Obama administration, new legal research could jack up antitrust heat on Intel

Recent actions show U.S. taking closer look at companies with market dominance

Nvidia Inc.'s charge that sales of its Ion graphics platform are being unfairly hampered by Intel Corp.'s bundling and predatory pricing tactics have so far gained the graphics vendor some public sympathy, but little more.

That could change, according to some legal experts, who point to a new antitrust climate in Washington under the Obama administration, as well as fresh legal scholarship that overturns the assumptions held by regulatory officials in the past eight years.

In stark contrast to its determined prosecution of Microsoft Corp. during the Clinton era, the U.S. Department of Justice did not bring a single antitrust case against a dominant company under President George W. Bush.

Rather, the DOJ "kept trying to build these incredible safe harbors of conduct for dominant firms," said David Balto, a senior fellow at the Center for American Progress, a liberal think tank, and a former policy director at the Federal Trade Commission. By the end of the Bush era, "that safe harbor had become [as big as] the outer continental shelf."

That has flipped under new DOJ antitrust chief Christine Varney, who, according to The New York Times, has "scrapped the Bush administration's monopoly guidelines, which had sharply limited the government's ability to prosecute large corporations that used their market dominance to elbow out competitors."

"The new administration is saying, 'That's not the way we're going to look at the world anymore, because it was a neutering and nullification of antitrust,' " said Ed Black, president of the Washington-based Computer & Communications Industry Association, which counts many high-tech vendors among its members and has taken antitrust stances against Intel and IBM.

Varney has also hired a number of intervention-minded deputies, including UC Berkeley professor Carl Shapiro, who worked on the DOJ's case against Microsoft in the late 1990s.

Intel says it's under no greater scrutiny than before. But lawyers such as Randy Gordon, a Dallas-based antitrust lawyer at Gardere Wynne Sewell LLP, said, "I suspect that we'll see many firms with positions of dominance put under the microscope."

Action on that front heated up last week. The U.S. Senate began holding hearings on whether exclusive deals between wireless carriers and phone makers, such as Apple Inc.'s iPhone deal with AT&T Inc., are good for the industry and consumers. The Federal Communications Commission also said it would investigate Apple for blocking a telephony app called Google Voice from the iPhone.

Prompted by a lawsuit brought by Advanced Micro Devices Inc. in 2005, the FTC began investigating Intel on antitrust grounds last year.

The DOJ has started to investigate a number of companies, including Google Inc., for its treatment of book publishers.

"This is going to have a dynamic effect on Silicon Valley," Balto said. "Intel is going to be front and center for agencies."

A twist in legal theory

Another factor that could weigh against the chip maker is new scholarship that seeks to overturn dominant legal theory that critics say has limited the scope of U.S. antitrust law, known as the Sherman Act.

Most prominent among these, according to Gary Reback, the legendary Silicon Valley antitrust lawyer who jousted and won against Microsoft in the 1990s, is a forthcoming article by Harvard Law School professor Einer Elhauge, titled "Tying, Bundled Discounts, and the Death of the Single Monopoly Profit Theory."

Elhauge, who was considered a leading candidate for Varney's antitrust job at the DOJ, argues that companies with "market power" that offer bundled discounts so that buying two or more products together is cheaper than buying them separately "can produce anticompetitive effects."

This test, he writes, is more accurate than more conventional ones, such as comparing a product's price against the cost of making it, which is often used to judge "predatory pricing."

Elhauge's article, which analyzes economic theory and precedent legal cases, does not mention Intel. "I actually don't know anything about the Atom-ION situation," he wrote in an e-mail.

But offering anticompetitive bundled discounts is exactly what Nvidia CEO Jen-Hsun Huang has accused Intel of doing with its Atom CPU and graphic chips. According to Huang, Intel sells its Atom CPU alone for $45 but sells an integrated chip set, which includes an Intel graphics chip, for just $25.

Huang's complaints have been echoed by some publications, such as DigitTimes.com, that are close to PC makers in Taiwan, which buy the majority of the Atom chips.

Nvidia's Ion platform, which pairs Intel's Atom CPU with Nvidia's 9400M graphics chip, has been slow to catch on with PC makers, even though Nvidia's chip is widely considered more powerful (they are used in Apple's aluminum MacBook Pros).

Customers -- both PC makers and netbook buyers -- may enjoy lower prices in the short run, Balto said, but when used by a dominant company such as Intel, bundled discounts will unfairly drive out smaller competitors, with the result that "in the long term, customers will end up paying more."

Nvidia, which is involved in several lawsuits against Intel, though none specifically involving Ion, declined to comment for this article.

But Reback said in an e-mail that Elhauge's article "would make [Nvidia's] arguments a lot easier."

Intel spokesman Chuck Mulloy vigorously disagreed.

"[Elhauge's] article has zero applicability to Intel whatsoever, and there's no basis for anyone to reach that conclusion," he said. "The article certainly has merit, but it is not as simple as it is being portrayed. It's an academic discussion."

Mulloy declined to confirm or deny the prices cited by Nvidia's Huang but said any bundling-related discounts Intel offers "are consistent with legal practices."

A potential gain for AMD

According to Balto, Intel is already fighting back through "a massive lobbying campaign to cool the FTC's jets."

"Their message is, 'We are the linchpin to the economic recovery, and if you are foolish enough to sue us, the economy will collapse and we'll all go back to the Stone Age,' " Balto said.

Mulloy acknowledged that Intel has beefed up its D.C. team in the past year, though he said they are there to help push Intel's broad "innovation agenda."

Rival AMD, meanwhile, stands to gain more from Intel's potential legal vulnerability than Nvidia.

The civil lawsuit filed by AMD, the long-standing second banana in the CPU market against Intel, is expected to go to trial next year in Delaware.

AMD already indirectly won when Intel was fined $1.44 billion in May by the European Commission for anticompetitive behavior against AMD. Intel was also fined $25 million in South Korea last year. The company has said it will appeal in both cases.

Some experts, such as Gordon, say that the EC ruling has little bearing in the U.S., because of different laws in Europe that explicitly favor underdogs.

"In the U.S., we probably wouldn't get too worked up if a small retailer were run out of business, as long as there were plenty of other competitors," Gordon said. "My sense is that the EU would be less likely to indulge that presumption."

"I strongly disagree," Balto said. "I think mainstream U.S. antitrust law would suggest what Intel does is a violation of the Sherman Act." Moreover, Balto said overseas antitrust rulings have a big impact on domestic investigations such as the FTC's.

"American enforcers will look at what foreign officials do," he said.

Copyright © 2009 IDG Communications, Inc.

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