Intel settlement: The power of emails
How emails played a role in Intel's $1.25 billion settlement with AMD nine days after they were made public.
NEW YORK (Fortune) -- Nine days after New York State Attorney General Andrew Cuomo made public emails to, from, and about current and former Intel CEOs Paul S. Otellini and Craig Barrett, Intel settled a four-year-old antitrust case that semiconductor rival AMD had filed against it.
Cuomo says the emails show the men discussing some of the $6 billion in quarterly payments Intel (INTC, Fortune 500) made to computer maker Dell (DELL, Fortune 500) from 2001 to 2006, which Cuomo and other regulators believe were conditioned on Dell's agreement not to ship any computers powered by AMD (AMD, Fortune 500).
Under the settlement, Intel will pay AMD $1.25 billion and make certain other concessions.
Okay, it wasn't just publication of the emails that did the trick. A source familiar with the situation tells me that Intel and AMD actually had a handshake deal on yesterday's settlement before Cuomo filed his antitrust complaint against Intel November 3, exposing the emails (though Intel did know by then that the Cuomo suit was coming).
At yesterday's conference call concerning the settlement, Otellini denied that publication of the emails hastened the settlement, stressing that the negotiations that led to it began in April.
Asked if the emails were accurate, he said, "Yeah, I said some of those things, but they are taken broadly out of context. When the full nature of the emails is exposed, [it will be clear that] there is another way to interpret them." He called them "four or five snippets" plucked from about 200 million pages of documents, referring to the discovery materials amassed in AMD's civil suit against Intel in federal court in Delaware.
Still, there is a telling sequence of events that obviously pressured Intel to take the positive, if grudging, step it took yesterday -- a step toward not only putting its worldwide antitrust problems behind it but, more important, restoring its tarnished credibility.
AMD first laid out the broad outlines of its case against Intel back in June 2005. Its premise -- and the premise of all succeeding antitrust litigation against Intel to date -- was that Intel uses exclusionary "loyalty rebates," whereby a monopolist conditions discounts on a customer's agreement to fill, say, 90% to 100% of his needs exclusively from the monopolist.
Loyalty rebates when employed by a dominant company -- and Intel is as dominant as they come, having raked in at least 80% of the revenues in the market for PC computer microprocessors for almost two decades -- can effectively exclude rivals from a market, even if the rivals' offerings are cheaper and better.
The payment of loyalty rebates is illegal abroad and very likely illegal in the U.S., though the American precedents are not crystal clear. Intel, in any event, maintains that it has never paid loyalty rebates to anybody, and that it only uses traditional, volume-based discounts, which benefit consumers. "We don't buy exclusivity," Intel's then general counsel, D. Bruce Sewell, flatly told this magazine in 2006, and that is still the company's position.
When AMD filed its complaint, it possessed relatively little hard proof backing its suspicions. Massive amounts of information were then unearthed through the discovery process -- the 200 million pages Otellini was referring to -- but none of it has yet seen the light of day. Everything was sealed from public view by broad confidentiality orders imposed by the court. (The Reporters Committee for a Free Press challenged those orders on behalf of two dozen media organizations in late 2005, but lost.)
Though the Japan Fair Trade Commission issued formal sanctions against Intel in March 2005, finding that it had, indeed, paid illegal loyalty rebates to five unidentified Japanese computer makers (identified as NEC, Sony (SNE), Toshiba, Fujitsu, and Hitachi (HIT) in AMD's civil complaint), it revealed almost nothing about the nature of its evidence against Intel.
Similarly, when the Korea Fair Trade Commission ruled, in June 2008, that Intel had paid illegal loyalty rebates to Samsung and Sambo Computer, the information it made public was skeletal. (Intel settled the Japanese charges, and has appealed the Korean ones.)
In May, the European Commission socked Intel with its largest fine in history -- $1.46 billion -- after finding that it had paid exclusionary loyalty rebates to Dell, Hewlett-Packard (HPQ, Fortune 500), NEC, Acer, Lenovo, and Media Saturn Holdings, which is the largest computer retailing chain in Europe.
Nevertheless, the EC's more than 500-page written ruling, though shown privately to Intel, remained confidential at that time. Intel derided it as the work of biased foreign regulators, unfairly crediting the sour-grapes speculations of an outshone competitor.
But the awful truth could not be kept at bay forever. AMD's civil case had a firm trial date approaching March 29, 2010, in federal court in Delaware, and there was no way the public could be excluded from a trial.
More pressing, summary judgment motions in that case were due to be filed December 1, and those would inevitably refer to, and append, volumes of emails, internal documents, and testimony from high-level officers. Though Intel might have fought to keep those sealed, too, it's doubtful it could have suppressed all of them. Cracks were appearing in the dam.
It was another bad omen for Intel when its longtime general counsel -- the experienced and respected antitrust litigator Sewell -- jumped ship to take the top job at Apple in early September.
