Chipmaker only receives a financial slap on the wrist for alleged threats and kickbacks

Is Intel Corp.'s days in the antitrust doghouse finally over?  A settlement has come in one of the last antitrust cases against the world's top maker of personal computer CPUs.  The settlement may close an important chapter in Intel's history -- one that saw it consolidate a dominant position, yet be universally criticized for what numerous parties called blatant antitrust violation.

I. "Cheaters" Finish First 

In the middle of the last decade CPU maker Intel Corp. (INTC) has been accused by governments worldwide -- and its competitors -- of using threats and kickbacks to convince computer makers to hang on to its dominant position.  The allegedly anticompetitive tactics paid off; Intel was bought the time to rejuvenate its product line.  The chipmaker went from lagging behind Advanced Micro Devices, Inc.'s (AMD) Opteron and Athlon 64 designs to coming back strong solidifying its lead during the new core war.

Intel reportedly threaten to cut shipments to computermakers who used AMD chips too, and offered payments and discounts to those who complied.  It also reportedly sought to pressure retailers to fix the price of its CPUs in some regions.

AMD Opteron Denmark
Intel is accused of using anti-competitive tactics to hold off AMD and NVIDIA during the Pentium 4 era. [Image Source: "LanParty"/WiFTech Forums]

While few would argue that the tactics weren't worth it from a pure financial perspective, Intel has paid somewhat for its approach, fined €1.06B ($1.45B 2009 USD) by the EU [source].  In 2009 it also paid $1.25B USD to AMD to settle a U.S. antitrust lawsuit.  In 2010 the U.S. Fair Trade Commission only gave it a tiny fine, but as part of the settlement forced Intel to sign an agreement to play fair in the future or face stiff fines.  And in 2011 it paid $1.5B USD to NVIDIA Corp. (NVDA), a graphics rival, whom it also allegedly harmed.  

The settlements may not amount to a legal admission of guilt, but they do offer a strong indication that Intel acknowledged it was doing at least some of the anticompetitive and underhanded tactics its smaller rivals and government regulators alleged.  If Intel was truly playing fair, it would undoubtedly have fought the charges more vigorously.

For Intel the settlements may have tarnished its reputation, but they hardly hurt its bottom line -- the company made $12.94B USD in 2011 alone, up from

II. "Naughty Boy" Settles Last Case

Now it has cleared out one final lingering antitrust lawsuit -- the New York state's case against it.  The case was filed in November 2009 by then-Attorney General Andrew Cuomo.  The case was filed in Delaware Federal District Court, as Intel is incorporated in Delaware, despite having its headquarters in Santa Clara, Calif.

Andrew Cuomo
The New York case was first filed by Governor Andrew Cuomo, back when he was Attroney General. [Image Source: AP Photo/Mike Kroll]

Mr. Cuomo would go on to become the governor of New York.  His successor, Eric Schneiderman, did his best to diligently pursue the lawsuit.  But his campaign was dealt a huge setback when U.S. District Judge Leonard Stark said that the state could only pursue offenses that occurred from 2007-2009, not 2004-2009 as the AG had hoped. 

The decision essentially meant that the state could not prosecute Intel on the primary years where appeared to have committed abuses.  The ruling frustrated Governor Cuomo, who had long argued that emails obtained from Intel showed long-time CEO Paul Otellini was aware of some of the anticompetitive tactics.  Governor Cuomo's perspective was that it was clear this was not some rogue effort within Intel -- it was a concerted anticompetitive game the company was playing.

But the federal judge also ruled out the state pursuing triple damages against Intel.

Between all of these court-imposed limitations, the New York Attorney General's office begrudgingly settled with Intel.  

The resulting payout of $6.5M USD represents roughly the amount of income Intel makes in five hours.  In other words, to quote former U.S. Senator-turned-sex offender Larry Craig, "it's a slap on the wrist, it's a bad boy... you're a naughty boy."

Intel's General Counsel Doug Melamed was very pleased with the settlement, stating, "We have always said that Intel's business practices are lawful, pro-competitive and beneficial to consumers."

Intel sign
Intel was pleased to settle the case for a trivial sum. [Image Source: ModMyI]

CEO Paul Otellini -- a vocal critic of the EU fine -- did not comment on the settlement. But likely even he would have been satisfied with this outcome.

If there's any consolation to AMD, NVIDIA, and the other players allegedly harmed by Intel abuses, it's that the chipmaker is now confined by stricter rules in the U.S. and abroad.  

And while Intel currently enjoys a healthy process lead, with its 22 nm 3D FinFET chips launching in two months, Intel is now being forced to watch its back.  A coalition of chipmakers using ARM Holdings plc.'s (LON:ARM) wildly successful RISC microarchitecture is preparing to invade the PC CPU and server spaces.  One of the top ARM competitors leading the charge?  NVIDIA -- one of the companies Intel alleged abused; some might call it karma.  

III. Side Note: Tax Sheet

Intel is among the fortunate few who has received big tax breaks under President Obama and the bipartisan Congress.  While far from the worst corporate offender (Intel paid well above the "average" corporate tax rate among Fortune 500 corporations [source]), when it comes to cash-for-tax holidays, it's still interesting -- and a bit alarming -- to see how Intel has successfully steered the federal tax policy over the past decade.

Intel only paid effective tax rates of 24 and 28 percent in 2010 and 2011 [1][2], significantly lower than the 34 to 35 percent any small-to-midsize busines making over $335,000 USD per year in profit must pay. 

The tax break came thanks to a special "research and development" tax credit, which legislators applied to Intel a handful of other privileged friends.

In the last three (2006, 2008, and 2010) election cycles, Intel's PAC blanketed Congresspeople with $1.02M USD in campaign finance gifts [source].  The awards were relatively bipartisan and closely mirrored whoever was gaining political momentum, e.g. in 2006 and 2010 the Republicans were favored in House donations, while Democrats came out slightly ahead in 2008.

Congress bribes
Intel has paid a lot of money to federal politicians and received tax breaks in return.
[Image Source: Wikimedia Commons]

In other words, Intel and others have mastered the public's cyclical sentiment, giving them the illusion of choice.  But whichever candidates the majority was supporting, were in the end supporting Intel (and Intel is far from being alone in this clever strategy).

Barack Obama received $228,000 USD from Intel employees [source] in his successful 2008 campaign.  This election cycle he has received $22,000 thus far [source], over twice as much as the $10,250 USD that top Republican rival Mitt Romney has received [source].

Barack Obama has been a good friend to Intel, appointing its CEO to his jobs council, which "advises" Congress and the President on corporate tax policy.

Intel, like many corporations use a "PAC" to avoid the appearance of impropriety.  The political action committee (PAC) lobbies employees to donate, often offering them a matching or greater kickback for their troubles.  In that essence the contribution is "launder" (in a colloquial, not a rigid legal sense), through private donors, although it is steered by the corporations.  The PAC isn't free -- it often bloats the contribution costs to the corporation several times.

But while several million in campaign finance efforts may not seem like a lot of money for a company whose profits measure in the billions, Intel's big tax breaks are evidence of the phenomena noted by the University of Kansas School of Business -- that for every $1 USD spent lobbying, a company receives an average of $222 USD of tax breaks.  

It seems both polticial parties in Washington, D.C. are more than willing to play the game.  And it seems the elected officials -- or their staffers, more likely -- are very good at knowing who the "check goes to" in terms of tax breaks.  Ultimately small-to-midsize businesses and individual taxpayers are left paying the check in the form of higher taxes, while these fortunate special interests enjoy record profits.

Sources: Intel, NPR/University of Kansas [$1 Lobbying = $222 Tax Breaks]

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