January 17, 2017

New York AG Files Antitrust Suit Against Intel

Yesterday, New York’s state Attorney General filed what could turn out to be a major antitrust suit against Intel. The suit accuses Intel of taking illegal steps to exclude a competitor, AMD, from the market.

All we have so far is the NYAG’s complaint, which tells one side of the case. Intel will have ample opportunity to respond, and the NYAG will ultimately have the burden of backing up its allegations with proof — so caution is in order at this point. Still, the complaint lays out the shape of the NYAG’s case.

The case concerns the market for x86-compatible microprocessors, which are the “brains” of most personal computers. Intel dominates this market but a rival company, AMD, has long been trying to build market share. The complaint offers a long narrative of Intel’s (and AMD’s) relationships with major PC makers (“OEMs”, in the jargon) such as Dell, HP, and IBM — the customers who buy x86 processors from Intel and AMD.

The crux of the case is the allegation that Intel paid OEMs to not buy from AMD. This is reminiscent of one aspect of the big Microsoft antitrust case of 1998, in which one of the DOJ’s claims was that Microsoft had paid people not to do business with Netscape.

I’ll leave it to the experts to debate the economic niceties, but as I understand it there is a distinction between paying someone to buy more of your product (e.g. giving a volume discount) as opposed to paying someone to buy less of your rival’s product. The former is generally fine, but if you have monopoly power the latter is suspect.

As the NYAG tells it, Intel tried to pretend the payments were for something else, but the participants knew what was really going on: that the payments would stop if an OEM started buying more from AMD. The evidence on this point could turn out to be important. Does the NYAG have “smoking gun” emails in which Intel made this explicit? Does the evidence show that OEMs understood the arrangement as the NYAG claims? I assume there’s a huge trove of email evidence that both sides will be digesting.

It will be interesting to watch this case develop. Thanks to tools like RECAP, many of the case documents will be available to the public. Stay tuned for more improvements to RECAP that will provide even better access.

iPhone Apps: Apple Picks a Little, Talks a Little

Last week Apple, in an incident destined for the textbooks, rejected an iPhone app called Eucalyptus, which lets you download and read classic public-domain books from Project Gutenberg. The rejection meant that nobody could download or use the app (without jailbreaking their phone). Apple’s rationale? Some of the books, in Apple’s view, were inappropriate.

Apple’s behavior put me in mind of the Pick-a-Little Ladies from the classic musical The Music Man. These women, named for their signature song “Pick a Little, Talk a Little,” condemn Marian the Librarian for having inappropriate books in her library:

Maud: Professor, her kind of woman doesn’t belong on any committee. Of course, I shouldn’t tell you this but she advocates dirty books.

Harold: Dirty books?!

Alma: Chaucer!

Ethel: Rabelais!

Eulalie: Balzac!

This is pretty much the scene we saw last week, with the Eucalyptus app in the role of Marian — providing works by Chaucer, Rabelais, and Balzac — and Apple in the role of the Pick-a-Little Ladies. Visualize Steve Jobs, in his black turtleneck and jeans, transported back to 1912 Iowa and singing along with these frumpy busybodies.

Later in The Music Man, the Pick-a-Little Ladies decide that Marian is all right after all, and they praise her for offering great literature. (“The Professor told us to read those books, and we simply adored them all!”) In the same way, Apple, after the outcry over its muzzling of Eucalyptus, reverse course and un-rejected Eucalyptus. Now we can all get Chaucer! Rabelais! Balzac! on our iPhones.

But there is one important difference between Apple and the Pick-a-Little Ladies. Apple had the power to veto Eucalyptus, but the Ladies couldn’t stop Marian from offering dirty books. The Ladies were powerless because Old Man Mason had cleverly bequeathed the library building to the town but the books to Marian. In today’s terms, Mason had jailbroken the library.

All of this highlights the downside of Apple’s controlling strategy. It’s one thing to block apps that are fraudulent or malicious, but Apple has gone beyond this to set itself up as the arbiter of good taste in iPhone apps. If you were Apple, would you rather be the Pick-a-Little Ladies, pretending to sit in judgement over the town, or Old Man Mason, letting people make their own choices?

European Antitrust Fines Against Intel: Possibly Justified

Last week the European Commission competition authorities charged Intel with anticompetitive behavior in the market for microprocessor chips, and levied a €1.06 billion ($1.45 billion) fine on the company. Some commentators attacked the ruling as ridiculous on its face. I disagree. Let me explain why the European action, though not conclusively justified at this point, is at least plausible.

The starting point of any competition analysis is to recall the purpose of competition law: not to protect rival firms (such as AMD in this case), but to protect competition for the benefit of consumers. The key is to understand what is fair competition and what is not. If a firm dominates a market, and even drives other firms out, but does so by producing better products at better prices, they deserve applause. If a dominant firm takes steps that are aimed more at undermining competition than at serving customers, then they may be crossing the line into anticompetitive behavior.

To do even a superficial analysis in a single blog post, we’re going to have to make some assumptions. First, for the sake of this post let’s accept as true the EC’s claims about Intel’s specific actions. Second, let’s set aside the details of European law and instead ask whether Intel’s actions were fair and justified. Third, let’s assume that there is a single market for processor chips, in the sense that any processor chip can be used in any system. A serious analysis would have to consider carefully all of these factors, but these assumptions will help us get started.

With all that in mind, does the EC have a plausible case against Intel?

First we have to ask whether Intel has monopoly power. Economists define monopoly power as the ability to raise prices above the competitive level without losing money as a result. We know that Intel has high market share, but that by itself does not imply monopoly power. Presumably the EC will argue that there is a significant barrier to entry which keeps new firms out of the microprocessor market, and that this barrier to entry plus Intel’s high market share adds up to monopoly power. This is at least plausible, and there isn’t space here to dissect that argument in detail, so let’s accept it for the sake of our analysis.

Now: having monopoly power, did Intel abuse that power by acting anticompetitively?

The EC accused Intel of two anticompetitive strategies. First, the EC says that Intel gave PC makers discounts if they agreed to ship Intel chips in 100% of their systems, or 80% of their systems. Is this anticompetitive? It’s hard to say. Volume discounts are common in many industries, but this is not a typical volume discount. The price goes down when the customer buys more Intel chips — that’s a typical volume discount — but the price of Intel chips also goes up when the customer buys more competing chips — which is unusual and might have anticompetitive effects. Whether Intel has a competitive justification for this remains to be seen.

Second, and more troubling, the EC says that “Intel awarded computer manufacturers payments – unrelated to any particular purchases from Intel – on condition that these computer manufacturers postponed or cancelled the launch of specific AMD-based products and/or put restrictions on the distribution of specific AMD-based products.” This one seems hard for Intel to justify. A firm with monopoly power, spending money to block competitor’s distribution channels, is a classic anticompetitive strategy.

None of this establishes conclusively that Intel broke the law, or that the EC’s fine is justified. We made a lot of assumptions along the way, and we would have to reconsider each of them carefully, before we could conclude that the EC’s argument is correct. We would also need to give Intel a chance to offer pro-competitive justifications for their behavior. But despite all of these caveats, I think we can conclude that although it is far from proven at this point, the EC’s case should be taken seriously.