Intel delays Merced

FTC attorneys have been investigating Intel's business practices since September 1997 and are reportedly compiling a case to present to FTC commissioners, who will shortly vote on whether to file suit against the Santa Clara, Calif., company.

Any FTC action against Intel (INTC) would likely have a greater immediate impact on Intel's chip customers than it would on corporate IT departments, although both parties could benefit over the long term.

A central issue is whether Intel has leveraged its approximately 85 percent market share to subdue competitors and third parties, while locking OEMs into using Intel processors.

"[Intel has] monopoly power. That's clear," said Scott McNealy, CEO of Sun Micrososystems Inc., in Mountain View, Calif. "The question is whether they're abusing it. They certainly have less absolute power than Microsoft -- there is some level of competition in the chip space."

The biggest impact on Intel, its customers and IT buyers would be if the FTC forces Intel to openly license its patents. Analysts see this as a possibility, citing the government's moves in the 1970s to force IBM to open all of its patents on all its products.

If that happened, a more competitive market for processors, chip sets and motherboards could drive prices down, and not only for domestic companies.

For example, off-shore companies like Samsung Electronics Inc., Hitachi Electronics Ltd. or Hyundai Ltd. could use their vast manufacturing resources to build X86 microprocessors in large quantities. Most PC makers today buy significant portions of a PC -- motherboards and some chip sets -- from off-shore companies.

"This would not ensure their success, but they would not be blocked from competing by something that's out of their control,'' said Martin Reynolds, an analyst at Dataquest Inc. in San Jose, Calif.

Advanced Micro Devices Inc. and Cyrix Corp., through foundry agreements with IBM Microelectronics, do have access to Slot 1 patents.

In a surprising move, Intel recently disclosed that it has licensed the Pentium II bus design to a third-party manufacturer. Intel declined to name the company.

The FTC refused to comment this week on its investigation, but previous comments demonstrate its belief that Intel's market power could stymie competition.

"Maintaining and enhancing Intel's market power ... could result in increased prices and reduced quality and innovation in each of the relevant markets,'' the FTC said in an April statement, when it conditionally approved Intel's purchase of Digital Equipment Corp.'s semiconductor business.

One critical piece the FTC may use against Intel is the chip maker's patent dispute with Intergraph Corp. In that case, a federal judge ruled that Intel wrongfully withheld products and information from Intergraph because the computer maker was suing Intel.

An Intergraph attorney acknowledged the FTC has been in touch with the company regarding Intel.

"Cutting off supplies steps over the line of fair conduct for a company with [Intel's] market position," said the attorney, who requested anonymity.

The FTC is likely investigating Intel's policy of requiring vendors to sign NDAs (nondisclosure agreements) before being allowed to access information about Intel's chips. Intel and its OEM partners can withdraw from the NDA at any time, for any reason. Each party can also request the return of intellectual property.

That's a key part of the Intergraph suit, in which Intergraph executives claim that because Intel withheld both chips and chip information, the company lost millions in sales because it was late to market with products.

"Intel can't leverage [access to] next-generation technology to force OEMs to do what they want them to do,'' said Jim Meadlock, CEO of Intergraph.

If the FTC forces Intel to relax its NDAs, OEMs would not have to be so concerned that they were putting their business in jeopardy by competing against Intel, either in the courtroom or the marketplace.

As part of its investigation, the FTC also has asked microprocessor competitors to provide information on pricing, going back to the 486, as well as to recount instances where they tried to sell their chips to an OEM who uses Intel processors.

OEMs were asked about joint marketing programs, flexibility in using non-Intel products and use of NDAs.

Intel officials refused to comment on the status of the investigation.

Additional reporting by John Dodge