Intel and AMD bury the hatchet in Anti-Trust case for $1.25B

After decades of market wrangling and years of legal complaints, AMD and Intel have settled on their long standing dispute of Intel's alleged anti-competitive practices against AMD. In accordance with the settlement, all patent disputes are resolved and AMD will withdraw all legal complaints worldwide. In addition to this, the cross-license agreement has been extended for another 5 years. In the aftermath of this historic settlement between the two largest chip-makers, there will likely be many who cry foul or vindication and the flames on forum's will reach far and wide.

We don't know the exact reason's why Intel settled now, or what the long term ramifications will be for either company, but suffice it to say, this long and storied chapter is now closed. AMD may have come away with a victory, but what about consumers and OEM's, did they gain anything from this? How about the semi-conductor industry?

The legal battles and anti-trust complaints stem from the notion that Intel is a "monopoly" and has used its position to push AMD out of the market and in the process hurt AMD and consumers. The specific complaints are against the use of discounts or rebates that Intel would pay to OEM's if they agreed to use Intel chips exclusively or at some percentage of volume. The logic goes, that Intel was able to use a dominant position and essentially "pay" companies not to use AMD chips. This is claimed to not only directly hurt AMD, but the entire market. As a result, OEM's and consumer's now have "less choice" and this will ultimately result in less competition.

Not only is this analysis short-sighted, it is missing the bigger picture of the market as a whole and will ultimately result in hurting the semi-conductor market and consumers. Despite the fact that AMD actually sold everything it made during the time Intel was allegedly committing anti-competitive behavior, there is very little evidence that consumers were ever unable to buy AMD chips. The fact that Intel was able to offer rebates and discounts to OEM's and remain incredibly profitable only speak to the efficiencies of Intel's capital structure which resulted in lower prices for OEM's and consumer's. The fact that AMD was unable to offer discounts and under bid Intel for business shows that the problem is not with Intel being Anti-competitive, but AMD being uncompetitive in the market. AMD was unable to undercut Intel's prices because they had a less efficient capital structure and were unable to profitably sell chips at those level's. In a free market, the incentive is for AMD to improve efficiencies and eliminate waste such that they can compete.

Next, Is Intel really a monopoly? It is important that we distinguish between a legal monopoly and an economic monopoly. A legal monopoly is one that is granted by the state which allows a company to be a single supplier of a good at the expense of all others (i.e. utility companies etc.). An economic monopoly occurs when a company emerges as a single source supplier by being the most efficient (poorly run companies went bankrupt) or consumer preference chose a single entity in the market. Is Intel a legal monopoly? Yes and No. The patent system is a de facto monopoly system where a company is granted a legal monopoly over an idea. Intel is technically a legal monopoly on the x86 IP and other things like chipset busses and other misc items. When Nvidia complains about Intel refusing to grant them a bus license for QPI, the argument for anti-competitive behavior has some merit. However, in the case of Intel vs AMD, the government has brokered a cross-licensing agreement for all IP and they are essentially in a quasi-free market situation. So in this respect, Intel is NOT a legal monopoly. However, Intel is arguably an economic monopoly which is why the government steps in.

Ironically, The government has very little problem with anti-competitive behavior when Intel prevents Nvidia from creating Nehalem chipsets because they were complicit in the arrangement of the monopoly and license. However, it appears they do have a problem with Intel becoming an economic monopoly because that was chosen by the market, ergo, the government didn't have any control in the situation, and therefore, must punish everyone involved.

Finally, the least realized aspect of harm is the fact that billions of dollars in capital have essentially been flushed down the toilet. How you may ask? Through a combination of fines from the EU and this settlement, over $2.5B in capital have been moved from wealth generating activities to wealth destroying activities. In a free market that is removed from coercion and government intervention, a profit occurs when you create a product that is worth more than the sum of all resources put into creating it. When this occurs, your reward for using resources effectively is a profit. On the other hand, when you are wasteful and inefficient and create a product that is worth less than the sum of all resources put into it, your punishment is a loss. In this respect, we have moved over $2.5B from one of the largest wealth generating companies in the world and blown it on boondoggles and social programs in the EU and given a handout to AMD which is nothing more than corporate welfare for a company that has a record of destroying wealth to the tune of ($7.2B) in retained earnings over the course of its lifetime.

To sum this post up, has the market benefited from the anti-trust activities against Intel. Most likely not, although AMD could surpise us with a remarkable turn around, but unfortunately that is still speculation. On the other hand, what we do know is that Intel has suffered much harm in all of this at the hand of the legal system so as of now, we can only say that a net harm has occured in the market and it's unknown how that will affect consumer's in the future.