MARCH 2008, RELEASE ONE

AMD v. Intel:
An Assault on Price Competition

Robert E. Cooper

Gibson Dunn & Crutcher, LLP

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AMD v. Intel:

An Assault on Price Competition

Robert E. Cooper∗

nder U.S. antitrust laws, above-cost price competition is sacrosanct. Accepting

the notion that aggressively discounting prices, even though the discounted

prices exceed cost, might expose a company to a possible violation of the antitrust laws

would turn the antitrust laws upside down. It would chill the very price competition the

antitrust laws are meant to promote. It would disadvantage customers, by compelling

competitors to keep prices higher to avoid challenges under the antitrust laws from less

successful rivals.

This is precisely what Advanced Micro Devices (AMD) is trying to do in its

lawsuit against Intel. AMD is accusing Intel of nothing more than competing, by offering

customers attractive, discounted prices to win their business—prices that were always

comfortably above any appropriate measure of Intel’s costs, and almost always exceeded

AMD’s price.

What AMD wants is a rule requiring a successful competitor like Intel to pull its

punches and not compete aggressively on price when faced with competition from a rival

offering lower prices. By seeking to change the rules of the game, AMD runs headlong

∗
The author is a partner in Gibson, Dunn & Crutcher’s Los Angeles office and is counsel for Intel in
the Advanced Micro Devices, Inc. et al v. Intel Corporation on file in U.S. District Court in Delaware.
2

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into the teachings of the U.S. Supreme Court that are designed to encourage aggressive

price competition by treating it as legally protected competitive conduct.

Above-Cost Price Cutting Is Legally Sacrosanct

In a series of decisions spanning some 20 years, the Supreme Court has treated

above-cost price competition as the antitrust equivalent of free speech under First

Amendment jurisprudence. The Supreme Court has adhered to the bright line principle

that above-cost price cutting is per se lawful because permitting any judicial challenges to

such conduct runs too high a risk of chilling the very price competition the antitrust laws

encourage.

As early as 1986, in Matsushita Elec. Indus. Co. v. Zenith Radio Corp., the Court

announced that “cutting prices in order to increase business is the very essence of

competition,” and cautioned that “we must be concerned lest a rule or precedent that

authorizes a search for a particular type of undesirable pricing behavior end up by

discouraging legitimate price competition.”1 The same year the Court reiterated this

principle in Cargill v. Monfort.2

In 1990, the Court reaffirmed its view in Atlantic Richfield v. USA Petroleum

that:

[I]n the context of pricing practices, only predatory pricing has the requisite
anticompetitive effect. […] Low prices benefit consumers regardless of how those
prices are set, and so long as they are above predatory levels, they do not threaten
competition. […] We have adhered to this principle regardless of the type of
antitrust claims involved.3

1
Matsushita Elec. Indus. Co. v. Zenith Radio Corp, 475 U.S. 574, 594 (1986).
2
Cargill v. Monfort, 479 U.S. 104 (1986).
3
Atlantic Richfield v. USA Petroleum, 495 U.S. 328, 339 (1990).
3

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And, in 1993, Brooke Group v. Brown & Williamson Tobacco Corp., the Court was even

more explicit about why above-cost price cutting was sacrosanct:

The mechanism by which a firm engages in predatory pricing—lowering prices—

Just last year, in Weyerhaeuser v. Ross-Simmons, the Court again drove home the

principle that above-cost price cutting was sacrosanct.5 In its decision, the Court

reaffirmed the language from Brooke Group and Cargill that cutting prices is the way

firms stimulate competition, that low prices benefit consumers regardless of how they are

set, and that above-cost prices cannot threaten competition.

Throughout this 20-year span of cases, the message that the Supreme Court has

delivered about the sanctity of above-cost pricing is unmistakable in its clarity and

forcefulness.

The Dynamics of the Microprocessor Market

The dynamics of the microprocessor market drive intense competition, making it

impossible for Intel or any competitor to exercise market power.

Prices for microprocessors are set through negotiations with major original

equipment manufacturers (OEMs) that are sophisticated buyers experienced at driving

hard bargains. All have enormous financial muscle, and many, such as IBM, Dell, and

4
Brooke Group v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 226 (1993).
5
Weyerhaeuser v. Ross-Simmons, 127 S. Ct. 1069 (2007).
4

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HP, enjoy much higher annual revenues than Intel. These buyers understand the

economic forces that drive the market. In particular they understand that Intel faces vast

fixed costs in manufacturing microprocessors, which means that the incremental cost of

producing microprocessors is substantially below the average cost level. They know that

Intel has a strong incentive to discount its prices to maximize the utilization of its

manufacturing facilities. The economic forces driving Intel's pricing are transparent, and

OEMs fully exploit this advantage in their negotiations with Intel.

