FTC Ensures That Digital's Alpha Chip -- a Key Rival to Intel's Chips -- Remains Competitive

A proposed agreement to resolve Federal Trade Commission antitrust concerns arising from Intel Corporation's acquisition of Digital Equipment Corporation's microprocessor assets would preserve competition in the microprocessor market by ensuring the viability of Digital's Alpha chip, regarded by many as the fastest microprocessor in the world. The sale, the agency said, would have threatened competition by placing production of the Alpha chip solely in the hands of Digital's principal competitor, Intel -- possibly endangering the continuing and future development of the Alpha technology. The proposed settlement would resolve these concerns by requiring that Digital license Alpha technology to Advanced Micro Devices, a developer and producer of high performance microprocessors, and to Samsung Electronics, a developer and producer of semiconductors, or some other Commission-approved licensees. Digital also would be required to begin the process of certifying International Business Machines, or another Commission-approved company, as an alternative production source for Alpha chips. These licenses would ensure that there are adequate and independent supplies of Alpha microprocessors. According to the Commission, the agency's settlement would ensure that Intel does not have exclusive control over Alpha production, and would further the continuing development of Alpha.

"The Commission's order is designed to ensure that Alpha remains a viable competitive alternative to Intel's chips -- by sending a strong message to the market that other major chip makers are now committed to Alpha's future," said Chairman Robert Pitofsky. "By protecting competition, the Commission has preserved consumer choice and encouraged continued innovation in the market for microprocessors."

Digital, a corporation headquartered in Maynard, Massachusetts, had sales of approximately $13 billion and net income of over $140 million for the fiscal year that ended last June. Digital manufactures and sells computer systems and software solutions and develops, manufactures and sells microprocessors based on its proprietary Alpha architecture. The Alpha microprocessor is widely regarded as among the highest performing general purpose microprocessors available.

Intel, headquartered in Santa Clara, California, is the world's leading semiconductor manufacturer. Intel reports 1996 sales of approximately $20.8 billion, and net income of more than $5 billion. Intel supplies a broad line of semiconductor devices used as computer system components, including x86 compatible microprocessors such as the Pentium line of microprocessors, which is used primarily in conjunction with Microsoft's Windows and Windows NT operating system.

According to the FTC, Intel has market power in the market for all microprocessors accounting for nearly 90 percent of dollar sales and nearly 85 percent of unit sales. It also has market power in the market for microprocessors that are capable of running the Windows NT operating system. In addition, Digital and Intel are two of a very few innovation competitors in the design and development of high-performance microprocessors, the FTC said. Intel's market power is magnified by its huge installed base, brand recognition and network effects, the agency said.

Digital's Alpha technology represents the most significant threat to Intel's continued market dominance, the Commission alleged. Alpha microprocessors and Intel Pentium products are today the closest substitutes -- and perhaps the only two viable devices -- available for computer system manufacturers and computer users who require microprocessors capable of running the Windows NT operating systems. As the demand and functionality of Windows NT grows, the competition between Alpha and Intel's Pentium chip is likely to intensify.

Intel's proposed acquisition of Digital's microprocessor assets resolves patent-infringement and breach of contract litigation initiated by Digital on May 12, 1997. According to the FTC, Digital sued Intel, alleging that Intel had copied patented technologies employed in the Alpha microprocessor and used them in Intel's own microprocessors. Intel counter-sued, claiming that Digital's architecture and process technology included Intel patented technology.

On October 26, 1997, the parties settled the litigation and signed an agreement to cross-license their patents. Intel also agreed to acquire Digital's Alpha fabrication plant (known as Fab 6) and its semiconductor business. Intel agreed to manufacture Alpha microprocessors for Digital alone -- at a fraction of Digital's current cost. Intel will be free to sell other semiconductors produced at Fab 6 to the market generally. Digital will retain the intellectual property rights and design assets for Alpha, including the design engineers who conduct research and development for the Alpha architecture.

According to the FTC's complaint outlining its charges, the agreement between Intel and Digital, unless remedied, is likely to create uncertainty regarding the future competitive viability of Alpha, thereby maintaining and enhancing Intel's market power, which could result in increased prices and reduced quality and innovation in each of the relevant markets. The complaint alleges that by putting Digital's supply of Alpha solely in the hands of Intel, Intel would have the opportunity to delay production of the Alpha chip, impede the development of new generations of Alpha microprocessors, and otherwise undermine the competitiveness of Alpha. The complaint also alleges that the transaction would reduce competition between Intel and Digital in the sale of microprocessors and other products to computer makers.

The proposed settlement would resolve these concerns by requiring Digital to enter into or to continue certain licensing arrangements with AMD and Samsung Electronics, or some other Commission-approved licensee, and to begin the process of certifying IBM or some other Commission-approved company to manufacture the Alpha chips. The order would require that the licenses be full "architectural" licenses -- that is, licenses not only for the production of Alpha chips, but for the Alpha architecture itself along with some sublicensing rights, so that these licensees can innovate and develop their own Alpha microprocessors, as long as they maintain backward compatibility with the existing Alpha architecture. The purpose of these provisions is to establish two licensees and another manufacturing source as providers and developers of Alpha devices, independent of Intel. According to the Commission, these consent provisions provide solid protections that would ensure that Alpha remains a viable competitive alternative to Intel's chips.

The Commission vote to accept the consent agreement for a public comment period was 5-0. An announcement regarding the proposed consent agreement will be published in the Federal Register shortly. The agreement will be subject to public comment for 60 days, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaint, the proposed consent agreement and an analysis to aid public comment are available from the FTC's web site at: http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-FTC-HELP (202-382-4357); TDD for the hearing impaired 202-326-3627. Copies of consent agreements subject to public comment also are available by calling 202-326-3627. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No. 981 0040)