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Roger Parloff, Fortune senior editor August 8 2006: 5:04 PM EDT (Fortune Magazine) -- Advanced Micro Devices has finally arrived. Long the also-ran of the microprocessor business, a perennial distant second to industry behemoth Intel, AMD is now a contender. In the even more lucrative market for x86 server chips, its unit share has rocketed from negligible three years ago to 26% last quarter.
The trustbusters don't often succeed in breaking them up. Standard Oil In 1911, at the Justice Department's request, the US Supreme Court broke up John D Rockefeller's Standard Oil monopoly, which began in 1870. It was split into 33 companies, including Jersey Standard (Exxon), Socony (Mobil), and Socal (Chevron). ALCOA In 1945 a federal appeals court found that Alcoa had illegally maintained its monopoly over aluminum ingot production, which began in 1888. The company was not broken up, but the government strengthened competition by selling its own wartime plants to Kaiser and Reynolds. It agreed to divest its 22 local operating companies, which were then reorganized as the seven Baby Bells. Microsoft In June 2000 a federal judge found that Microsoft had illegally maintained its monopoly on PC operating systems and ordered Bill Gates' company split in two. A year later, however, portions of the ruling were overturned, and Microsoft then settled-avoiding a breakup. Despite all the good news, he still sees one crucial - and worrisome-piece of unfinished business standing in his way. "What can still hurt us the most, frankly, is Intel's antitrust practices," he says. "That's the largest obstacle for us to get where we need to go."
That was in 2001, when the company had also gained share for five years straight. The contraction was especially severe in Japan, where AMD's unit share slid from 25% in mid-2002 to 9% in mid-2004, according to Gartner Dataquest. The downright suspicious part, as AMD execs see it, was what happened to AMD's share with particular Japanese customers.
Charts) plummeted from 84% to almost nothing over the same period, while its total share of NEC business sank from close to 40% to less than 15%. AMD's Toshiba business flat-lined-dropping from about 15% in 2000 to zero in 2001 and ever since, AMD alleges. McCoy, 55, is AMD's executive vice president for legal affairs. He is also now the company's longest-tenured executive, having joined in early 1995-and maybe its toughest. When it comes to competing against Intel, nobody's had a longer, more close-up, or more jaundiced look. "As a matter of economics, the monopoly probably breaks somewhere between 30% and 35%," says McCoy, referring to the point at which AMD's rising market share would imperil what he sees as Intel's stranglehold on the x86 market. "Intel clearly got nervous," he continues, "so it went into Japan and just blew us out, just as a matter of sheer exercise of monopoly power." It did so, McCoy hypothesizes, by giving the Japanese computer makers millions of dollars in rebates and other payments for varying degrees of exclusivity - in some cases, 100%. "We don't buy exclusivity," responds Intel general counsel Bruce Sewell, 48, flatly. Though younger and more polished than the gruff and blunt McCoy, Sewell has been a soldier in the AMD-Intel wars for just as long, first as an outside lawyer and then, since 1995, from inside Intel's legal department. Intel's recapture of share in Japan reflected a variety of innocent factors, Sewell says, including Intel's rebound from certain production constraints and from having allowed its product line to grow stale, as well as its introduction, in March 2003, of the popular Centrino platform for notebook computers. In June 2005, AMD filed a historic antitrust suit against Intel, accusing it of illegally preserving its alleged monopoly on x86 processors by means of a wide range of exclusionary practices. The suit aims to keep Intel from cramming AMD back into its familiar market-share box. AMD claims that computer makers are quietly rooting it on. With the regulatory spotlight being turned on bright, the industry would be more courageous in building market share with us." To begin with, none of the 38 customers mentioned in AMD's complaint-computer makers, distributors, or retailers-has yet come forward to back AMD's claims. Judges may wonder exactly what manner of monopolist Intel could be when AMD is gaining share in servers, desktops, and notebooks; when CEO Ruiz has stated publicly that the 37-year-old company "is in the strongest position we've ever been in"; and when AMD's operating margin was, as of the first quarter of 2006, actually higher than the alleged monopolist's. Still, AMD argues that it should be doing even better, and that it is still being artificially excluded from the crucial market for enterprise-quality desktop and notebook computers.
Charts) in 1998-and about related probes of, or actions against, Intel now taking place in the European Union, Japan, and Korea. For readers of Fortune, claims that Intel competed unlawfully have an intrinsic fascination; Andy Grove, who stepped down as Intel's CEO in 1998 and as its chairman last year, has been saluted on Fortune's cover no fewer than eight times since 1993, including this past December, when we extolled him as "America's greatest student and teacher of business." Yet the suit is commanding the attention of the global business community for another reason too. It's seen as a bellwether for a mega-issue roiling competition law today: Assuming for the sake of argument that Intel did do what AMD alleges, is that illegal? For while there is wide consensus among antitrust experts about the harmfulness and, consequently, illegality of collusive activity among competitors - eg, cartelization, bid-rigging, price-fixing-there is no comparable agreement about conduct by one very big competitor acting alone. What's still largely undefined is precisely when tactics by such a player cross the line from vigorous competition into unlawful preservation of a monopoly (the American term) or abuse of dominance (the European term). The ambiguous outcome of the US government's case against Microsoft-whose practices were condemned, but narrowly, and punished, but lightly-has spurred more debate than it has quelled.
The one practice that has generated the most debate among scholars and regulators in recent years is the very one at the center of AMD's case against Intel: so-called loyalty rebates. These arise when a dominant firm offers rebates to business customers who fulfill 80%, 90%, or even 100% of their needs with that firm's products. These incentives can be so great as to amount to an offer the customer can't refuse. The rebates exclude competitors, yet the rebated prices may be well above cost and, therefore, not "predatory" by any traditional definition. Do such rebates ultimately hurt the public or benefit it? The US Federal Trade Commission, the US Department of Justice, the US Antitrust Modernization Commission, and the European Commission's Directorate-General for Competition had all been grappling internally with this question at the time AMD filed its complaint in Delaware, teeing up the issue for a US district court and eventually, some predict, the US Supreme Court. Cranking up the competition AMD's suit arrives at a critical moment in the long-standing blood feud between AMD and Intel, which have been fighting each other in court for most of the past 20 years. Though AMD's performance edge in those markets will be challenged as Intel phases in its new Core 2 Duo generation of chips, the interlude of technological superiority has given AMD an opportunity to change forever its status and reputation in the industry. Each company incorporates this recent history into the idealized narrative it is telling in court. AMD says Intel stepped up its wrongdoing when it saw itself falling behind technologically in 2003. Consumers were hurt by being forced to use higher-priced, inferior technologies. Moral: "When AMD has good parts, they do fine," as Intel's Sewell says. The muddled reality defies both sides' simplifications, though, in part because the case's origins long ...
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