EU issues a record $1.45B fine to Intel over sales tactics

In a landmark ruling, the European Commission on Wednesday slammed chipmaker Intel with a record $1.45 billion fine for using illegal monopolistic practices..

The Commission found Intel guilty of using rebates to unfairly restrict computers equipped with microprocessors made by rival Advanced Micro Devices from reaching Europe.

Intel CEO Paul Otellini said the company would appeal. He issued a statement saying Intel "takes strong exception" to the ruling, but declined to discuss the rebates.

In the culmination of an investigation that began in 2000, regulators found nothing wrong with Intel offering rebates per se, says Gartner analyst Martin Reynolds. The sanction hinged on evidence that Intel threatened to withhold rebates from certain PC makers and retailers if they declined to shun computers using AMD chips. "The illegal practice wasn't reflected in any contracts," says Reynolds. "It was happening behind closed doors. The problem was the cover-up."

Intel's fine surpassed the $675 million penalty the Commission levied against Microsoft in 2004 for anticompetitive practices associated with distributing its Windows media player and Windows server in Europe. And last year the Commission hit Microsoft with a $1.2 billion fine for not fully complying with the 2004 decision. What's more, Microsoft remains under investigation for allegations that it uses illegal practices to distribute its Internet Explorer web browser in Europe.

In the Intel case, regulators ruled Intel's sales practices in Asia, where most PC manufacturers are located, were subject to European law, if the end result was fewer AMD products available to compete against Intel products in Europe.

"The EU is telling Intel, 'make sure this doesn't happen anywhere else in the world," says Reynolds.

AMD, which brought the original allegations, celebrated. "Intel broke the law and consumers were hurt," said Tom McCoy, AMD executive vice president for legal affairs. "With this ruling, European consumers will enjoy greater choice."

While the specific legal issues are different, Microsoft's ongoing, contentious dealings with European regulators suggests Intel faces a drawn-out battle. Both cases derive from Europe's belief in "ordoliberalism" — competition based on many firms competing against one another to serve the market, says Luke Froeb, a former Federal Trade Commission official.

"If you apply that vision to the chip industry you're going to come up with a very aggressive enforcement posture," says Froeb, who's now a professor at Vanderbilt University's Owen Graduate School of Management. "They'd rather have two chipmakers with higher costs, than one that can realize economies of scale."

Intel, based in Santa Clara, Calif., has about 80% of the world's personal computer microprocessor market and faces just one real rival, AMD, which has its headquarters just three miles from Intel in Sunnyvale, Calif.

The two companies have been fighting for years over what AMD says is Intel's intimidation of computer makers into striking exclusive deals for the chips they use in their new machines.

AMD Chief Executive Dirk Meyer said the decision is "an important step toward establishing a truly competitive market."

"AMD has consistently been a technology innovation leader and we are looking forward to the move from a world in which Intel ruled, to one which is ruled by customers," Meyer said in a statement.

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