OEMs regularly refresh or update their product ranges of PCs. Consequently

OEMs negotiate microprocessor supplies on a frequent basis, typically every three or four

months. Indeed, some OEMs negotiate almost constantly and long-term deals are

infrequent. The market is in a near constant state of negotiation, which leaves multiple

opportunities for AMD to win business.

OEMs intensify the competition by putting substantial blocks of business up for

bid, playing AMD and Intel off against each other. Intel must respond to these

negotiating tactics in the fog of competition, without knowing how reliable the OEMs'

"threats" might be. Moreover, OEMs can—and do—shift substantial volumes of business

to and from a supplier in a short period of time, thus adding to the substantial leverage

they exert. Intel knows from past history that if a “threat” is made, it can also be swiftly

carried out.

Last, the OEMs themselves sell in a very competitive downstream market. Market

forces operating upon the OEMs serve as a powerful incentive for them to exert

maximum pressure upstream on their own suppliers.

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AMD's Allegations of Exclusive Dealing Fail for Multiple Reasons

Exclusive dealing entails a refusal by a supplier to sell to a customer unless the

customer buys exclusively from the supplier. Intel has never refused to sell, or threatened

to refuse to sell, microprocessors to a customer unless it agreed to buy only from Intel

So AMD has invented its own version of an exclusive dealing claim, alleging that

Intel has coerced customers into buying Intel microprocessors exclusively or near-

exclusively by providing greater discounts to OEMs who buy larger quantities from Intel.

Intel, of course, competes for the opportunity to supply as much of its customers'

needs as possible, and it competes in many ways, including by offering discounted prices.

However, Intel has not refused to provide competitive discounts to customers that also

buy from AMD. Indeed, it would be counterproductive for Intel to deny competitive

prices to OEMs that also buy from AMD—doing so would only increase the likelihood

they would buy even more from AMD.

While most OEMs also buy from AMD, a few OEMs at various times have

chosen to buy exclusively from Intel, but that does not mean that Intel and AMD have not

been competing to sell to those customers. Major OEMs refresh their computer models

several times each year, so any "win" leading to exclusivity is constantly at risk.

When a customer chooses to buy exclusively or almost exclusively from Intel,

and does so because Intel’s prices are attractive, there is nothing illegal about such sole-

sourcing. Providing above-cost discounts to customers that choose to buy more from Intel

is not exclusive dealing. It represents nothing more than a win for Intel on the merits, and

is immune from challenge under the antitrust laws. Any contrary principle would chill

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price competition, putting a dominant supplier a risk when it competes by offering

discounted but above-cost prices and wins most or all of an OEM's business.

Winners and Losers Are Determined in the Marketplace Based on All Facets of

Competition

Intel competes to win customers’ business not just on price, but in all aspects of

its product including quality, performance, and reliability. In doing so, it has compiled a

record of continuing product innovation and a willingness to make risky investments to

build the capacity to supply its customers’ complete needs, and a long-standing

reputation for excellence unmatched by AMD. In contrast, AMD has a long history of

product and production problems that it only began to address in the past few years. For

many years AMD floundered, introducing products that did not live up to expectations

and found itself saddled with a reputation for inconsistent performance and inferior

reliability.

When AMD has executed well, however, by introducing competitive products and

producing them reliably and in sufficient volume, it has achieved commensurate

successes in the marketplace. Ironically, it did so during the very time it is accusing Intel

of foreclosing it from the marketplace. By the end of 2006, AMD's worldwide share of

the x86 microprocessor market segment had increased significantly, to 25 percent—about

double AMD's share four years earlier. AMD's microprocessors revenues also tripled

over the same general timeframe. AMD's profitability increases were even more

stunning. During 2005, the same year AMD sued Intel, AMD announced record-breaking

profits each quarter.

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The overall picture that emerges is not one of a competitor hamstrung by

anticompetitive conduct. It is a picture of a highly competitive marketplace, where

opportunity is always present. AMD—and AMD alone—is responsible for its successes

and failures.

Competition Has Led to Stunning Advances in Microprocessor Performance While

Prices Have Declined Dramatically

Competition in the microprocessor industry is so intense that it has driven

innovation and investment at an unprecedented pace, resulting in declining prices even as

quality and performance have increased dramatically. The picture that emerges is the

exact opposite of a stagnant monopoly.

According to Bureau of Labor Statistics reports, which reflect a combination of

price reductions and product improvements, microprocessor prices have outperformed

every one of the 1,200 product categories tracked by the Bureau. Microprocessor prices

declined over the period 2000 through 2006 at the annual rate of 48.9 percent, outpacing

the rate of decline in prices for personal computers (25.6 percent), storage devices (23.1

percent), and software (0.8 percent).

Nothing about the microprocessor industry suggests that it is hobbled by a

monopolist living in the past, looking to reap monopoly profits by selling old and staid

products while stalling the development of new and better products. Rather, the hallmarks

of a highly competitive industry stand out: prices are going down, performance is going

up, and innovation is fast-paced.

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