Playing Monopoly . . .

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AMD commissioned a report in which it is claimed that Intel basically made $60 billion too much money due to nasty monopolistic practices, and that if they were stopped from doing this, the world would save about $80 billion over the next decade.

Is this true?

We could spend a lot of time going over the details, and your eyes would glaze over, and while we might cure some cases of insomnia, we don’t want to be sued by those who crack their heads against a table when they fall asleep reading such a piece.

So we’ll just focus on three big items, two today, the last tomorrow, which should be enough to tell you how much this report is worth:

Point One: Where’s the Rest of Me?

AMD has released a “summary” of this report. They have not released the entire report, anywhere. In reports like this one, the devil is in the details, more specifically, the assumptions that lie behind the numbers. From what little we can see from the summary, there’s at least a few really bizarre ones (like growth in the CPU market will suddenly half over the next ten years).

Until the whole report becomes available, it’s pretty hard to seriously judge it because most of it is missing. One can only point out problems that are blatantly obvious from the summary.

Point Two: You’ve Ruined 70% Of My Life

Twenty-five years ago, two pizza parlors opened up in your neighborhood. Let’s call them Number One and Number Two.

For the first fifteen years or so, Number One offered excellent pizza and pasta: great cheese, fresh toppings, speedy, reliable delivery and service for both small and big orders.

What did Number Two do? Well, they stuck with just pizza, and basically bought slices from the first place, then eventually made copies of whatever Number One did, but while the copies were usually OK-to-good, they just weren’t the same as the original. Sometimes the ingredients weren’t the best, but more often the pizza arrived late and cold, and occasionally, not at all. Really big pizza orders were often rejected because Place Number Two couldn’t handle the whole order.

Number One did excellent business; they normally got about 85% of the business in the town, even though it charged pretty high prices, even higher than the price of equivalently excellent pizza in the big city, where there were lots of excellent pizza parlors.

Number Two managed to stay in business, but found it could charge only about half the price the leader charged, which meant they barely broke even.

Some found the pizza good enough for them, good enough for them to be steady customers, but even the most loyal patrons of the second place mainly went there because it was cheap, not because it was better.

Time went on, and after some legal difficulties with place number one about copying its products, place number two decided that it would be better off if they stopped copying and started making their own style of pizza. After a couple years of using somebody’s else recipe that they bought, they developed their own recipe, and after a while, they started making pizza generally considered as good or even better than Place Number One (which had a few problems for a while), though they still had delivery problems, especially for the bigger orders.

They got some more customers, but most people stayed with the first place, mostly out of sheer habit. Many didn’t even know about Number Two (they almost never advertised), and some of those who did stayed away due to earlier bad experiences.

The big customers were even more loyal, and just to make sure they stayed that way, Place Number One started offering their big customers secret deals like, “Buy all your pizzas from us, and get 10-20% cash back.” Since place number two could only supply the big customers with a part of their order, this deal kept the big customers very loyal to Number One.

Eventually, Number One patched up its problems, regained its pizza superiority, and Number Two lost its extra customers.

Number Two did have a plan, though. It came up with a new way to make pizza that was much better, though much harder to make.

More importantly though, the head guy at Number Two retired and a new guy took over. While he was for the new way, he felt that the big priority at Number Two was to greatly expand their capacity to make more pizzas so they could supply the big customers and take those customers away from Number One.

Meanwhile, Number One was having problems again. It stuck with the old way of making pizzas because new ways were expensive and hard to handle, even though they had more and more problems with the ovens, and the pizzas coming out of those ovens were getting acidic and too hot to eat. Eventually, the old way broke down, and Number One had to go back to the drawing and come up with a new way to make pizza.

Number One also found out that people were finding out about their secret deals, and their lawyers told them that they’d probably lighten up and at least change some of the details on them.

It took Number One a couple years to work things out, and for a while, Number Two did even better than they did a few years before; they got more sales AND better prices. While most customers still stuck with One out of inertia, things were looking decidedly rosier for Number Two than they ever had before. They started borrowing lots of money to make more pizzas and borrowed even more to buy a pasta company so they could also serve that like Number One always did.

