Read the following article, and answer the following questions. 2 pages, the whole.

On November 12, 2009, Intel Corp. gave Advanced Micro

Devices (AMD) $1.25 billion to settle a lawsuit AMD

filed against it in 2005. Intel’s CEO Paul Otellini said

he agreed to pay $1.25 billion to settle AMD’s lawsuit

because he no longer felt the “time and money [spent

fighting it] makes sense.” 1 AMD’s lawsuit accused Intel

of being a monopoly and of using its monopoly power to

unfairly keep computer companies from buying AMD’s

microprocessors. With about 70 percent of the market,

Intel Corp. is the world’s largest manufacturer of personal

computer (PC) “microprocessors”—also called

“computer chips,” “microchips,” or “processors”—tiny

electronic devices that serve as the “brain” of a personal

computer and carries out its basic operations. As

the world’s second largest maker of PC microprocessors,

AMD is Intel’s only real competitor, although it

holds only about 20 percent of the PC processor market.

It is difficult for other companies to get into the

business of making PC microprocessors because of

several “barriers to entry.” First, Intel and AMD hold

the patents for making the kind of microprocessors

almost all personal computers use. Second, it costs several

billion dollars to build facilities for making microprocessors.

Third, Intel and AMD are so big and experienced

that they can now make microprocessors for a lot less

than a new company could, so if a new company tried to

enter the market its prices would likely not be competitive

with Intel’s or AMD’s.

AMD was not the only one that had accused Intel of

using monopoly power to stifle competition. On May 5,

2009, the European Commission fined Intel a record $1.5

billion and said the company had used its monopoly power

to unfairly block AMD from the market. On November 4,

2009, New York Attorney General Andrew Cuomo sued

Intel for harming New York’s consumers by using its monopoly

power to keep computer makers from buying better

AMD microprocessors. In June, 2008, South Korea’s

Fair Trade Commission ruled that Intel had used its monopoly

power in violation of its antitrust laws. In 2005, Japan’s

Fair Trade Commission ruled that Intel had violated

Japanese antitrust laws by paying companies to buy all or

almost all of their processors exclusively from Intel.

230 THE MARKET AND BUSINESS

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ETHICS IN THE MARKETPLACE 231

Many of the activities Intel was being blamed for

originated in a strategic mistake the company made in

the late 1990s when it invested hundreds of millions of

dollars developing a new type of microprocessor that

would not use “x86 technology.” x86 technology consists

of certain instructions that are built into so-called

“x86 microprocessors.” All microprocessors must contain

“instructions” that allow them to “read” and run software

programs like games, word-processors, or web browsers.

Because all x86 microprocessors contain the same

instructions, the newest x86 microprocessors can generally

read and use the same data and programs that ran on

older x86 microprocessors. This means that when a customer

who has been using a computer with an x86 processor

buys a new computer with a more advanced x86

microprocessor, he or she does not have to throw away

all his or her old programs and data because they will still

work on the new computer.

This ability of each new generation of x86 microprocessors

to run most of the programs that previous

generations of x86 microprocessors could run is a major

advantage for both consumers and businesses alike.

However, from Intel’s perspective, x86 microprocessors

have a major disadvantage: AMD can legally make x86

microprocessors so Intel is forced to compete with AMD.

Intel’s biggest nightmare was that AMD someday might

come up with an x86 microprocessor that was faster and

more powerful than any of Intel’s and then take over the

market.

So when it invested in a new generation of microprocessors

in the 1990s, Intel decided to develop and patent

a microprocessor that did not use x86 technology. Since

Intel alone would hold the patent for this new non-x86

processor, AMD would be legally barred from making it.

With luck, Intel might eventually have the entire pc processor

market to itself.

