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Sued for Success

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Sued for Success

Computer chip maker Intel is back in court. On Wednesday,
New York State Attorney General Andrew Cuomo filed a federal antitrust
lawsuit against the firm. The suit follows a record-shattering $1.5
billion antitrust fine levied on Intel by the European Union last May.

Going after Intel might allow Cuomo to score political points--never mind the inconvenient fact that Advanced Micro Devices,
Intel's arch-rival, is building a massive new factory in New York--but
this legal assault will only stymie innovation in the computer chip
market.

What did Intel do wrong? From 2001 to 2006, Intel allegedly offered
rebates and discounts to computer makers to encourage them to use its
products over those of its rivals. Cuomo claims that this constituted
"coercive" pricing practices designed to undercut AMD.

Yet in most cases, such pricing policies are perfectly legal.
Offering better prices to loyal customers, whether through volume
discounts or rebates, is a common practice in many industries. Thus
Intel's real offense, it seems, is its high market share.

In the personal computer processor market, Intel sells nearly 80% of
all chips, or four times as many as AMD. This means that under U.S.
antitrust laws, Intel is considered to possess "market power." Firms
with market power are barred by antitrust laws from engaging in certain
behaviors that are deemed anti-competitive, including so-called
vertical restraints, which are arrangements between companies at
different levels of the production and distribution process.

However, an examination of the computer processor industry's recent
evolution reveals an intensely competitive and vibrant market. For over
a decade, Intel and AMD have competed fiercely, yielding immense
benefits to consumers. Processors are rapidly growing faster, cheaper
and more energy efficient every year. This trend shows no signs of
letting up. Between 2001 and 2006, the speed of the leading Intel
processor available for under $250 increased by a whopping 553%, or 41%
per year, according to data from PassMark Software.

But what if Intel really were stifling innovation? Flawed antitrust
laws have gutted a key market mechanism for policing undue market
power, standing in the way of market solutions. Under federal law, it
is illegal for competing firms to engage in group boycotts. So, if IBM, Dell and Hewlett-Packard
were to band together to pressure Intel to change its policies, the
computer makers themselves would be guilty of illegal anticompetitive
behavior.

Moreover, if Intel really was acting in an anticompetitive manner,
it did not do a very good job of it. Consider that from 2001 to 2006,
the same period during which Cuomo alleges Intel was engaged in
anticompetitive behavior, its share of the computer processor market
actually declined from 78.7% to 73%, according to statistics from
Mercury Research and AMD. During the same period, AMD's share jumped
from 20.2% to 22.0%.

Finally, Intel's market share tracks closely the quality and value
of its processors, not its use of aggressive rebates. The company's
market was essentially stagnant until the summer of 2006, which
coincided with the launch of Intel's revolutionary Core 2 Duo line of
processors.

As the Intel saga illustrates, U.S. antitrust law is simply not
equipped to cope with the realities of the modern information economy.
Defining distinct markets in any meaningful sense is next to impossible
in an age when new markets are emerging constantly. Currently, the
processor market is rapidly shifting toward handheld computing devices,
where Intel is far behind companies like Samsung, Texas Instruments and, yes, AMD.

Antitrust laws are intended to protect the public, not struggling
competitors, as the U.S. Supreme Court noted in 1993. The processor
industry shows no signs of consumer harm, regardless of Intel's market
share or its pricing practices. Punishing Intel for simply doing its
best to compete will only curtail its potential to create innovative
new products that can benefit consumers. Worse, it will discourage
entrepreneurs from taking the big risks that will create the Intels of
tomorrow. If Cuomo's suit succeeds, consumers will be the ultimate
losers.