixed sunk costs in an appropriate multiple of that average variable cost. Paragraph 6 will have the effect of raising Intel’s prices — which AMD will profit from with a pricing umbrella effect — while ignoring the fact that Intel’s fixed sunk costs (e.g., semiconductor fabs) eventually are paid off and then become more profitable even while the fabs are building other products. For example, the 45nm fabs that made Core 2 processors for two years are switching now to make integrated graphics cores that marry with 32nm Westmere microprocessors in 2010 mainstream Core i5 and i3 microprocessors. Well-planned reuse of capital equipment is one of Intel’s legitimate profit drivers.
There are more eye-openers. Paragraph 23 prohibits Intel from suing its competitors’ third-party chip fabricators. Really? Even if those fabricators, say, misappropriate Intel’s patents. And without due process for Intel. What happened to the Constitution along the way?
The FTC complaint is replete with references to events that allegedly took place in the early part of the decade, more than two presidential elections ago. There’s a good case to be made that the FTC should not have made this complaint at all. But the FTC did file suit and it’s fair to ask “why now?” And why so long after many of the alleged acts?
The threat to Intel’s business by the FTC complaint is so great and the remedies so draconian (i.e., Paragraph 23) that any outcome short of outright dismissal is likely to end up at the Supreme Court. The issue for the Supremes will be the limits on big technology companies that deliver society-changing innovation and grow big on technology-driven change. Closely watching Intel in the docket are Microsoft, Apple, and Google. In the meantime, consumers can expect higher prices, some confusion, and less discipline in the PC industry as Intel marketing development funds dry up, and the PC ecosystem struggles to play nice while the government gorilla is in the room.
Peter S. Kastner is an information technology industry analyst with over forty years of industry experience. He resides in Westport, Massachusetts.
Copyright © 2009
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