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Intel Inflates CPU Prices says AMD. We Investigate

By - Source: Tom's Hardware US | B 96 comments

We have all heard in recent news that Intel was slapped with a hefty fine by the European Union ringing to the tune of $1.4 billion. This fine is even larger than the one Microsoft was handed, which was already a record $1.3 billion.

Comparing anti-trust rulings in the United States and those in Europe, one has to wonder why these trials rarely end in the plaintiff's favor here in the U.S., but seem to routinely punish the defendants with judgments of biblical proportions in Europe. While it's true that both sides of the table put up a good fight, it's not nearly the same as when Microsoft was in court with the U.S. Department of Justice. During that epic battle, it was Microsoft versus nearly the entire U.S.A. Yet, in the end, Microsoft won.

So why is it that Microsoft didn't win, and neither did Intel, against the EU?

Intel holds firm that it has not violated any terms of fair competition. In fact, we recently spoke to a system builder, that admitted Intel was simply more competitive. From its own experience, the system builder said that Intel was significantly more aggressive with rebates, promotions and giving away marketing dollars.

Several years ago, I was the business development manager at a value added reseller (VAR). My company at the time, specialized in customized services for the enterprise space. This meant we helped large firms deal with consolidation, network infrastructure design, deployment and management. Within this scope, we also supplied the necessary hardware and software.

One of our best partners at the time, was Hewlett-Packard. While we had our own marketing budget, HP made sure that we would receive a lot of money every month to spend on marketing if we sold more HP products. This was wholly legal. They're called marketing development funds, or MDFs. Many large companies offer this, and while it may differ in name from company to company, the intent is the same.

Consequently, we ended up pushing more HP products than say, IBM products. HP wasn't paying us money to avoid using other vendors' products, but with a lot of cash sitting there for us to use, it made sense to try to accumulate that money instead of dipping into our own pockets. MDFs are not the same as rebates. With rebates, we received lower prices for certain products if we sold enough of other products. If we sold over 1000 HP multi-function printers (MFPs) for example, we would receive rebates on HP server products.

In this situation, who wouldn't want to receive free money?

We realize that the EU accused Intel of actively paying vendors to outright avoid AMD technology. But it's important to bear in mind that there are valid forms of incentivizing sales."

Interestingly enough, in 2007, a lawsuit was filed alleging that HP was paying Staples up to $100 million a year in MDFs to stop carrying ink cartridges from competing vendors, encouraging the sale of original HP-branded ink. At the time, some HP partners doubted that HP actually coerced Staples into doing this, and indicated that Staples probably acted on its own accord--in conjunction with the MDFs.

What happened there with HP? Nothing.

In a recent QOTD, I asked readers whether or not they personally felt that CPU prices were too high and inflated. The majority of responders indicated clearly they felt CPU prices were either cheap or very affordable, and certainly far lower than they were several years ago. Most of you simply stated that you felt CPU prices were fair, from both AMD and Intel.

I decided then, to speak to AMD directly.

In a recent press filing, AMD's executive VP of legal affairs, Tom McCoy, said that Intel's CPUs were sold with inflated pricing. Dirk Meyer, AMD's CEO, also chimed in to say that thanks to the EU ruling, "we are looking forward to the move from a world in which Intel ruled, to one which is ruled by consumers."

Indeed it's clear that Intel hold's the majority market share. Even many who are new to computers know the Intel brand name very well.

I took a look at financial reports from both companies, to see why this could be the case.

In the first quarter of 2009, AMD spent a total of $287 million to market (PDF) its products. During the same period, Intel spent $1.2 billion (PDF). Intel also spent $1.31 billion on R&D, while AMD spent only $446 million. Clearly we can see where all the partner support and customer demand stems from. I see Intel TV spots almost daily, and they're even showing up often on sites like Hulu. Even the Intel chime rings clearly in my mind. I cannot honestly think of something catchy to associate with AMD.

With the clear responses from readers, and a combination of historical financial data, I asked AMD some questions. My questions are in bold (any actual pricing that I asked about were true at the time of questioning):

I just did several price comparisons, and AMD's flagship CPU is priced very much in line with Intel processors with matched performance (by benchmarks). For example, the Phenom II X4 955 Black Edition is priced at $245, while the equivalent Q9550 is priced at $269. This is hardly "inflated" pricing as suggested by McCoy. What do you make of this?

AMD: First, remember that this isn't about pricing. It was about the evidence the EU found that Intel illegally bribed and coerced customers to either not offer, or delay offering, AMD-based solutions to consumers. The exhaustive investigation focused on the period of time between 2002 and 2007, and the lengths Intel went to during that period to limit consumer access to AMD technology.

