INTEL : NEXT MS ?

Byungbae Kim

Senior Counsel for International Business Affairs

Wilson Sonsini Goodrich & Rosati, P. C.

bbkim@wsgr.com

American Bar Association’s Section of International Law’s Spring Meeting

(April 15, 2009)

Table of Contents

Price-cost test for fidelity rebates analysis ; comparison of Korea, EU, and the U. S.

Introduction.

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1

Summary of KFTC decision on Intel.2

2

introduction.

■ KFTC decision on Intel’s fidelity rebates (June. 2008)

○ Abuse of its market dominant positions.

○ Foreclosed competitors by providing fidelity rebates to SEC and

Sambo.

○ Cease/desist orders and administrative fines( US ＄ 20million).

■ Fidelity rebates (FR) : pricing structures offering

lower prices in return for a buyer’s commitment to

a larger share of his requirements.

■ Intel : Next MS ?

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3

Summary of KFTC’s decision on Intel.

■ Provision of FR to SEC on the condition to stop pur-

chase CPUs from AMD. (May. 2002)

01 4/4

02 1/4

02 2/4

02 3/4

02 4/4

03 1/4

03 2/4 ~05 2/4

Rebates to SEC (US ＄

million)

230 76 100 260 200 210 280 (quarterly average)

2.1 Alleged illegal practices of Intel.

< Intel’s rebates to SEC >

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■ Provision of FR to Sambo on the condition to switch from

AMD to Intel all CPU requirements for home shopping PC’s

(3nd Qtr 2003 ~ 2nd Qtr 2004 ; US ＄ 2.4 millions)

■ Provision of FR to Sambo on the condition to purchase

from Intel at least 70% of CPU requirements for domestic

PC

(4nd Qtr 2004 ~ 2nd Qtr 2005 ; US ＄ 3.8 millions)

■ Provision to FR to Sambo on the condition (3rd Qtr 2003)

1) Not to participate in AMD’s promotional event( September 25, 2003) for

64-bit CPU, and

2) Not to manufacture and sell PCs with AMD’s 64-bit CPU

2.1 Alleged illegal practices of Intel.

Summary of KFTC’s decision on Intel.2

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■ Related law : article 3-2 of the Monopoly Regulation

and Fair Trade Act of Korea (“MRFTA”)

■ Relevant market.○ Product market : x-86 series CPU for PC○ Geographical market : Korean market○ Distribution channel : direct channel to PC manufacturers

■ Intel had market dominant positions○ Market share : 95.1% on average from 2001 to 2005,○ High entry barrier : large capital investment and R&D investment.

2.2 KFTC findings.

Summary of KFTC’s decision on Intel.2

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■ Intel had provided rebates with an intent to exclude com-petitors

○ Adopted the rebates when AMD’s market share began to increase and stabilize

○ Intel’s FR to Sambo (3rd Qtr 2000) : linked to minimum shares (70%) of CPUs for domestic PCs, excluding CPUs for exports, and

○ Intel’s internal documents

■ Foreclosing effects.○ Intel’s rebates : most likely exclude competitors

1) Strong binding effects : “must-stock” characteristics, back-end payment

method, uncertainly of a rebate amount and AMD’s inability to compensate

the loss of switching buyers

2) Difficulty for AMD to find other buyers to substitute SEC and Sambo

3) Long reference period : three years for SEC and 21months for Sambo

4) Intel’s focus on SEC and Sambo : strategic and influential buyers

2.2 KFTC findings.

Summary of KFTC’s decision on Intel.2

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○ Foreclosing effects had actually occurred 1) Phase Ⅰ: 1st Qtr 2002 ~ 3rd Qtr 2002

SEC started purchasing AMD CPUs for home shopping PCs and PCs for ex-

ports

AMD’s market share in the direct channels : increased from 1.1% (4th Qtr

2001) to 8.0% (2nd Qtr 2002)

Intel’s conditional rebates caused SEC to stop the purchase of AMD CPUs

AMD’s market share : decreased to 1.2% ( 4th Qtr 2002)

2.2 KFTC findings.

Summary of KFTC’s decision on Intel.2

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○ Foreclosing effects had actually occurred 2) Phase Ⅱ: 1st Qtr 2003 ~ 4th Qtr 2003

Sambo increased the purchase of AMD CPUs for home shopping PCs

AMD’s market share in the direct channels : reached 3.2% (3rd Qtr 2003)

