FTC: Intel Abuses its Monopoly Power in Violation of Federal Law

The Federal Trade Commission charged today that Intel Corporation, the world’s largest manufacturer of microprocessors, used its monopoly power to cement its dominance over the microprocessor market. The FTC alleged that Intel illegally used its market power when it denied three of its customers continuing access to technical information necessary to develop computer systems based on Intel microprocessors, and took other steps to punish them for refusing to license key patents on Intel’s terms. These three companies -- Digital Equipment Corporation, Intergraph Corporation and Compaq Computer Corporation -- hold important patents on microprocessor and related technologies. When they sought to enforce those patents against Intel or other computer companies who buy Intel products, Intel retaliated by cutting off the necessary technical information and threatening to cut off the supply of microprocessors, the FTC said.

“Innovation is critical to economic progress, and patents play a crucial role in encouraging that innovation,” said William J. Baer, Director of the FTC’s Bureau of Competition. “Intel’s great contributions to this country’s economic growth have been encouraged and protected by patents in the design and manufacturing processes for its semiconductor products. But if Intel can use its monopoly position in the market for microprocessors to prevent other firms from enforcing their own patents, other firms will have little incentive to invent new features to challenge Intel’s dominance. As a monopolist, Intel can compete by producing better, cheaper and more attractive products. It cannot act to cement its monopoly power by preventing other firms from challenging its dominance. Intel has acted illegally. It has used its monopoly power to impede innovation and stifle competition.”

Intel, based in Santa Clara, California, has annual worldwide sales of approximately $20.8 billion. The company designs, manufactures and sells a variety of semiconductor products, including a line of microprocessor products that are generally known, marketed and sold under the trade names Pentium, Pentium with MMX, Pentium Pro, and Pentium II.

A microprocessor is the central processing unit of a computer system. Often described as the “brains” of a computer system, the microprocessor serves the essential functions of processing system data and controlling other devices integral to the system.

According to the FTC complaint detailing the charges in this case, Intel has monopoly power in the market for general-purpose microprocessors. Intel’s market dominance is reflected in its own internal market analyses, which indicate that sales of Intel microprocessors have consistently accounted for approximately 80 percent of the total dollar sales of general-purpose microprocessors worldwide.

The complaint charges that Intel has unreasonably used its market power to cut off important customers who sought to protect their own patent rights in microprocessor and related technologies that rival Intel’s technology. Over the years, Intel has promoted and marketed its microprocessors by providing customers with technical information in advance of the official commercial release of new microprocessor products. This makes it possible for computer makers to have computers based on new Intel microprocessors ready to sell at the time of the official commercial release of the microprocessors, or shortly afterwards. While Intel considers the advance technical information to be proprietary, it makes the information broadly available subject to nondisclosure agreements. This is part of the mutually beneficial relationship between Intel and its customers. Intel benefits because its customers -- computer systems manufacturers - - commit resources to designing new computer products that incorporate the new Intel microprocessors. The customers benefit because they are able to introduce “leading edge” computer products with the latest microprocessor technology on a timely basis, the complaint states.

The FTC alleged that on at least three occasions, Intel has terminated or threatened to terminate its mutually beneficial relationships in a selective, targeted fashion to retaliate against the firms that sought to protect or assert patent rights in rival microprocessor technologies or that refused to license such rights to Intel. This retaliation has primarily taken the form of cutting off access to technical information needed to design computer systems based on soon-to-be-released Intel microprocessors. By its actions, Intel sought to injure the customer until that customer surrendered the patent licenses Intel desired. These actions have hurt the sales and profitability of the targeted companies and threatened to have an even more significant, long-term impact on their computer systems businesses absent settlement agreements or, in one case, judicial intervention, the complaint charges.

Digital Equipment Corporation

Digital, based in Maynard, Massachusetts, has worldwide sales of approximately $13.7 billion. It designs, manufactures, and sells computer hardware and software systems, including personal computers, workstations, and servers. Digital also designs, manufactures, and sells certain microprocessor products under the trade name Alpha.