AMD is a lower price option, with a CPU ASP price difference of 45-percent during the last 10 years according to Mercury Research. So it's obvious that when you exclude AMD from the market, computer manufacturers are forced to use higher-priced Intel chips. It's simple math. So the conclusion is obvious: the EU decision targets Intel's attempt to exclude AMD, the lower-priced competitor, from the market through coercive contract terms and simple impropriety--like paying computer makers to delay launching AMD-powered computers.

The committee also found that Intel broke the law by limiting consumer access to AMD technology, and ordered Intel to cease all illegal behavior. There is never a time where it is ok to break the law, and there is never a time when that behavior shouldn't be corrected. Who knows what the world would look like now if Intel had not manipulated the market? How much more choice would consumers have? How would innovation been accelerated? We will never know, but at least now we know that regulators in Japan, Korea and Europe have acted to put a stop to Intel's practices and we are three steps closer to ensuring we never have to ask these questions again.

I agree that AMD is the lower priced option, but having a lower priced option doesn't necessarily mean that the one that was priced higher is monopoly-inflated, as McCoy indicated. There will always be a less expensive option of something, because there will always be a market for something that costs just a bit less.

True, the EU said that it found Intel had coerced vendors and did illegal things. However, I'm still curious as to what metric McCoy used to define Intel's pricing as inflated. I disagree if McCoy means to say that Intel's prices are inflated simply because there is a lower priced alternative.

AMD: So, if the evidence the committee found is that Intel's illegal behavior foreclosed markets to AMD's products, and our ASPs over the past 10 years on the average have been lower than Intel's, then by default Intel's actions limited customer and consumer access to higher value options from AMD.

But this still doesn't make Intel's pricing inflated--since McCoy stated that Intel has inflated pricing--by default. This only makes Intel's behavior anti-competitive. Intel's pricing is higher, but Intel trying to make customers pick its products over AMD products, by coercing vendors or other means, doesn't make the products' pricing themselves inflated by default.

It is entirely possible that Intel could still act in an illegal manner, even if its pricing is fair. Since setting inflated prices doesn't require a company to be in a state of monopoly, therefore a company's anti-competitive and illegal behavior is not a prerequisite occurrence to inflated pricing, or vice versa.

Consequently, it is likewise possible for AMD to coerce companies not to stock higher priced Intel products, even if AMD's prices are lower. One set of circumstances (inflated pricing) is not a requirement of another (legal tactics of having a monopoly).

AMD: We're not in a position to coerce anyone... but putting that part aside.

Why would Intel act to limit customer options?

If you accept that our pricing is lower (Mercury data shows this), and that the evidence the EU collected from the files of Intel and its customers shows that [Intel] broke the law to limit customer options (and that Intel tried to cover this up after the fact) then I think you can reasonably draw a line connecting the two dots and argue that if higher-value AMD parts were more readily accessible, Intel would need to compete on the merits (and the prices) of its products. Apparently, that is a situation Intel worked aggressively to avoid.

Why else limit choice if not to ensure their products don't have to compete on merits... with pricing being a component.

Thanks to AMD for answering these questions. I leave it up to you to study what AMD said.

I also spoke to a well known motherboard manufacturer, and asked for its thoughts on the current pricing and demand situation between the two CPU rivals. The manufacturer requested its name not be revealed.

Do your customers demand more Intel platforms or more AMD platforms?

Motherboard Company: We sell roughly 60-percent Intel-based motherboards and 40-percent AMD motherboards. There is strong demand on Intel [from customers]. But, we do see [increasing] demand for AMD ever since it launched the Phenom II processor. AMD is more [focused] on the mid-end and value markets. Intel is more on the high-end.

Performance-wise, Intel is in demand. I think AMD doesn't focus on performance like Intel does, rather, AMD focuses more on price-performance value systems instead.

Despite AMD's response, it's interesting to note that a very well-known motherboard manufacturer indicated that it sells more Intel-based motherboards simply because of customer demand for better performing parts. A quick search on your favorite online etailer should reveal that CPU prices are very well in line with each other, from both sides of the fence--except for the highest end parts.

Coincidentally, the monumental $1.4 billion fine landing on Intel's lap, matches the quarterly loss of $1.4 billion that AMD reported back in January of this year.

At the end of the day, one thing is clear: Intel aggressively competes with AMD. If the EU's findings are indeed true, in that Intel did illegally coerce partners and vendors to actively avoid AMD technology, then it's also clear that Intel perceives AMD as a big enough threat to take on these types of strategies.

Which brings us to this: the long term victor of this brawl will be the one who fights aggressively not so much on pricing, but the one who successfully embeds itself deep within the conscious and subconscious. "Bong! Bam bam, bam bam."