Intel’s conditional rebates caused Sambo to drop AMD CPUs

AMD’s market share plummeted to 0.8% (4th Qtr 2003)

2.2 KFTC findings.

Summary of KFTC’s decision on Intel.2

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○ Foreclosing effects had actually occurred 3) Phase Ⅲ: 3rd Qtr 2004 ~ 2nd Qtr 2005)

Sambo increased the purchase of AMD CPUs

AMD’s market share : increased to 16.7% (3rd Qtr 2004)

Intel’s conditional rebates forced Sambo to purchase at least 70% of its

domestic CPU requirements from Intel

AMD’s market share : decreased to 3.9% (2nd Qtr 2005)

2.2 KFTC findings.

Summary of KFTC’s decision on Intel.2

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The market share of AMD CPU in the direct channels

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The market share of AMD CPUs in SEC

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The market share of AMD CPU in Sambo

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The market share in CPUs for home shopping PCs

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The market share of AMD CPU in Sambo’s home shopping PCs

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The market share of CPUs in SEC’s home shopping PCs

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■Harm to consumers

○ Restriction of consumer choices for diverse PCs

○ Resulting in higher PC prices considering the severe compe-

tition in the PC market

Intel stopped its conditional rebates (3rd Qtr 2005)

Intel rebates to SEC : increased up to 14.2% (4th Qtr 2006)

2.2 KFTC findings.

Summary of KFTC’s decision on Intel.2

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■ Intel’s arguments and KFTC’s decision

○ Intel

Predatory pricing analysis, instead of exclusionary dealing

On effective price test, Intel’s rebate fall under the safe harbor

⇒ KFTC

Exclusive dealing under MRFTA

In exclusive dealing, economic analysis was not always neces-

sary

Results of effective price test : so unstable and lacking in ro-

bustness that it could not be depended upon (key variables;

CVS, rate of unconditional rebates, definition of average cost,

etc.)

2.2 KFTC findings.

Summary of KFTC’s decision on Intel.2

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■ Intel’s arguments and KFTC’s decision

○ Intel : no actual foreclosing effects

⇒KFTC : statistics showed the foreclosing effects on AMD

○ Intel : efficiency-increasing effects (the economy of scale,

motivation to sell more PCs, relation-specific investment)

⇒KFTC : no relation to the economy of scale, no motivation

for buyers to sell more PCs, and the existence of less re-

strictive means of competition such as quantity rebates

2.2 KFTC findings.

Summary of KFTC’s decision on Intel.2

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Price-cost test for fidelity rebates analysis; comparison of Korea, EU, and the U.S.

■ KFTC

○ Effective price test : not mandatory for exclusionary dealing analy-

sis

○ KFTC’s effective-price test on Intel’s conditional rebates : so unsta-

ble and lacking in robustness that it could not be depended upon

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■ EU

○ EU Commission and the courts : no price-cost tests ( Hoffman-La Roche,

Michelin I & II, and British Airways )

○ Considered the purpose and nature of rebates, reference period, transparency,

and other related circumstances

○ The EU Commission’s Guidance to Abusive Exclusionary Conduct by Domi-

nant Undertakings (December 2008)

Would examine economic data relating to cost and prices

Cost benchmarks : average-avoidable cost (AAC) and long-run average incremen-

tal cost (LRAIC)

Failure to cover AAC => an equally efficient competitor cannot serve the tar-

geted customers without incurring a loss

Failure to cover LRAIC => an equally efficient competitor could be foreclosed

Effective price that the rival will have to match : not average price of the domi-

nant firm, but the normal price less the rebate it loses by switching

Price-cost test for fidelity rebates analysis; comparison of Korea, EU, and the U.S.3

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■ U. S.

○ No single-product discount antitrust case has yet reached the Supreme Court

○ Lower courts : generally adopted below-cost pricing test (Barry Wright Corp.,

Concord Boat Corp., Virgin Atlantic Airway Ltd., and J.B.D.L. Corp.)

○ In Masimo Corp., the Court did not analyze or discuss about below-cost pricing

○ DOJ Reports on Single-Firm Conduct ( September 2008 )

Standard predatory-pricing approach has advantages : administrability, clarity, and

reduced risk of chilling precompetitive competition

DOJ : likely would apply this approach in most cases

Further assessment is necessary before applying this approach to all cases

Price-cost test for fidelity rebates analysis; comparison of Korea, EU, and the U.S.3

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THANK YOU

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