That was just about a week before the EC issued the first public version of its ruling. The detail, meticulousness, and professionalism of the decision were profoundly unsettling to anyone who studied it closely.
Nevertheless, the text was heavily redacted and, therefore, far from persuasive. Though there were hundreds of references to damning emails and internal documents, the names of virtually every individual officer implicated had been deleted, as had almost every dollar figure mentioned in them, because at this stage EC rules permit Intel and third parties, like Dell, to liberally excise portions they claim to be confidential.
Upon release of this redacted version of the EC decision, Intel again characterized it as biased. "In a typical example of the evidence the Commission relied on," it said in a prepared statement, "a lower-level employee of a customer company speculates that Intel might retaliate against that customer by disproportionately reducing its discounts if that customer bought (or bought more) from AMD." We had to take Intel's word for it, because, as noted, all the names of individuals had been redacted from the report.
It was that last fiction -- that the EC case had been built on the speculations of lower-level executives -- that was destined for obliteration as soon as either the Cuomo complaint or the summary judgment exhibits were filed in AMD's civil case, whichever came first.
It happened to be the Cuomo complaint. Because his complaint -- which focuses on loyalty rebates allegedly paid to Dell, HP, and IBM (IBM, Fortune 500) -- overlaps with the portions of the EC ruling that deal with Dell and HP, Cuomo now filled in many of the elisions from the EC decision. Real names and numbers finally saw the light of day.
With the EC findings in one hand and Cuomo's answer key in the other, the public could now begin to piece together what the EC really found and some of its basis for doing so.
In the case of Dell, for instance, Cuomo alleges -- and the European Commission has already concluded -- that Intel began paying large, quarterly loyalty rebates to Dell in 2001. By July 2002, however, many Dell customers were asking the company to make certain computer lines available with cheaper AMD chips.
Dell's then-chief operating officer (and later CEO) Kevin Rollins, after meeting with Intel negotiators to discuss that prospect, reported back internally that Intel was ready to do "whatever it takes" to keep Dell from purchasing from AMD. "Initial word is that our MOAP" -- the acronym stands for "Mother of All Programs," a term used to refer to Intel's massive quarterly rebate payments to Dell -- "should increase from the $70M this qtr to $100 mm."
More formally, the MOAP was known as the Meet Competition Program (MCP), but precisely how it was calculated and what it was for were things that weren't spelled out in any contract. A 2003 Dell internal document describes the MCP as a "'monogamy tax' for Intel," and explains: "There is not a formal contract per se that documents all the terms and conditions of the MCP program for a quarter. Rather, the MCP terms and conditions are agreed upon via email and telephone communications, and are finalized in a spreadsheet." One hundred million dollars per quarter, and no formal contract. Hmm.
Whatever these payments were for, they skyrocketed in size as Dell became increasingly tempted to stray from the Intel fold. The pressure to stray intensified after April 2003, when AMD introduced its Opteron chip for servers, which many customers saw as clearly superior to Intel's then offerings (as well as cheaper). Worse still, due to certain misplaced bets and calculations relating to its product "roadmap," Intel was not going to be able to offer a truly competitive server chip for a period of two to three years.
Dell considered switching to AMD, but its executives feared the "double whammy" of seeing a huge chunk of its rebates not only vanish, but shifted to a competing computer maker. By mid-2004, Intel was paying Dell about $300 million per quarter in rebates -- or more than one-third of its quarterly net income.
But Dell continued to lose share, revenue, and reputation by not shipping the Opteron. On November 4, 2005, then CEO Otellini reported back to colleagues on a call he had received from Michael Dell, Dell's then chairman: "[Michael Dell] opened by saying 'I am tired of losing business'... 'Dell is no longer seen as a thought leader.'" Later that month, Michael Dell emailed his own people writing, "We are losing the hearts, minds and wallets of our best customers."
But Otellini countered Michael Dell's complaints by, according to Otellini's email, reminding him, "We are transferring over $1 billion per year to Dell for [MCP] efforts. This was judged by your team to be more than sufficient to compensate for the competitive issues." When advised in February 2006 that Dell's then CEO Rollins had decided to stay with Intel chips, Otellini emailed a colleague calling Rollins "The best friend money can buy."
Intel's rebate payments to Dell maxed out that fiscal quarter, February to April 2006, at $805 million, according to the Cuomo complaint. That figure represented 104% of Dell's net income for the quarter. (Do these sound like traditional, volume discounts to you, reader?) Nevertheless, Dell capitulated in May and announced plans to introduce one line of AMD-powered servers. Intel's payments to Dell that quarter dropped to $554 million (which, nevertheless, constituted 116% of Dell's quarterly net). In August 2006, Dell actually started shipping AMD-powered servers, and in September it unveiled plans to introduce other AMD-powered lines of PCs. The next quarter, its rebate dropped to $200 million.