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Top Comments
  • 22 Hide
    Anonymous , May 26, 2009 9:33 PM
    One glaring thing this article refuses to acknowledge is the one fact that AMD stresses repeatedly: "For the period from 2002 to 2007". You can ask motherboard manufacturers now and get the expected response "Intel offers high-end, AMD value-priced". What you refuse to acknowledge, repeatedly, is that this was not true for the period in question (2002-2007). Even Tom's Hardware tests repeatedly proved that the Athlon/Athlon64 offerings were superior to Intel's Pentium IV.
  • 18 Hide
    scarywoody , May 27, 2009 12:21 AM
    I think everyone is missing the point of the article. It's basically questioning why McCoy thinks intel inflates CPU prices. AMD doesn't really answer the question, but states that intel blocked consumer access to a cheaper alternative. That in itself doesn't mean intel has inflated their prices. There has always been a correlation between the amd vs intel price at various performance levels. The article isn't about the EU or any other ruling.
  • 16 Hide
    swiftsword69 , May 26, 2009 9:25 PM
    If not for AMD, we will still be paying top dollars of our hard earned money to own Intel parts.

    Anyone still remember the old days when you pay ridiculous price just for a mid performance part and over the roof for the high end stuff (still true these days but to a much lesser extent).

    I will always be grateful of what AMD has done for us and thank god they got their acts together with ATI in their graphics division. The radeon 4 series rock, the 3 series was a joke.
Other Comments
  • 12 Hide
    tenor77 , May 26, 2009 8:57 PM
    Well I don't think you can expect AMD to not try to put a positive spin on this. If you come to them directly and ask what they think of their competition they're not going to give them a raving review.

    AMD: "Well shucks, Intels alright. Sure they do some illegal things, but they're good people all the same"

    No I don't think Intel inflates CPU prices. By the vary nature of competition both companies help to lower prices.
  • 14 Hide
    tenor77 , May 26, 2009 9:06 PM
    dman3kSo by the very nature of competition, it's ok for one company who has significantly more resources kill their competition by selling things at ridiculously low prices that the competition cannot survive?Great!


    Did I say that? Umm no. The question is, "Does Intel inflate CPU prices?"
    No. Competition lowers prices.
  • 9 Hide
    turboflame , May 26, 2009 9:09 PM
    Quote:
    We realize that the EU accused Intel of actively paying vendors to outright avoid AMD technology.


    You sure? The entire article pretty much sidesteps this issue.

    The article also focuses purely on today's CPU situation. Back when the Pentium 4 was facing the Athlon 64, Intel made no real attempt to price it's CPUs competitively as it does now. They were still selling $1000 extreme edition CPUs that were beaten by AMD CPUs that cost less than half as much.
  • 10 Hide
    snowysoul , May 26, 2009 9:19 PM
    I own only AMD home built desktops, and yes thought it was great that Intel was getting a fine. But who else thought this was just a bunch of misconstrued garbage for EU to get money? What is next, Cisco getting sued by EU for being competitive?
    Also I was appalled to learn that AMD does not have the same level of interaction with company system builders in a previous article on this website. You reap what you sow.
  • 6 Hide
    gzhang , May 26, 2009 9:19 PM
    well, is it ridiculously low price or inflated prices?
  • -1 Hide
    porksmuggler , May 26, 2009 9:20 PM
    Quote:
    one has to wonder why these trials rarely end in the plaintiff's favor here in the U.S.
    Here in the U.S., anti-competitive practices rarely see the light of day in court, unless there's strong public outcry.

    Quote:
    We realize that the EU accused Intel of actively paying vendors to outright avoid AMD technology
    But yet you are determined to sideline that real issue in this article.

    Quote:
    This only makes Intel's behavior anti-competitive
    Let's focus on AMD's key question. Why would Intel act to limit customer options? You need to revisit your understanding of the nature/root of anti-competitive behavior.

    Quote:
    I leave it up to you to study what AMD said
    I get it, you dont, hopefully most that read this will, despite the anecdotal evidence you seem to rely on...





  • 5 Hide
    danhitchcock , May 26, 2009 9:20 PM
    I like (meaning I don't like) how I'm left to interpret AMD's response which was kind of the the point of article, but I am not informed that the Intel fine was equal to AMD's loss....

    I see AMD's point on price inflating for high end CPUs. They clamin that Intel crippled their ability to produce high end CPUs. Right now, there is no consumer (AMD) processor which can compare to the corei7. $1000 for a corei7 965? c'mon... If AMD released a processor which could compete, we would see that price cut in half in a week.
    AMD does provide excellent competition for the mid range, so I agree there is not much if any price inflation for those processors. I suppose since I'll never shell out $1000 for a CPU it doesn't really affect me.
  • 16 Hide
    swiftsword69 , May 26, 2009 9:25 PM
    If not for AMD, we will still be paying top dollars of our hard earned money to own Intel parts.

