AMD CEO: Intel Is a Monopoly, Microsoft Isn't

AMD CEO: Intel Is a Monopoly, Microsoft Isn't
By Scott M. Fulton, III, BetaNews
June 21, 2007, 3:09 PM

In a keynote address this morning to the American Antitrust Institute in Washington, D.C., AMD CEO Hector Ruiz gave attendees what he described as "an idea of what it's like to do business day in and day out when you are competing against an abusive monopolist." Although he also invoked the phrase "illegal monopoly," he left a convenient 846-word buffer zone between that phrase and his first invocation of the term "Intel."

"I do not need my fortune teller hat to tell you one truth about which I am absolutely certain," Ruiz told attendees, "There is no proper or defensible place for illegal monopolies in the 21st century global marketplace...My purpose is not to argue for competitive advantage [1] - we know how to compete. My purpose is to lay out the facts so that law and economics can do their job [2] to protect consumers."

[1] The strategies, skills, knowledge, resources or competencies that differentiate a business from its competitors, hence reducing the number and closeness of substitutes.

[2] Equilibrium price and quantity is determined by the profit maximizing point, instead of out-pricing the competition in secret deals such as huge volume discounts for exclusivity rights / raising the price of the products beyond reasonable prices.

When a certain unnamed monopolist is permitted to do business as it wishes, Ruiz explained, its competitors may be more efficient and more innovative [3], though it cannot form partnerships and engage in cooperation with other players in the market. "All of that yields the one outcome antitrust law is designed to prevent," he continued, "consumers suffering at the hands of a monopoly by being forced to pay higher prices for what are all-too-often inferior products." [4]

[3] Other firms face strong competitive pressures (from the monopoly) on profit margins; hence they would be stringent on cost controls. They will also engage in Research and Development to come up with better quality products and better production methods to lower cost.

[4] The monopoly is a price setter. The monopoly can raise the price and the consumers either pay or go without the (inferior) good as they cannot turn to other alternatives.

Evidence of that inferiority, he stated, comes from the fact that desktop computers have not fundamentally changed [5] in the last decade-and-a-half, except perhaps for the introduction of flatter monitors and wireless connectivity.

[5] I disagree with this point. The computer manufacturing industry is a competitive one, due to its oligopoly nature with some big players such as Hewlett-Packard, Dell, IBM and other smaller players such as Ranger, Tatung etc. Therefore, we can deduce that computer manufacturers engage in heavy Research and Development to come up with better quality products to differentiate their products. Over the years, desktop computers have become smaller, and are now termed “Small Form Factor” computers.

When new laws brought an end to monopolies such as Standard Oil and the original AT&T, Ruiz' speech went on, a multitude of players were enabled to enter those markets, creating not just more competition but more cooperation and innovation [6]. New players could enter markets and compete on a level field [7].

[6] Cooperation: Firms share Research and Development information; hence better production methods are used. Cost of production decreases, and if firms pass the cost savings to consumers, consumers will clearly benefit from the lower prices.

Innovation: More competition would create more incentive for firms to engage in Research and Development to differentiate their product. Hence consumers clearly benefit from better quality products.

[7] Barriers to entry are lowered (Standard Oil and the original AT&T were controlling the key factors of production) and are no longer high enough to prevent entry of new firms.

For instance, he cited, "Google, Microsoft, and computer manufacturers like HP and Dell all owe their existence to the simple fact that competition replaced forced exclusivity and allowed a variety of players to compete and succeed."

Only after Ruiz mentioned those four names did he invoke the dreaded "I" word.
An iSuppli quarterly report issued in April showed Intel was responsible for having earned 80.2% of the world's global sales of microprocessors [8], with AMD earning 11.1% and smaller players the remainder. Though this is down from a high of 86% for Intel in the first quarter of 2004, it's a sizable 4.5% gain over the previous quarter, and a drop of 4.6% for AMD over the same quarter.

[8] Intel has a large market share in the microprocessor industry. It has a certain degree of monopoly power, hence has the ability to influence the market supply and price.

US law does not explicitly specify how much share a manufacturer must have of a given market to qualify as a monopoly. However, it does not stipulate monopolies to be illegal either, as so many discovered over the course of the Microsoft antitrust trial. Being a monopoly means a company has certain extra responsibilities to maintain and ensure competitiveness, and prevent erecting barriers to entry [9] for competitive players.

[9] Barriers to entry that the monopoly erects are said to be Artificial BTO. Examples include: Control over key factors of production and over wholesale or retail outlets.

Ruiz cited examples of both upheld and alleged anti-competitive behavior on Intel's part, including findings that it paid for exclusivity rights among Japanese computer manufacturers, Intel's alleged exclusivity deals with German retailers (which is the subject of AMD's antitrust suit against it in the US), and a shareholder lawsuit against Dell alleging that company received $1 billion per year in rebates from Intel prior to its decision last year to end its exclusivity arrangement and do business with AMD. [10]

[10] Artificial BTO; Control over wholesale or retail outlets.

