Hewlett-Packard - Intel dealings laid bare in European report

Hewlett-Packard - Intel dealings laid bare in European report


At the heart of the European antitrust case against Intel are a series of once-confidential memos that provide a rare glimpse into the intense and at times acrimonious negotiations between the world's biggest chip maker and Hewlett-Packard, the world's biggest computer company.

Even a company as powerful as HP, the documents suggest, had to make business decisions based on how Intel would react. The Palo Alto computer company reportedly was so worried about threats from Intel that it dramatically scaled back its plans earlier this decade to sell computers powered by chips from Intel competitor Advanced Micro Devices of Sunnyvale.

And when AMD offered HP 1 million free microprocessors, saying it was a gift "no reasonable business partner could refuse," HP took only 160,000 to avoid Intel retaliation, according to the report unveiled last week by the European Commission.

But the significance of the e-mails and other documents, which were generated by the two Silicon Valley titans after HP introduced a business computer using AMD chips seven years ago, remains in dispute. HP declined a Mercury News request to be interviewed and Intel insists it did nothing illegal, calling the commission's findings "wrong as a matter of fact, law, economics and elementary fairness."

Founded in 1968, Santa Clara-based Intel has long dominated the market for x86 microprocessors, the brains of most personal computers and servers. But AMD, formed a year


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later, began making serious inroads into that business about 10 years ago as the quality of its chips improved. Then, on Aug. 19, 2002, HP introduced a business desktop computer in the United States with an AMD x86 chip, the first major computer maker to do so. That prompted Intel, HPs biggest chip supplier, to step up the pressure, the commission's report said.

At the time, HP had been negotiating to get a new round of Intel rebates, a form of financial incentive Intel has used for years to persuade computer companies to buy its chips. The deals tended to be renegotiated every few months, but how much Intel paid was not made public in the commission's report.

Although many rebates are perfectly legal, antitrust regulators contend large companies can misuse the payments to dominate their markets. In fining Intel a record $1.45 billion, the European Commission claimed the chip maker limited competition and, thus, consumer choice, by threatening to reduce or eliminate its rebates to customers who bought too many AMD chips. And it cited Intel's dealings with HP as a prime example.

AMD had gotten its chips into some consumer computers by 2002, and it hoped HP would help it expand into the lucrative business computer market. But a month before HP introduced the AMD-powered computer, according to the commission report, HP was already getting nervous about how Intel would react.

The commission cited an HP memo asking AMD to establish a multimillion-dollar fund, "which HP can draw from as compensation for potential 'retaliatory' acts from Intel." The memo added that HP feared losing Intel's rebates and even worried that Intel might punish HP by giving "unusual discounts" to an HP competitor.

When HP finally introduced the controversial business computer, "Intel reacted very negatively," according to an HP document cited by the commission, and for a time the chip maker broke off its rebate negotiations with HP. Eventually, HP and Intel resumed their talks. But the arrangement they worked out slammed AMD hard, making HP reluctant to reveal the terms to AMD.

"PLEASE DO NOT communicate to the regions, your team members or AMD" what HP has agreed to, an HP executive pleaded in an e-mail to Intel.

Besides requiring HP to buy 95 percent of the chips for its corporate desktop computers from Intel, the deal discouraged HP from selling the AMD-powered computers to big businesses or through HP's regular distributors, the commission said. It also delayed the computer's launch in Europe, the Middle East and Africa by six months.

A couple of years later, an HP executive asked in a memo if the company could sell the AMD-based computers through HP's regular distributors in parts of Europe and the Middle East, "and let Intel react if they discover it?" But another HP executive replied, "You can NOT," because of the chance that Intel would find out and halt its rebates to HP. "The risk is too high."

Since 2002, AMD has managed to increase its share of HP's chip business from about 13 percent to about 19 percent, with Intel controlling the rest, according to data gathered by research firm Gartner. But AMD today supplies only about 16 percent of the chips used in HP's business computers, which Chuck Diamond, AMD's lead lawyer in a pending antitrust lawsuit the company has filed against Intel, blames on the restrictive rebate deal HP worked out with Intel.

"That was devastating to AMD," Diamond said.

However, in an extensive response to the commission's report, Intel contends the European regulatory body — which the chip maker derided as having acted as investigator, prosecutor and judge — "reached indefensible conclusions."

According to Intel, which has appealed the commission's findings to Europe's Court of First Instance in Luxembourg, the evidence hardly suggests AMD has been damaged by Intel's rebates.

AMD not only has grabbed a bigger share of the microprocessor market over the past decade, Intel argues, but HP and the four other computer makers mentioned in the commission's report increased their combined purchases of AMD chips by 533 percent from 2002 to 2007, the main period of the report's focus.

Consumers also have benefitted over the same period, Intel claims, because the microprocessor market has seen "dramatically lower prices, significantly greater output of product and exponentially improved performance."

As for the allegation that Intel bullied computer makers, Intel counters that much of the commission's report is based on "documentary fragments" from low-level employees who didn't understand Intel's relationship with its customers.

In fact, Intel insists the computer companies played Intel and AMD off of each other to get the lowest chip prices and weren't intimidated at all by Intel. As evidence, Intel gave the Mercury News a summary of a deposition Dell gave in the ongoing suit filed by AMD, which asserted that "Intel never threatened Dell with retaliation if Dell bought microprocessors from AMD," even after Dell began using AMD's chips in 2006.

In HP's case, Intel contends the Palo Alto company came up with the idea of limiting AMD to 5 percent of HP's chip supplies and that HP chose to buy most of its microprocessors from Intel "because of the superiority of Intel's offer, taking into account customer demand for Intel and AMD."