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EU Imposes Record $1.45 Billion Fine On Intel

May 13, 2009

Intel Corp was fined by the European Commission a record $1.45 billion on Wednesday and directed to freeze illegal rebates along with any other practices being used to beat out its competition, Advanced Micro Devices (AMD).

The Commission found that the world’s biggest chipmaker, Intel, paid to have computer manufacturers and retailers to not introduce products using AMD chips, and offered illegal rebates to encourage the use of Intel chips as well as paid a retailer to stock computers with Intel chips.

After an eight-year investigation, the antitrust fine was finally imposed making it the largest amount the EU has fined any one company.

The fine was welcomed by AMD, which had lodged complaints in 2000, 2003 and 2006.

“The EU decision will shift the power from an abusive monopolist to computer makers, retailers and above all PC consumers,” said Giuliano Meroni, AMD’s European president.

Financial analysts believe Intel would be able to maintain its market dominance but that the EU’s verdict could help AMD boost its market share.

Last year, Intel was responsible for 80.5% of the microprocessors in PCs, while AMD made only 12% of them.

David Anderson, a lawyer at Berwin Leighton Paisner, said Intel was “facing a wall of regulatory resistance to its business practices around the world” with antitrust infringement accusations now in Japan, South Korea and the EU.

European Union Competition Commissioner Neelie Kroes said, “Intel has harmed millions of European consumers by deliberately acting to keep competitors out of the market for computer chips for many years.”

The Commission has ordered Intel to immediately cease all illegal practices, but Intel President and CEO Paul Otellini reported that the company plans to appeal at the Court of First Instance, the EU’s second-highest court.

“Intel takes exception to this decision. We believe the decision is wrong and ignores the reality of a highly competitive microprocessor market,” he said in a statement.

“There has been absolutely zero harm to consumers,” he added.

Kroes says that the EU antitrust sanctions will be acted on immediately. In a past antitrust case against software giant Microsoft, the Commission halted its remedies during part of an appeal filed by that company.

Bruce Sewell, a lawyer for Intel, said the firm had yet to discuss how to abide by the ruling, but said, “We will try to be compliant with the order.”

The fine put a damper on Intel’s optimism after late Tuesday its orders and billing patterns had reportedly been slightly better than expected in the second quarter. Shares of Intel rose 1.3%in premarket trade.

Some analysts say the ruling will have little strategic impact and will not likely affect the manner in which Intel operates, while other say it is an historic action that shows the EU’s commitment protect the rivals of dominant companies from being shut out of the market, which will have a large impact on the global IT industry.

Andy Ng, an analyst at investment research firm Morningstar said, “Intel’s competitive advantage is not that they cheated or anything like that. It’s that they are much larger than their smaller rival AMD. As far as long-term competitive advantage (goes), Intel still has it.”

The Commission investigated practices dating back to 2002, and found that Europe accounted for 30% of Intel’s current worldwide $30 billion market.

The Commission says Intel must pay the fine within three months of being given the order, a number that represents 4.15% of the company’s 2008 turnover.

The Commission had the right to fine Intel 10% of their annual revenue.

Ms Kroes jokingly remarks in her own news conference that Intel would now have to change its latest advertising slogan from “sponsors of tomorrow” to “the sponsor of the European taxpayer”.

This penalty exceeds last year’s $1.2 billion fine on glassmaker Saint-Gobain for price fixing, and a $677 million penalty in 2004 on Microsoft for abuse of dominance.

Intel reported first-quarter sales of $7.1 billion. Analysts estimate that the company generated close to $10 billion in cash last year.

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