Andrew Cuomo Should Leave Intel Alone

New York Attorney General Andrew Cuomo announced on November 4 that he is suing Intel for antitrust violations. Cuomo’s lawsuit is a mistake. He should drop it for two simple reasons. First, Intel’s alleged behavior is pro-competitive, not anti-competitive. Second, Cuomo has severely underestimated the extent of the relevant competitive market.

The primary charge against Intel is that the chipmaker has given out billions of dollars in payments and rebates to its customers in exchange for exclusivity agreements. Dell alone received nearly $2 billion in 2006. Cuomo calls this practice “bribery.” But in economic terms, this is exactly the same as lowering prices—and lower prices always help consumers.

Computer makers are free to turn down Intel’s offer. If they don’t like Intel’s exclusivity requirement, all they have to do is to say no. Intel is free to sell its products on its own terms; customers are free to refuse those terms. Rival chipmakers like AMD are similarly free to offer a better deal. Cuomo’s allegation of coercion falls flat.

Monopolies are characterized by reduced quantities sold, higher prices, and unsatisfied consumers. Consumers are hardly suffering with today’s wide assortment of netbook computers selling for under $400.

Moore’s Law continues to hold; processor power is still doubling every eighteen months or so. That is itself evidence of a competitive market. Intel has to keep improving its products. If it doesn’t, AMD and other competitors would overtake Intel in a heartbeat.

Consider also graphics processor maker Nvidia’s plans to enter the microprocessor market and directly compete with Intel and AMD. If Intel really were such a big, scary menace, potential competitors would stay away. Instead, Nvidia sees opportunity. Monopolies produce less than the optimal quantity. But consumers are not suffering from a lack of microchips. Therefore a monopoly does not exist.

In fact, most chips are not found in PCs at all. They are in cars, coffee makers, rice cookers, cell phones, watches, calculators, gas station pumps, and even self-flushing public toilets. That is the relevant competitive market. It is huge and growing. Fewer and fewer of the chips in non-PC devices are Intel’s. Samsung, VIA, Texas Instruments, and other firms continue to out-compete Intel in this vast market. Perhaps Intel should seek antitrust protection from them?

The chip market is not static, but dynamic. It is rapidly, unceasingly changing. Intel’s market share in computer processors might be substantial – 80% to AMD’s 18%. But that market appears to be past its peak. Consumers’ tastes are changing before our very eyes. And in any competitive market, it is consumers who hold all the cards. If Intel doesn’t make chips people want, they’ll go elsewhere. Nothing Intel can do will ever change that.

Laptops began to outsell desktops a few years ago. They are in turn starting to lose out to super-small netbooks, smartphones, and other devices that grow smaller and more powerful every year. If the trend continues, Cuomo’s antitrust suit will become not just misguided, but obsolete.

Calling Intel’s business practices “bribery” and “coercion” is little more than argument by assertion. Rebates and exclusivity deals are normal competitive behavior. Not only is Intel facing increasing competition in its home turf, that small segment is hardly the extent of the relevant competitive market. Intel faces an uncertain future as consumer tastes shift to smaller products powered by non-Intel chips. Cuomo’s antitrust lawsuit does not stand up to scrutiny. It deserves to be dropped.