But analysts credit Intel's recent market share gains over AMD to its introduction last summer of far more competitive processors at price points that were near to, or lower than, AMD processors - in many segments of the market, for the very first time. Recent performance tests from respected independent sources show Intel has not yet ceded that price/performance lead [11], though its margin has slimmed [12] somewhat since last year.

[11] Price Lead: Intel is able to enjoy cost advantage due to the significant Economies of Scale that it experiences.

Performance Lead: Intel is able to enjoy revenue advantage due to its large market share (80.2% of the world’s global sales of microprocessors). Hence it is able to engage in Research and Development to maintain its product superiority.

[12] Intel might be experiencing X-inefficiency which leads to (Price margin) higher costs – without competitive pressures on profit margins, cost controls may become lax. The result may be overstaffing and spending on prestige buildings and equipment, as well as (Performance margin) less effort to keep technology up to date, scrap old machines, research new products.

In a recent conference call with AMD senior vice president Henri Richard, he advised reporters to no longer expect any one company -- Intel or AMD -- to hold the performance lead in CPUs for any more than a six-month stretch [13].

[13] The microprocessor industry is a highly competitive one. Firms are constantly engaged in Research and Development to come out with better quality products which outperform their counterparts.

But in response to a question as to whether AMD now considers itself in a performance disadvantage against Intel, Richard alleged that Intel was being anti-competitive not because it failed to be innovative or was overcharging customers, but that by his description, Intel had decided to release a major new series of CPUs that it was not prepared to sell in volume.

"Our competitor, because they were under such duress given our leadership in the marketplace, elected to announce an architecture in the middle of last year that was not available in volume," stated Richard in April. "So what you had was a lot of hype around Core 2 Duo and a lot of Pentiums [that had reached their] end-of-life in the marketplace. So I'm confronted into a situation where, who am I competing against? A product that's being talked a lot about but that's not available, or a product that's being dumped because it's end-of-life, running too hot anyhow, and why should I chase that product down?"

As Richard put it, AMD was faced with a situation where it had to decide whether its Athlon 64s, Athlon FXs, and Opterons were to be price-competitive with the new Core 2 Duos or the older Pentium Ds, which were then being phased out.

"We found ourselves with a single product line," Richard continued. "We're not in that product transition, and frankly, in some case, at a disadvantage because it made no sense to devaluate our products to compete against old Pentium products. But on the other hand, I needed to be competitive if I was actually sold against the Core 2 Duo, which was a much better product than their preceding generation."

I don't know of the economics involved in the above paragraphs, but it states a crucial factor why AMD, who had a 7 year run of having the best processor on the market at the best price compared to Intel, eventually lost out in the microprocessor industry.

But this is not the same story Hector Ruiz told attorneys at the American Antitrust Institute conference this morning.

"The IT industry is being held hostage by Intel," Ruiz proclaimed, "a fact that has detrimental effects across the board, and it has gone on for too long. Consumers are punished by less choice and innovation, and higher prices [14].

[14] Less choice: High BTO, both natural (significant EOS due to large market share Intel possesses) and artificial (Control over wholesale or retail outlets such as Japanese and Germany retailers and Dell + strong brand name –“Intel Corp, whose marketing made its computer chips a household name..” Bloomberg December 30, 2005), which prevent entry of new firms and hence less availability of substitutes.

Less innovation: Without competitive pressures on profit margins, Intel has less incentives to engage in Research and Development to keep technology up to date/research new products.

Higher prices: Intel might be experiencing X-inefficiency which leads to higher costs – without competitive pressures on profit margins, cost controls may become lax. The result may be overstaffing and spending on prestige buildings and equipment. Also, since Intel has a certain degree of monopoly power, it can raise the price of their chips and consumers either pay or go without the good as they cannot turn to other alternatives.

"Some of you know enough to agree with me," he closed. "Some of you do not know enough yet to decide. But all of you should agree on this: There are serious issues about the microprocessor market that need to be examined without taint of politics or ideology. Your devotion to the enforcement of antitrust law makes you ideal candidates to assume this responsibility. Not for me. Not for my company. But for the values for which you strive - competition, choice, consumers."

----------------------------------------------------------------------------------------------

I think Intel made a wrong move by engaging in exclusivity deals with retailers. This clearly violates antitrust laws, and creates a negative view of Intel as an abusive monopoly. Respected independent sources and benchmark tests have clearly reflected that Intel's chips remain superior in the microprocessor industry. Furthermore, the introduction of the 45nm chips (refer to mingwei's post) provides Intel with greater product superiority as compared to AMD. Core 2 Duo has remained the dominant line of microprocessor production, and the launching of Quad 2 Core and Core 2 Extreme chips further seals Intel as the leader in the microprocessor industry. On the flipside of the coin, AMD should stop crying wolf and re-group, go back to the drawing boards, and figure out how they are going become a competitor again. Looking at their history, AMD shot themselves in the foot and all the while Intel was a mere bystander to the situation. Maybe it is time for AMD to lay everything on the line again like they did with the Athlon 64, for without which, we would still be stuck in the 32 bit world.

Alton Chang (: