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Posted 7/11/2005
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Does Intel win with technology -- or threats?
Advanced Micro Devices' suit alleges it's not the great chips that keep customers coming back to Intel; it's the strong-arm tactics. Here are some of the details.
By Bill Fleckenstein
I know I have spilled a lot of ink on the subject of Advanced Micro Devices vs. Intel (INTC, news, msgs). But I have to take the subject up again.
I think the lawsuit Advanced Micro Devices (AMD, news, msgs) filed against Intel on June 27 is potentially a very significant event. It's not simply a loser's lament or a frivolous suit in which one company sues another for small-time gains (as we see fairly regularly among technology companies).
(For other columns on the topic, check here and here .)
AMD's suit should be required reading for all those folks interested in the subject. Here, I want to share a few examples of the practices cited and executives named in the suit.
I'll start with this comment by Ted Waitt, then CEO of Gateway (GTW, news, msgs), to an AMD executive on Intel's offer of large sums of money not to deal with AMD: "If by dropping you, I become profitable, that is what I will do." (Shortly thereafter, Gateway quit doing business with AMD.)
Further, says the suit: "According to Gateway executives, their Company has paid a high price for even its limited AMD dealings. They claim that Intel has beaten them into 'guacamole' in retaliation." That happened after Gateway built an AMD-powered model at Circuit City's (CC, news, msgs) request
A 64-bit bully
Continuing on, the suit alleges in some detail that Intel interfered with AMD's attempt to do business with Hewlett-Packard (HPQ, news, msgs):
"Eager to break into the commercial market, and to earn a place in H-P's successful 'Evo' product line, AMD agreed instead to provide H-P with the first million microprocessors for free, in an attempt to overcome Intel's financial hold over H-P. On the eve of the launch, H-P disclosed its plan to Intel, which told H-P it considered AMD's entry into H-P's commercial line a 'Richter 10' event. . . . Intel went so far as to pressure H-P's senior management to consider firing the H-P executive who spearheaded the AMD commercial desktop proposal."
Related news and commentary on MSN Money
On the subject of coercion, I thought that a comment by Mike Capellas, former CEO of Compaq, was quite potent. Capellas said he "had a gun to his head" when he told an AMD executive that he had to stop buying its processors, the suit says.
Boss Barrett pays a visit
However, I think the most embarrassing allegation was made by Acer, the Taiwan-based computer maker, on the September 2003 launch for AMD's Athlon 64 chip. Acer had committed to support the chip. According to the suit,
"Days before the event, Intel CEO Craig Barrett visited Acer's Chairman, CEO and President in Taiwan, expressed to them Intel's 'concern' and said Acer would suffer 'severe consequences' if it publicly supported AMD's launch. The Barrett visit coincided with an unexplained delay by Intel providing $15-20 million in market development funds owed to Acer. As a result, Acer withdrew from the launch in the U.S. and Taiwan and pulled its promotional materials. Then, the suit says, Intel banned AMD's use of the video, and delayed the announcement of its Athlon 64-powered computers. Acer's President subsequently reported that the only thing different about Intel's threats was the messenger -- they were 'usually done by lower ranking managers,' not Intel's CEO."
That gives you some flavor of Intel's alleged tactics.
Strong-arming vs. long arm of Japanese law
This lawsuit is as potent as it is because AMD was able to go to school, if you will, on discovery done by the Japanese government on Intel's strong-arm tactics vs. Sony (SNE, news, msgs), Toshiba (TOSBF, news, msgs), NEC (NIPNF, news, msgs), Fujitsu (FJTSY, news, msgs) and Hitachi (HIT, news, msgs). On March 8, the Japanese Fair Trade Commission recommended that Intel be sanctioned for its "exclusionary misconduct." At the end of the month, Intel said it would agree to the commission's recommendations.
Thus, in addition to whatever information AMD may have unearthed on its own, it was able to both corroborate that information and, perhaps, gather new evidence, thanks to what the Japanese were able to uncover. (I should note that the European Commission is conducting its own investigation.)
Intel excoriation, AMD affirmation
Industry executives are in a tricky position. If they did not believe that AMD was a viable source for parts, they'd be extremely reticent to discuss in public what Intel had done to them -- or threatened to do to them. Therefore, I think this is a powerful statement on the part of industry executives who have put themselves and their companies at some risk to detail Intel's tactics.
Were they not fairly certain that (a) AMD is a viable competitor and (b) the light of day might stop Intel's tactics, I doubt we would see the specific instances cited in AMD's complaint. (On the conference call to discuss this suit, AMD said that it was extremely well received by its customers, as no one wants to be held hostage. AMD officials also said the company had not received one negative comment from a customer or business partner. However, in all fairness, that might change over time.)
As one can see from reading this, Intel seems quite threatened by AMD's Athlon, Opteron and Turion lines and appears desperate to thwart with muscle what it has been unable to overcome with technology. I have long believed that Intel is essentially a marketing (muscle?) machine, not a technological powerhouse.
A monopoly in the unmaking
If the mere threat of this suit causes Intel to tone down its tactics (which I expect to occur), that will help AMD increase its own market share. The latter has grown recently, despite these barriers thrown up by Intel. Any sort of level playing field will also make AMD's life better and expose Intel for what it is -- a technological also-ran.
Folks might remember a point I made in my May 16 column that Mort Topfer, Dell's (DELL, news, msgs) former vice chairman, is on the board of AMD. Thus, he would obviously be aware of any tactics that Intel may have previously used with Dell, and obviously, Intel knows that AMD has Mort on the board.
Meanwhile, the information contained in the suit only serves to enhance my view of the two companies. Though I am not short Intel at the moment, I continue to hold puts. The filing of the suit only increases my desire to reinstitute my short position and buy more puts sometime in the next few weeks. But, to be clear: That doesn't mean anyone else should do what I do.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckensteincapital.com Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of MSN Money. At the time of publication, Fleckenstein was long AMD and Intel puts.
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