OPINION:
Who Blinked, Intel Or The US? The
Best Guess Is Uncle Sam Made A Hasty Retreat From Its
Antitrust Case
THE BridgeNews FORUM: One of a series of
viewpoints on government regulation.
March 9, 1999
By James V. DeLong
WASHINGTON-The
Federal Trade Commission staff and Intel, the California-based
computer chipmaker, reached a preliminary settlement
of their antitrust case just 24 hours before trial.
The
terms are unknown and will remain secret until reviewed
by the commission itself. But given the great interest
in the case in high-tech circles, there is speculation
on the possible contents of the settlement.
The
best guess is that Intel gave little ground, and that
the interesting issues were left for another day.
The
FTC complaint started from the premise that Intel has
a monopoly on general purpose microprocessor chips.
It then charged that the company tried to maintain this
monopoly with conduct designed to discourage other companies
from developing microprocessor technologies.
The
specific conduct involved Intel's actions in intellectual-property
disputes it had with three of its customers.
IN
EACH CASE, Intel pressured the customer to grant
the chipmaker a license to microprocessor patents developed
by the customer, on pain of being cut off from information
about Intel technology necessary to the customer's core
business.
The
evil of this, according to the FTC, was not the direct
effect on the customers, but that Intel's actions lessened
the incentive for other companies to develop new microprocessor
technologies. The FTC says this served to entrench Intel's
monopoly.
It
would have been a tough case for the FTC to make.
The
first hurdle is the definition of monopoly. The charge
that Intel has a lock on the microprocessor market rests
on a few facts. Intel has about 80 percent of the worldwide
market. Entering that market would require about $250
million in development costs and $1.6 billion for factory
construction.
In
addition, a new entrant into the microprocesor field
would need to cultivate the support of both software
developers and customers.
BUT
THESE facts are not very impressive. An 80 percent
market share sounds good to the newspapers, but absent
some serious barrier to entry, it says little about
real monopoly power-the power to charge a high price.
A
company that has large market share because it charges
low prices is not a monopolist, especially if other,
technically competent companies are circling it waiting
for a sign of weakness.
The
FTC argued the expense of entry-meaning the couple of
billion dollars needed for development and construction-is
prohibitive. But in the high-tech industry that's chicken
feed.
Intel's
revenues exceeded $25 billion last year, and those of
the customers it was supposedly bullying averaged $13
billion. For a shot at Intel's market share, lots of
companies could raise the money in an afternoon.
THIS
LEAVES the FTC with the "network effect"
argument. This theory contends that, once a company
gets a head start in a field, it cannot be overtaken
because software suppliers and customers will all go
with the winner. Thus a competitor has no way to break
the circle.
Network
effect is a neat theory, but like many theories, it
is hard to prove in practice.
The
most important putative networks in our history-in telephones,
electricity and trash collection-were in fact not the
result of true network effects. Rather, these industries
were transformed into monopolies by government fiat,
usually at the behest of private companies.
The
most commonly cited examples of so-called network effect,
such as the VHS videotape system, or the alleged superiority
of the Qwerty keyboard to the Dvorak, have been refuted
by careful researchers.
In
addition, network theory ignores the ability of real
companies to respond according to their strategic interests.
INTEL
WAS accused of bullying Digital Equipment ($14 billion
in annual sales), Compaq ($25 billion) and Intergraph
($1 billion).
Such
large companies are well aware of the risks of being
dependent on one supplier for a crucial component. Individually
and collectively, they have the clout to offset any
network effects if they think the issue crucial, simply
by ensuring that no supplier gets a monopoly.
If
all these hurdles were not enough for the FTC to overcome,
it also had to demonstrate that Intel's actions vis-a-vis
its customers had no legitimate business justification,
but were meant only to extend its monopoly.
This,
too, would have been difficult, given the real disputes
between the parties.
WITH
ALL these problems facing the FTC, the best guess
is that it got mostly fig leaves out of the case. It
is difficult to imagine Intel conceding that it is a
monopolist in any way, shape or form, since doing so
could cause it big problems down the road.
Intel
could have easily agreed, however, not to cut off customers
without legitimate reason.
This
would have allowed the FTC to leave the field with its
colors and arms, postponing the fight over the meaning
of monopoly and network effects for another case-perhaps
against a weaker opponent.
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