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Thu 30 Jun 2005 04:00 AM

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Processor punch-up

Once again it appears that the IT industry’s dirty laundry will be aired in public. AMD’s decision to take on Intel in a high-profile antitrust lawsuit in the US promises to reveal an absolute minefield of information about behind the scenes negotiations and marketing tactics. This bruising battle looks set to run and run.

Once again it appears that the IT industry’s dirty laundry will be aired in public. AMD’s decision to take on Intel in a high-profile antitrust lawsuit in the US promises to reveal an absolute minefield of information about behind the scenes negotiations and marketing tactics. This bruising battle looks set to run and run.

AMD’s 48-page filing contains some scintillating nuggets of information about the global relationships that major OEM vendors have with Intel. It also explores in detail how the channel is coerced (according to AMD at least) into working with Intel. One of the main points of AMD’s case is that Intel’s bumper profits exist at the expense of the IT hardware vendors who are forced to scrape by on wafer-thin margins. Here’s what AMD had to say in its filing:

“Through its economic muscle and relentless marketing — principally its ‘Intel Inside’ and ‘Centrino’ programmes which financially reward OEMs for branding their PCs as Intel machines — Intel has transformed the OEM world. While once innovative companies themselves, the OEMs have largely become undifferentiated distributors of the Intel platform, offering ‘Intel Inside’ and ‘Centrino’ computers largely indistinguishable from those of their rivals. As their products have become commoditised, the Tier One OEMs operate on small or negative margins and the overwhelming portion of PC profit flows to Intel.”

Right, let’s deal with this claim straight away. The one point that AMD fails to consider in this argument is the fact that OEM PC vendors work on slim margins simply because there are so many of them competing against each other. To suggest that Intel is somehow creaming off the profits that should be going to the PC makers themselves is fundamentally flawed. If you have lots of companies competing against each other, margin pressure will increase.

There is no law against marketing and Intel has turned it into an art form, making itself the the only component brand that consumers specify when they make an IT purchasing decision. Businesses and consumers are not overly fussed what hard drive or motherboard is inside their machines, but you just know they'll take a keen interest in whether their processor is Intel or AMD.

The fact that the processor market is currently a duopoly — namely Intel and AMD — is the reason why Intel can maintain its awesome margins and operate such an aggressive marketing machine. It knows it is only up against one competitor so can do everything in its power to come up with tactics that limit its rival’s opportunities.

AMD’s lengthy complaint also explores in detail Intel’s allocation of marketing funds to the companies it works with. Much of this support for distributors, local assemblers and retailers is pumped into the channel in the form of back-end rebates, incentives and even market development funds (MDF). In the low margin world of IT hardware, these financial sweeteners are frequently the difference between profit and loss.

AMD makes out that the financial incentives Intel pumps into the channel are some sort of evil plot to keep people locked in to using Intel products. Again, I have to take issue with this argument to a certain extent.

I don’t believe for a second that this is a one-way street where Intel holds all the power and uses the allocation of marketing funds to keep OEMs and assemblers totally committed to Intel products.

In fact it is a two-way street. OEMs and assemblers still use the threat of building systems based on AMD processors to squeeze as much money as they can from Intel in terms of MDF and rebates. There’s no doubt at a global level that Intel itself is paying heavily for the privilege of keeping major names such as Dell exclusive to Intel, but the story with local assemblers is just as interesting.

I remember talking recently to a PC assembler based in the Levant who decided that the time was right to build his first batch of PCs based on an AMD processor platform. According to him, Intel got wind of the plan and promptly paid him a visit (chequebook in hand) asking how much he needed to stick exclusively with their processors. He told the Intel representative how much, the cheque was written, and everyone went home happy — except AMD of course.

Is there substance to AMD’s case? Yes. Has Intel acted illegally? Debatable. This is a case concerned with business ethics and global economic theory and people can form highly subjective opinions. The main problem in the processor space is that there are only two global players with any real credibility. The dynamics of this duopoly ensure that the dominant player will be as aggressive as possible to keep the smaller competitor out of the picture. Intel has done a fantastic job in this respect to date.

The biggest positive stemming from AMD’s case is that the industry code of silence regarding Intel’s tactics may finally be broken.

I’ve spoken to representatives from Middle East distributors, local assemblers and even the regional representatives from the global OEMs. The fact is that they still do not want to talk about this case on the record because they know that their business is dependent on the Intel dollar. Typically, they will let out a nervous laugh, fiddle with their collar before declaring that is not their place to comment on the record when asked about Intel’s tactics. Off the record it is a different story.

Competition is healthy and having a core component sector with only two major vendors present is a recipe for trouble — especially when one player is so much more dominant. This case may well mean that Intel gets a slap on the wrist in the US. The European Commission may also wag its finger and ask the naughty boys and girls at Intel to cease and desist their aggressive tactics in much the same way that the Japanese authorities recently did.

However, I do not see any authoritative body capable of delivering a similar reprimand in the Middle East and Africa region. For this reason alone, I expect the status quo to continue in this region for the foreseeable future. Intel is the friendly face for the Middle East channel at present; visiting pretty much every city in the region and helping local assemblers grow and develop their business.

To be perfectly blunt, Intel-AMD power politics bickering will only go away if there was a third credible player in the processor sector and one player didn’t dominate the space quite so much. Look at the hard drive space where, despite consolidation, the presence of four major players — Hitachi GST, Maxtor, Seagate and Western Digital — ensures healthy levels of competition and a choice of suppliers for PC vendors.

Unfortunately, the massive barriers to entry mean that a third processor player is highly unlikely. When it is one against one, the stronger player always goes for the knockout punch. AMD is in the Intel firing line and will stay there whatever the outcome of the US antitrust case. There is an incredibly fine line between aggressive sales and marketing tactics and illegal activity.

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