Intel called its new pc processor the “Itanium” and it

was faster and more powerful than all previous generations

of pc processors, but there was a problem. Since the Itanium

processor did not use x86 technology, all software

designed to run on current and older x86 processors would

not work on the new Itanium unless the user first ran an

“emulation” program that, in effect, forced the Itanium

to imitate an x86 processor. But the emulation program

slowed down the programs designed for x86 processors,

sometimes to a frustrating crawl. This meant that when a

consumer or business bought a new computer with the Itanium

processor inside, its current software and data would

not work at all well on the new computer. This was a major

deterrent for buyers.

AMD had also developed a more advanced generation

of PC processors during the 1990s. But AMD decided

to stick with the x86 technology so its new processor

could run software designed for x86 processors without

using an emulation program. AMD called its new processor

the Athlon. Since the Athlon was not slowed down by

an emulation program when it ran x86 programs, all x86

programs ran extremely fast and smoothly on computers

equipped with AMD’s new processor. Not only could

AMD’s Athlon run x86 programs much faster and better

than Intel’s Itanium, it also used less electricity and AMD

sold it for less than the Itanium. Intel’s worse nightmare

had come true.

When AMD and Intel marketed their new microprocessors

in 1999, reviewers and users raved about AMD’s

fast and low-priced Athlon and heaped scorn on Intel’s

clunky Itanium. PC manufacturers flocked to put AMD’s

processor into their new computers and AMD’s market

share grew from about 9 percent to about 25 percent of

the PC processor market, while Intel’s fell from 90 percent

to 74 percent.

But in 2003 and 2004, AMD’s sales hit a wall. Computer

manufacturers suddenly refused to buy AMD’s

processors. In 2002, Sony had put AMD’s Athlon into

23 percent of its computers; by 2004 it had stopped

using the Athlon completely. NEC went from using the

Athlon in 84 percent of its desktop computers, to using

it in virtually none. Toshiba went from using it in

15 percent of its computers in 2000, to using it in none

by 2001. 2 Altogether, AMD’s share of the Japanese PC

processor market fell from 25 percent in 2002 to 9 percent

in 2004.

What had happened? Tom McCoy, AMD’s executive

vice president for legal affairs, claimed in an article that

the drop in orders for Athlon chips was “a matter of sheer

exercise of monopoly power” by Intel. 3 McCoy claimed

that Intel paid the Japanese companies—Sony, NEC, and

Toshiba—millions of dollars in “rebates” provided they

stopped buying AMD’s microprocessors and used only

Intel microprocessors inside their computers. But these

payments, McCoy claimed, were not really rebates. A true

rebate is a payment based on the number of products a

customer purchases, and so are in effect discounts that are

paid after the customer buys the product, unlike regular

discounts which are subtracted from the price before the

purchase. But the payments Intel was giving computer

makers, McCoy asserted, were not related to the number

of processors they bought. Instead, Intel handed over

these payments when a company agreed to stop buying

from AMD, regardless of the number of processors they

subsequently purchased.

Moreover, McCoy wrote, Intel threatened companies

by warning them that if they did not stop using

AMD’s microprocessors, Intel might stop supplying

them with any microprocessors at all. The threat was

a powerful one because even if they used AMD’s microprocessors

on some of their top-quality computers,

every computer manufacturer still depended on Intel

232 THE MARKET AND BUSINESS

for the microprocessors in all their other computers. 4

Because of its small size, AMD could not provide the

full range of microprocessors that the larger companies

needed.

Convinced that Intel was using unfair and illegal

means to block them out of the market, AMD sued Intel

on June 27, 2005. Intel’s general legal counsel, Bruce

Sewell, responded to AMD’s claims by arguing that the

reason computer makers stopped buying AMD’s microchips

was because once they started using them in large

numbers and running many different programs on them,

they found AMD chips did not run the programs as fast as

they had first appeared to. “When AMD has good parts,

they do fine,” said Bruce Sewell, “When AMD has lousy

parts, they don’t do so well. That’s what a competitive

market is all about.”