    Anyone still remember the old days when you pay ridiculous price just for a mid performance part and over the roof for the high end stuff (still true these days but to a much lesser extent).

    I will always be grateful of what AMD has done for us and thank god they got their acts together with ATI in their graphics division. The radeon 4 series rock, the 3 series was a joke.
  • 4 Hide
    Anonymous , May 26, 2009 9:26 PM
    In my opinion the company you were working for and HP should both be fined, the company for misleading customers and HP for anti-competitive strategies.

    How can you possibly justify the fact that you didn't advise your customers what they needed but advised them with the goal of filling your own pockets?

    Apparently this is legal in the US but it sure as hell is a shady area, and a practice that I (and the EU obviously) deem unacceptable.

    I have to agree with P1nky on this one, Intel has been proven wrong and who do you think you are questioning the verdicts of several legal authorities?
  • 16 Hide
    Soul_keeper , May 26, 2009 9:27 PM
    I payed 300 for my Q9450 over a year ago, prices havn't changed
    they just replaced it with the Q9550 (basically identical) and charge the same price for 2009.

    Intel will milk every dollar out of us if given the chance.
    I refuse to consider/recommend the i7 to anyone, it's just too painfull when I remember the Socket A days, when amd was on top, where for under 100 bucks you could basically get a top of the line athlon (with a little oc).



    please don't quote me, just my opinions here.
  • 13 Hide
    brother shrike , May 26, 2009 9:29 PM
    I love how AMD completely ignores the question about how they consider Intel's pricing to be inflated.

    TH: Do you consider Intel's pricing to be inflated?
    AMD: Intel broke the law!

    TH: Yes, Yes, we get that. How do you consider Intel's prices to be inflated?
    AMD: Intel broke the law!
  • -5 Hide
    bill gates is your daddy , May 26, 2009 9:30 PM
    There seems to be a lot more Intel / Nvidia love coming out in the articles nowadays. You might want to try and stay a little more neutral in the future. The fanboyism is starting to show.
  • 4 Hide
    armistitiu , May 26, 2009 9:31 PM
    Why else limit choice if not to ensure their products don't have to compete on merits... with pricing being a component.

    I think this is pretty clear.

    I do remember the Intel jingle all the time and yes AMD needs to focus more on marketing. I mean i do remember "Smarter choice" and "The future is fusion" (i don't like this one) but they don't have a jingle or something really catchy.
  • 0 Hide
    swiftsword69 , May 26, 2009 9:31 PM
    In the end, im sure everyone here wants the competition between the two rivals to go on for eternity.

    Competition = consumer benefits.

    I would hate to see AMD die. Intel has money to burn anyway and AMD seriously need that $1.4bil to keep going.

    Out of curiosity, does anyone have any idea how much debt they are still in after buying out ATI?
  • 22 Hide
    Anonymous , May 26, 2009 9:33 PM
    One glaring thing this article refuses to acknowledge is the one fact that AMD stresses repeatedly: "For the period from 2002 to 2007". You can ask motherboard manufacturers now and get the expected response "Intel offers high-end, AMD value-priced". What you refuse to acknowledge, repeatedly, is that this was not true for the period in question (2002-2007). Even Tom's Hardware tests repeatedly proved that the Athlon/Athlon64 offerings were superior to Intel's Pentium IV.
  • 15 Hide
    KT_WASP , May 26, 2009 9:38 PM
    This article was written by someone who went into this "interview" with their own preconceived notions. All it was ,was one question, asked over and over again, in an argumentative tone, followed by a "preachy" speech based on the "interviewer's" own views. How do you expect AMD to shed light on this subject when it is apparent that the person who did the interview had their own agenda?

    Do a search on newegg right now for sub-$100 Retail CPUs :

    Intel:
    Single core = 1 (1.8GHz)
    Dual Core = 8 (1.6GHz - 2.8 GHz)

    AMD:
    Single Core = 3 (2.2GHz - 2.7GHz)
    Dual Core = 9 (2.6GHz - 3.0GHz)
    Triple Core 2 (2.1GHz - 2.3GHz)
    Quad Core = 1 (2.3GHz)

    Intel does offer up some good CPUs in that price range, but half of those Intel dual-cores are 2.2GHz and under, where as AMD's lowest offering for dual cores is 2.6GHz. AMD also has triple and quad core options... I don't think you will see an Intel quad core offered at the sub $100 mark any time soon.

    Intel has more money.. hands down... AMD is hurting for money, but still delivers better price conscience options.... Instead of doing underhanded things for business, why doesn't Intel just suck it up and lower their prices?

    I guess what I'm trying to say is, AMD's argument holds some water and this article was clearly written by someone who refuses to see that.
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