Technology

Intel under the gun

Regulators try to rein in another high-tech titan

WARREN CARAGATA June 22 1998
Technology

Intel under the gun

Regulators try to rein in another high-tech titan

WARREN CARAGATA June 22 1998

Intel under the gun

Regulators try to rein in another high-tech titan

Technology

They are the titans of the high-tech world. Intel Corp., from its base in the heart of California’s Silicon Valley, makes microprocessor chips for more than 80 per cent of the world’s personal computers. Farther up the coast, Seattle-based software giant Microsoft Corp. makes the Windows operating system that runs an estimated nine-tenths of personal computers. But after years of market mastery, the dominance of this so-called Wintel group has raised the ire of government regulators. Last month, Microsoft was hit by a landmark U.S. antitrust case. Now, U.S. authorities have turned their gaze to the other half of the desktop-computer duo.

Last week, the U.S. Federal Trade Commission sued Intel for antitrust violations, alleging that Intel deliberately withheld important technical information from three other computer firms to prevent them from developing competing products. Intel argued it was within its rights to withhold information from its rivals. But William Baer, director of the FTC’s Bureau of Competition, called Intel’s action a “nuclear bomb” designed to wipe out its competitors. “Intel became successful by competing,” Baer said in announcing the case. “Once there, it cannot change the rules of the game so that no one else has a shot.”

But on the high-tech battleground, Intel’s

competitive drive is legendary. Former CEO Andrew Grove summed up the company’s philosophy in the title of his 1996 best-seller, Only the Paranoid Survive. Still, Intel has gone far beyond mere survival. From its founding in 1968, success was almost immediate. Computer giant IBM’s decision in 1981 to use Intel chips for its personal computers secured the company’s future, and brought phenomenal wealth. Based on the value of its stock, Intel is now worth about $175 billion. It generated profits last year of $10.2 billion on sales of $36.9 billion. That rich and steady profit stream has helped Intel stay ahead of its competitors and fund the

enormous cost of developing new products without taking on excessive debt.

Suddenly, however, the ground is shifting under the titan’s feet. The lawsuits against Intel and Microsoft mark a historic attempt by the U.S. government to regulate the business of high-technology, where intellectual property and constant innovation are critical assets. “The climate in Washington has changed,” says Jim Catty, a technology analyst and president of Corporate Valuation Services Ltd., a Toronto-based company that assesses the value of companies. If successful, Washington’s bid to force Intel to provide advance information about its products to every company that asks would break new legal ground, says Catty. Linley Gwennap, editorial director of Microprocessor Report, an industry newsletter based in Sunnyvale, Calif., says a victory by antitrust officials could also embolden Intel’s adversaries, opening the door to further antitrust troubles and lawsuits from aggrieved competitors.

The FTC’s ultimate goal is to block Intel from using its dominance in the microprocessor market to control new generations of computer chips. The antitrust cases against Intel and Microsoft, says James Love of the Washington-based Consumer Project on Technology, a group founded by consumer advocate Ralph Nader, “are almost carbon copies.” Both seek to address, and redress, what Love calls “the astonishing growth of assertions of intellectual property rights” that are against the public interest.

Both Intel and Microsoft argue that they have used their tremendous profits to bring pioneering new products to market, and that government attempts to regulate high-technology could kill the innovative spark that makes the industry tick. But rather than fostering invention, regulators argue, the two companies are stifling it by hindering competition. Intel’s conduct, according to the FTC case, diminishes “incentives to develop new technologies.”

The antitrust battle is far from the only problem Intel faces. Its stock price is near its 52-week low because of slowing demand for PCs—despite falling prices. The company recently pushed back the release of its new 64-bit Merced processor, which is aimed at the market for corporate workstations and computers doing heavy duty as network servers. The biggest challenge to the company, Gwennap says, is that consumers are now finding they can run most of the software they want without buying an expensive computer powered by one of Intel’s _ newest and most powerful processors. “If § that erosion continues, then Intel’s business I starts to teeter,” he says. Under the circum| stances, a little paranoia may be warranted.

WARREN CARAGATA

Warren Caragata may be contacted at: caragata@macleans.ca

A HEALTHY SHARE

Despite increased competition, Intel still dominates the market for microprocessors