Bruce Sewell also defended Intel’s rebates. If it is not

wrong, he said, for a small company to build loyal customers

by giving them more rebates when they agree to

use your products exclusively, why should it be wrong for

a larger company to do the same? Moreover, rebates in

effect lowered the price of its computer chips and what

was wrong with that? Ultimately, didn’t that benefit the

consumer? And why was it so important to relate rebates

to the number of units a customer buys? If Intel gave

larger rebates to those companies that agreed to use its

products exclusively, and smaller rebates to those companies

that would not make the same commitment, what

was wrong with that? Wasn’t a company’s agreement to

use Intel as its exclusive supplier valuable to Intel and

so shouldn’t Intel be allowed to reward that company

with larger rebates than the discounts it offered other

companies?

Because the AMD lawsuit was complicated and

required gathering and reviewing a great deal of documentary

evidence, it had still not gone to trial by the

end of 2009. By then, however, AMD’s allegations had

convinced several foreign governments—including the

European Union, South Korea, and Japan—that they

should investigate Intel and their investigations ended

with substantial fines of Intel for violating antitrust laws.

The United States, however, did very little until, toward

the end of 2009, the U.S. Federal Trade Commission

(FTC) sued Intel for “illegal monopolization,” “unfair

methods of competition,” and “deceptive acts and practices

in commerce.” 5

The FTC said in its suit that its investigations

had discovered what Intel’s legal counsel Bruce Sewell

had suggested: some software programs ran slowly on

AMD’s processors. But the reason was not because

AMD’s processors were inherently slow. They had

found that Intel had changed the programs sold by software

companies so that their programs would not work

well on computers using AMD’s computer chips. All

software companies use “compilers” to convert their

programs into a form that will run on particular kinds

of computer chips. The compilers are provided by the

companies that make the chips, in this case Intel and

AMD, who are each supposed to provide compilers that

will allow programs to run on both their processors. But

in 2003, the FTC said, Intel changed its compilers so

that programs compiled with Intel’s compilers would

run fine on Intel processors, but would run slowly or

poorly on AMD’s. Without their knowledge, when software

companies used Intel’s compilers to process one of

their programs, Intel’s compiler secretly inserted bugs

into the program that slowed it when it ran on an AMD

processor, but not on an Intel processor. Customers

and reviewers blamed AMD’s processor when their new

programs did not run well on a computer that had an

AMD chip inside. 6

The FTC also claimed that Intel had provided software

companies with “libraries” of software code that

were also designed to trip up programs when they ran

on AMD microchips. The software code the FTC was

talking about were short bits of software that carry out

certain frequently used, but routine operations on x-86

processors. Software engineers insert these short bits

of code into their programs instead of writing them out

each time they need them. Intel provided software engineers

with “libraries” consisting of dozens of these bits

of code. However, the FTC claimed, Intel changed the

software codes in its library so they would not work well

on AMD processors. Consumers and reviewers again

blamed AMD’s chips when a program containing Intel’s

codes did not run well on a computer that used an AMD

microchips. 7

The FTC also said that Intel had paid computer makers

to boycott AMD’s processors by giving them what Intel

called “rebates” although these payments required only

that a company agree not to buy AMD processors and

were unrelated to the amount the company bought. The

computer manufacturer Dell, Inc., was a good example of

how Intel paid computer makers to boycott AMD. Intel

had began making significant quarterly “rebates” to computer

manufacturer Dell, Inc. in 2001, and Dell at that

time stopped using AMD’s processors even though many

of its customers said they wanted computers with AMD’s

processor.

Dell, which was founded in 1984 by its current CEO,

Michael Dell, who was then a student at the University of

Texas at Austin, began when he started selling computers

out of his dorm room. By 2001, Dell had become the

largest PC manufacturer in the world and held 13 percent

of the worldwide PC market. The company finished 2001

with a net income of $2.24 billion, its largest so far.

