FTC action won't aide Intel rivals

By Richard Morochove

First published June 18, 1997

Now that the U.S. Federal Trade Commission (FTC) has let loose its legal cannons against Intel, what comes next for the world's largest chipmaker? While Intel may make some changes in its processor plans, I predict the FTC's action will have little or no effect on competition in the microprocessor industry.

While Microsoft has no qualms about crushing its competitors, Intel appears to be more conscious of the responsibilities as a monopolist. Under former CEO Andy Grove, Intel gained a dominant market share in the microprocessors that are at the heart of every PC, while making surprisingly few enemies.

The FTC's anti-trust action superficially looks like the left hook that follows up on the U.S. Justice Department's right jab at Microsoft. However, the actions are quite different.

The FTC's action is more narrowly based, and accuses Intel of withholding vital information about future processors from Compaq Computer, Digital Equipment and Intergraph Corp.

One way or another, these three companies were involved in intellectual property disputes with Intel. For example, in May 1997 Digital accused Intel of illegally using Alpha chip technology to boost the performance of Intel's Pentium processors. In retaliation, Intel withheld information about upcoming processors that Digital needed in order to design new models of PCs.

All three examples cited in the FTC suit focus on Intel's relationship with its customers, not its competitors. So this action is unlikely to do anything to help Intel rivals such as the Cyrix group of National Semiconductor or Advanced Micro Devices (AMD).

The Justice Department's case against Microsoft, on the other hand, is clearly aimed at increasing competition in the software business, and could help Netscape in its Internet software battle with Microsoft.

How will Intel react? The company has already announced it will speed up the release of 32-bit processors by a quarter or two, although it claims this is due to development efficiencies and is not a reaction to the suit. In this way, Intel hopes to stay a few steps ahead of its rivals nipping at its heels at the low-end of the chip market.

In the high end of the processor market, Intel faces an interesting scenario as two of the companies it is alleged to have wronged merge into one. Last week, Compaq Computer received final approval of its buyout of Digital Equipment.

Now Compaq, the world's largest PC maker, will be both Intel's largest customer for processors and an Intel competitor with its acquisition of Digital's high-end 64-bit Alpha processor. Intel recently announced a delay in the shipment of its next generation 64-bit chip, code-named Merced, that would compete directly against Alpha.

Compaq CEO Eckhard Pfeiffer announced last week that Compaq will continue to develop DEC's Alpha processor after the buyout. The delay in Intel's Merced could give Compaq a leg up over PC-making rivals, such as Hewlett-Packard.

Before Compaq finalized its buyout, Digital had resolved its problems with Intel and rather neatly disposed of under performing assets. DEC sold Alpha-related semiconductor facilities in the U.S. and Israel to Intel for about $600 million (U.S.). Intel also agreed to absorb about 1,800 former Digital workers employed at these locations.

Intel will now build Alpha chips for Compaq in the former Digital facilities. A patent cross-licensing agreement gives Intel access to Alpha technology.

Intel's biggest problem is not the FTC suit nor the competition posed by the Alpha chip nor the cheap processors from Cyrix or AMD.

Intel has long sought to stimulate demand for more powerful chips by encouraging the development of new applications and PC services.

The chipmaker has invested close to a billion dollars in dozens of companies like MGI Software, the Toronto-area developer of digital photo and video editing software. Intel has bought into many media and entertainment services, such as CNET, which produces both a television program and a series of Web sites.

Intel's theory is that high-bandwidth applications that suck up processor cycles and will encourage users to upgrade to PCs with more powerful Intel chips.

But what if we don't need to upgrade our PCs as frequently as in the past? Does it really matter if the spell-checking routine in a word processor finishes a fraction of a second faster with a Pentium II processor inside?

The growth in demand for home PC's that sell for $1,500 or less has resulted in the average price of a PC falling for the first time in years. This trend to lower-cost machines now appears to be spilling over into the business PC and server market. Many users seem satisfied with the current mix of power and capabilities and appear unwilling to pay more for the latest technology.

Intel bases its business on the rapid obsolescence of technology that encourages computer users to buy new machines every few years. Unlike most CEOs, Intel's Craig Barrett biggest worry is the happy consumer, perfectly content with a current PC. CW