According to the FTC, although Digital’s Alpha microprocessors have a small share of the market, they are technologically significant. Alpha provides the only other microprocessor platform that competes with Intel’s microprocessor architecture in running the Windows NT operating system developed by Microsoft Corporation. Alpha microprocessors are widely regarded to be the highest performing general purpose microprocessors available, with performance superior to any of Intel’s products in terms of accepted industry benchmarks for processor performance. Digital also is a significant Intel customer. Digital’s sales of Intel-based computers accounted for approximately $2 billion of Digital’s revenues for the fiscal year ended July 30, 1997. In May 1997, Digital sued Intel for patent infringement, alleging that Intel’s Pentium microprocessor infringed ten Digital microprocessor patents. Intel responded to Digital, the complaint alleges, by cutting off Digital’s access to technical information necessary to develop computer systems based on Intel microprocessors in a timely and efficient manner, and by threatening to cut off the supply of microprocessor devices. Only when Digital settled its patent lawsuit with Intel did Intel agree to restore the flow of information to Digital about present and future Intel microprocessors, the FTC said.

Intergraph Corporation

Intergraph, based in Huntsville, Alabama, develops and sells hardware and computer software. It focuses on workstations for computer-aided design, computer-aided engineering, computer-aided manufacturing, computer-aided animation, and other computer graphics, multimedia and digital media functions. Prior to 1993, Intergraph developed Clipper microprocessors for its own computer systems.

According to the FTC’s complaint, beginning in 1992, Intergraph became the first company to develop a family of workstations and servers based on Intel microprocessors and Microsoft’s Windows NT operating system. By 1996, Intel-based systems represented 100 percent of Intergraph’s hardware unit sales. That year, Intel sought to obtain a royalty-free license to Intergraph’s Clipper microprocessor technology as a condition for Intergraph obtaining technical information needed for it to continue developing Intel-based workstations. When Intergraph said it could not agree to such a demand, Intel refused to provide Intergraph with important information relating to graphics technology, contributing, along with subsequent Intel conduct, to a significant delay of Intergraph’s development of a graphics workstation, the complaint alleges. In 1997, Intergraph again refused Intel’s demands. In turn, Intel cut off Intergraph from access to technical information and prototypes necessary to develop computer systems based on Intel microprocessors that were not yet officially released.

Compaq Computer Corporation

Compaq, headquartered in Houston, Texas, is the largest manufacturer of personal computers in the world. Compaq designs, manufactures, and sells a full line of computer system products, including personal computers, workstations, and servers. Compaq reported revenues of approximately $24.6 billion for the fiscal year ending December 1997.

According to the complaint, Compaq is Intel’s largest volume customer, in units and dollars, for microprocessors, having purchased approximately $2 billion worth of Intel microprocessors during 1997. Such Intel-based machines constitute a significant part of Compaq’s business. In November 1994, the FTC said, Compaq sued another computer systems manufacturer, Packard Bell Electronics, Inc. (now Packard Bell NEC, Inc.) for using patented Compaq technology in Packard Bell motherboards. A motherboard is the main circuit board of a computer, containing the central processing unit and memory. Intel, the supplier of the motherboards, intervened on Packard Bell’s side, because Intel had an obligation to indemnify Packard Bell. In response to Compaq’s assertion of its intellectual property rights in motherboards, Intel cut off technical information that Compaq needs in order to design systems based on Intel’s newest chips, even though that technical information is widely available to similarly situated computer manufacturers. Intel restored Compaq’s access to technical information only after Compaq agreed to cross-license its patents with Intel, the agency said.

Following a trial by an administrative law judge, the FTC is seeking a notice of contemplated relief that would prevent Intel from repeating the kind of conduct it has engaged in with respect to Digital, Intergraph, and Compaq: using the threat of a discriminatory cut-off of products or technical information to force customers to license or sell their intellectual property to Intel. According to the FTC’s notice of contemplated relief, the agency is seeking an order that would leave Intel free to change customer’s access to products and technology when it has legitimate business reasons, rather than to coerce licensing or sale of property.

The Commission vote to issue the administrative complaint was 3-1 with Commissioner Orson Swindle dissenting. Commissioner Swindle stated that, at this time, he did not find reason to believe that Intel has violated the law, and that he would have preferred to gather and analyze more information before making a reason-to-believe determination.

Photos from News Conference

NOTE: The Commission issues a complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The issuance of a complaint is not a finding or ruling that the respondent has violated the law. The complaint marks the beginning of a proceeding in which the allegations will be ruled upon after a formal hearing.

Copies of the complaint and notice of contemplated relief will be available  shortly on the FTC’s World Wide Web site at: http://www.ftc.gov (no period) and also from the FTC’s Consumer Response Center, Room 130, 6th Street and Pennsylvania Ave., N.W., Washington, D.C., 202-382-4357; TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No. 951 0028)