In 2002, according to a Dell memo, Dell’s chief operating

officer (COO) met with several Intel officials. Before

ETHICS IN THE MARKETPLACE 233

the meeting, Dell’s lead negotiator had explained what he

expected Intel’s officials would say to Dell’s COO: “without

being blatant [Intel] will make it clear that Dell won’t

get more [payments] if we do [use] AMD [processors].

We’ll get less and someone else will get ours.” 8 During the

meeting Intel officials said they were willing to do “whatever

it takes” to get Dell not to use any AMD processors

in its computers. According to the memo, Intel agreed at

the meeting that its quarterly payments to Dell “should

increase from the $70 million this quarter to $100 million.”

9 But Dell had to continue to refuse to use AMD’s

processors. 10

It was not difficult for Intel to pay the hundreds of

millions of dollars it was giving Dell. Intel had unusually

high profit margins of 50 percent that allowed it

to accumulate $10.3 billion of cash at the end of 2001,

and by the end of 2005 it held $14.8 billion of cash. In a

February, 2004 email, Michael Dell remarked on Intel’s

profitability:

[Intel’s] profits in the 2nd half of 2001 were

$1.397 billion on revenues of $13.528 billion.

In the 2nd half of 2003 they were $4.885 billion

on revenues of $16.574 billion. In other words

their sales went up 22.5% and their profits went

up 350%! Or said another way, their revenues

went up $3.046 billion and their profits went

up $3,488 billion!! Not even Microsoft can do

that. 11

Although many smaller companies started using

AMD’s chips, Dell feared retaliation from Intel if it

tried to do the same. In an email, a Dell executive noted

that if “Dell joins the AMD exodus” the consequences

would be costly for Dell. He noted that Intel’s CEO and

Chairman “are prepared for jihad if Dell joins the AMD

exodus. We will get ZERO [payments] for at least one

quarter while Intel ‘investigates the details’—there’s no

legal/moral/threatening means for us to apply and avoid

this.” 12

Although Dell complained that its refusal to use

ADM processors was hurting its sales, Intel kept Dell

loyal, throughout 2004, by increasing its quarterly

payments to $300 million per quarter, an amount equal

to almost a third of Dell’s quarterly net income and

apparently enough to compensate Dell for any sales

declines.

But Dell continued to lose market share and its CEO,

Michael Dell, became increasingly frustrated. On November

4, 2005, Intel’s CEO, Paul Otellini wrote an email saying

that he had just received “one of the most emotional

calls I have ever, ever had with [Michael Dell].” Otellini

noted that “[Michael Dell] opened by saying ‘I am tired of

losing business’. . . He repeated it 3–4 times. I said nothing

and waited. [He said] he has been traveling around the

USA. He feels they are losing all the high margin business

to AMD-based [computers]. Dell is no longer seen

as a thought leader.” 13 A week later, Michael Dell sent

an email to Otellini complaining that “We have lost the

performance leadership and it’s seriously impacting our

business in several areas.” Otellini responded to Dell’s

complaints by pointing out how much Intel was paying

Dell: “We are [now] transferring over $1 billion per year

to Dell for its efforts. This was judged by your team to be

more than sufficient to compensate for the competitive issue.”

14 On November 25, Michael Dell wrote in an email

to Otellini that “None of the current benchmarks and reviews

say that Intel-based systems are better than AMD.

We are losing the hearts, minds and wallets of our best

customers.” 15

In spite of realizing that boycotting AMD’s processors

was hurting its revenues, Dell remained so loyal to Intel

that in February, 2006, Otellini joked that Dell’s CEO

was “The best friend money can buy.” 16 Intel continued

to increase its payments to Dell through 2005 and 2006

until they reached a high of $805 million a quarter in early

2006, an amount equal to 104 percent of Dell’s net income

per quarter that year.

But 2006 was the year Dell finally broke away from

its agreement to not use AMD processors. That year

it purchased Alienware, a computer manufacturer that

made high-end gaming computers with AMD microprocessors.