Number Two started getting more and bigger orders from big customers, so many that they had to ignore many of their smaller but older customers. This did not make them happy.

Worse, Number One bit the bullet and this time truly fixed their pizza-making problems, which let them come up with a new line of pizzas much better than Number Two’s, and Number Two had nothing to match it, since they had been spending all their time, effort and money making more pizzas rather than planning better ones.

However, Number One still had many old ovens working, and not too many new ones, so to get rid of the old stuff (and not so coincidentally show Number Two who was boss), they started selling Old Style Pizza really cheaply. Customers really liked that, so Number Two was forced to cut its prices a lot. Since the company had gotten a lot bigger, it cost a lot more money to run the company and pay interest on its debts, so the price cuts meant that it started losing a lot more money than it ever had before (nor was the pasta business doing too well).


Having said all that, just how much of the success of Number One would you say was due to those secret deals they made to the big customers, and how much was due to them simply being a much better company, with better products and service, than Number Two, especially at the beginning when habits are set, and generally in the long-run?

Yes, Number One was very profitable, but which would you say was the bigger reason for it, a few lousy business practices, or generally lousy competition?

I think most honest, reasonably sane people would say that most of the reason for Number One’s Intel’s success was superior performance, far more than a few suspicious business practices. While I certainly don’t think it’s 100% performance, 0% shady practices (like Intel would have you believe), I think 70-80% performance is a very reasonable guess.

(For those AMDers who need a little help on the sanity part, would you have bought a K6-2 if it had cost the same as a Pentium II? An Athlon XP rather than a late-model Northwood? An X2 rather than a C2D? Even when AMD was competitive, weren’t your purchases more often driven by value rather than sheer superiority? Be honest.)

This report says that “generously” only 30% of the success (i.e., a pure, well, maybe not so pure guess not supported by any analysis) was due to Intel superiority, and the rest due to being “monopoly profits.”

There’s a fatal flaw right there. There is nothing illegal about being a monopoly. If you think otherwise, you’ve either been misinformed, or are just wrong. If you get practically all the business because your competition sucks, that’s perfectly OK, and you certainly can’successfullysfuly sued for that. Antitrust does not mean affirmative action. If Numbers One and Two were real pizza parlors, and some government agent stopped you at the door and said, “Sorry, you have to buy your quota of Number Two pizzas,” what would you say to that?

What US antitrust does say is that companies that are monopolies can’t engage in certain anti-competitive practices to freeze out small competitors. That’s bad, you can be sued for that, and some of Intel’s rebate practices may well be found not to be kosher, but . . . .

Before Intel can be found guilty of anything on antitrust grounds in the US, first it must be found to be a monopoly*. No monopoly, no grounds for a lawsuit, and it’s very arguable, I would say doubtful, that a court would find Intel a monopoly. It’s obviously dominant, but dominance and monopoly aren’t the same thing. Unlike Microsoft and Windows, you face no big impediments, if not impossibilities, running mainstream PC programs on an AMD-based computer. AMD has the licensed right to make x86-compatible CPUs, period.

(The EU has different rules which allow for punishment if a company “abuses” its “dominant position.” It’s very doubtful Intel could successfully argument that it didn’t have a “dominant position” in the EU.

(The case of Intel being a monopoly would become much stronger if it became the only decent-sized company that could make x86 processors, which is why it’s very unlikely Intel would pull AMD’s x86 license if it were taken over by anybody)

So that $60 billion dollar figure shrinks to about $25 billion even if you very generously assume that 30% of Intel profits are due to nasty practices, and goes to $0 billion if Intel is found not to be a monopoly.

If AMD is trying to imply that they can sue Intel for a figure somehow connected to this figure, unless you completely buy that silly 30% figure, what they are effectively saying is that they’re partly-to-mostly suing Intel for being better than them. Gee, if they’re going to do that, why don’t they sue Jerry Sanders, they’d have a stronger case. 🙂

That, of course, will be laughed out of court, and I don’t think even the AMD execs would seriously pursue such a bloated figure, but as you’ll see tomorrow, this study was commissioned for PR, not legal reasons.

Ed


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