Intel Inflates CPU Prices says AMD. We Investigate

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."