In April of that year Michael Dell sent an email

to his top executives which said: “We have been looking

at the situation for a long time, and have decided

to introduce a broad range of AMD based systems into

our product line to provide the choice our customers are

asking for.” In the second quarter of the year, perhaps

testing Intel’s reaction, Dell announced a single new line

of high-end computers with AMD chips inside. That

quarter its payments from Intel dropped to $554 million.

The next quarter Dell announced additional lines of PCs

with AMD processors inside and Intel paid it only $200

million.

Intel’s Board Chair told Intel’s CEO that the company

should respond harshly to Dell’s actions: “I think you

should reply in kind. Not a time for weakness on our part.

Stop writing checks immediately and put them back on

list prices [i.e., on prices with no discounts or rebates]. 17

The next day Intel CEO Otellini instructed his people

that “We should be prepared to remove all [payments] and

related programs. Post haste . . . then we ought to enter

negotiations.”

Now subject to Intel’s punishment, Dell received

no more “rebates.” In 2007, Dell’s net income fell to

$2.58 billion, down from $3.57 billion in 2006. The

company recovered a bit in 2008 when it posted a net

income of $2.95 billion, but then it began a downward

234 THE MARKET AND BUSINESS

slide to $2.48 billion in 2009 and $1.43 billion in 2010.

Between 2001 and 2006, Intel had pumped an estimated

total of about $6 billion into Dell’s income figures. Because

Dell had not reported that most of its profits during

those years were cash it was receiving from Intel,

the U.S. Securities and Exchange Commission (SEC)

accused Dell and its officers of deceiving investors who

had been told by the company that it’s high profits were

due to its ultra-efficient management of its supply chain,

its direct-sales strategy, its cost reduction initiatives, and

the declining costs of computer parts. 18 Dell had become

one of the most admired companies in America because

it was falsely assumed that its strong profits were due to

the company’s management skills.

Intel pressured other big companies, like HP and

IBM, into refusing to use AMD processors. Unlike

Dell, HP and IBM did not agree to completely boycott

AMD’s processors. In HP’s case, Intel got HP

to agree to limit its purchases of AMD processors to

5 percent or less, and Intel agreed to give HP a “rebate”

of $130 million, spread out over a year. 19 IBM agreed

to only use AMD processors in its “High Performance

Computers.” 20

The FTC’s lawsuit against Intel never made it to

court. On Wednesday, August 4, 2010, the FTC announced

that without admitting guilt, Intel had agreed

to settle the FTC’s antitrust lawsuit. In a press release the

FTC wrote that under the settlement, “Intel will be prohibited

from conditioning benefits to computer makers

in exchange for their promise to buy chips from Intel exclusively

or to refuse to buy chips from others; and [from]

retaliating against computer makers if they do business

with non-Intel suppliers by withholding benefits from

them.” In addition, Intel was prohibited from using its

compilers or its libraries of software code to inhibit the

ability of programs to run on competitors’ microprocessors.

Some observers argued that the restrictions of the

settlement no longer mattered since Intel had once again

taken the lead in the x86 processor market and AMD was

again a trailing competitor. In the first quarter of 2006,

according to CPU Benchmarks, AMD’s market share

had climbed as high as 48 percent and Intel’s had fallen

to 51 percent. But AMD’s share dropped after that and

by 2011, Intel had 71 percent of the x86 microprocessor

1. In your judgment is Intel a “monopoly”? Did Intel

use monopoly-like power; in other words, did Intel

achieve its objectives by relying on power that it had

due to its control of a large portion of the market? Explain

your answers.

2. In your judgment, were Intel’s rebates ethical or unethical?

Explain your answer.

3. Was it unethical for Intel to use its compilers and its

libraries of software code in the way it did, or is this

permissible for companies in a free market economy?

Explain your answer.

4. Were Intel’s rebates unethical? Explain why or why not.

5. In your view, did Intel violate either of the two key

sections of the Sherman Antitrust Act? Explain.