Intel : Next MS ?

1. Intel : Next MS ? Byungbae Kim Senior Counsel for International Business Affairs Wilson Sonsini Goodrich & Rosati, P. C. bbkim@wsgr.com American Bar Association’s Section of International Law’s Spring Meeting (April 15, 2009)

2. Table of Contents 1 Introduction. 3 Summary of KFTC decision on Intel. Price-cost test for fidelity rebates analysis ; comparison of Korea, EU, and the U. S. 2

3. introduction. • KFTC decision on Intel’s fidelity rebates (June. 2008) • Abuse of its market dominant positions. • Foreclosed competitors by providing fidelity rebates to SEC and Sambo. • Cease/desist orders and administrative fines( US＄ 20million). 1 • Fidelity rebates (FR) : pricing structures offering lower prices in return for a buyer’s commitment to a larger share of his requirements. • Intel : Next MS ?

4. Summary of KFTC’s decision on Intel. 2.1 Alleged illegal practices of Intel. • Provision of FR to SEC on the condition to stop purchase CPUs from AMD. (May. 2002) < Intel’s rebates to SEC > 2

5. Summary of KFTC’s decision on Intel. 2.1 Alleged illegal practices of Intel. 2 • Provision of FR to Sambo on the condition to switch from AMD to Intel all CPU requirements for home shopping PC’s (3nd Qtr 2003 ~ 2nd Qtr 2004 ; US＄ 2.4 millions) • Provision of FR to Sambo on the condition to purchase from Intel at least 70% of CPU requirements for domestic PC (4nd Qtr 2004 ~ 2nd Qtr 2005 ; US＄ 3.8 millions) • Provision to FR to Sambo on the condition (3rd Qtr 2003) • Not to participate in AMD’s promotional event( September 25, 2003) for 64-bit CPU, and • Not to manufacture and sell PCs with AMD’s 64-bit CPU

6. Summary of KFTC’s decision on Intel. 2.2 KFTC findings. 2 • Related law : article 3-2 of the Monopoly Regulation and Fair Trade Act of Korea (“MRFTA”) • Relevant market. • Product market : x-86 series CPU for PC • Geographical market : Korean market • Distribution channel : direct channel to PC manufacturers • Intel had market dominant positions • Market share : 95.1% on average from 2001 to 2005, • High entry barrier : large capital investment and R&D investment.

7. Summary of KFTC’s decision on Intel. 2.2 KFTC findings. 2 • Intel had provided rebates with an intent to exclude competitors • Adopted the rebates when AMD’s market share began to increase and stabilize • Intel’s FR to Sambo (3rd Qtr 2000) : linked to minimum shares (70%) of CPUs for domestic PCs, excluding CPUs for exports, and • Intel’s internal documents • Foreclosing effects. • Intel’s rebates : most likely exclude competitors • Strong binding effects : “must-stock” characteristics, back-end payment method, uncertainly of a rebate amount and AMD’s inability to compensate the loss of switching buyers • Difficulty for AMD to find other buyers to substitute SEC and Sambo • Long reference period : three years for SEC and 21months for Sambo • Intel’s focus on SEC and Sambo : strategic and influential buyers

8. Summary of KFTC’s decision on Intel. 2.2 KFTC findings. 2 • Foreclosing effects had actually occurred 1) Phase Ⅰ: 1st Qtr 2002 ~ 3rd Qtr 2002 • SEC started purchasing AMD CPUs for home shopping PCs and PCs for exports • AMD’s market share in the direct channels : increased from 1.1% (4th Qtr 2001) to 8.0% (2nd Qtr 2002) • Intel’s conditional rebates caused SEC to stop the purchase of AMD CPUs • AMD’s market share : decreased to 1.2% ( 4th Qtr 2002)

9. Summary of KFTC’s decision on Intel. 2.2 KFTC findings. 2 • Foreclosing effects had actually occurred 2) Phase Ⅱ: 1st Qtr 2003 ~ 4th Qtr 2003 • Sambo increased the purchase of AMD CPUs for home shopping PCs • AMD’s market share in the direct channels : reached 3.2% (3rd Qtr 2003) • Intel’s conditional rebates caused Sambo to drop AMD CPUs • AMD’s market share plummeted to 0.8% (4th Qtr 2003)

10. Summary of KFTC’s decision on Intel. 2.2 KFTC findings. 2 • Foreclosing effects had actually occurred 3) Phase Ⅲ: 3rd Qtr 2004 ~ 2nd Qtr 2005) • Sambo increased the purchase of AMD CPUs • AMD’s market share : increased to 16.7% (3rd Qtr 2004) • Intel’s conditional rebates forced Sambo to purchase at least 70% of its domestic CPU requirements from Intel • AMD’s market share : decreased to 3.9% (2nd Qtr 2005)

11. The market share of AMD CPU in the direct channels

12. The market share of AMD CPUs in SEC

13. The market share of AMD CPU in Sambo

14. The market share in CPUs for home shopping PCs

15. The market share of AMD CPU in Sambo’s home shopping PCs

16. The market share of CPUs in SEC’s home shopping PCs

17. Summary of KFTC’s decision on Intel. 2.2 KFTC findings. 2 • Harm to consumers • Restriction of consumer choices for diverse PCs • Resulting in higher PC prices considering the severe competition in the PC market • Intel stopped its conditional rebates (3rd Qtr 2005) • Intel rebates to SEC : increased up to 14.2% (4th Qtr 2006)

18. Summary of KFTC’s decision on Intel. 2.2 KFTC findings. 2 • Intel’s arguments and KFTC’s decision • Intel • Predatory pricing analysis, instead of exclusionary dealing • On effective price test, Intel’s rebate fall under the safe harbor ⇒ KFTC • Exclusive dealing under MRFTA • In exclusive dealing, economic analysis was not always necessary • Results of effective price test : so unstable and lacking in robustness that it could not be depended upon (key variables; CVS, rate of unconditional rebates, definition of average cost, etc.)

19. Summary of KFTC’s decision on Intel. 2.2 KFTC findings. 2 • Intel’s arguments and KFTC’s decision • Intel : no actual foreclosing effects ⇒KFTC : statistics showed the foreclosing effects on AMD • Intel : efficiency-increasing effects (the economy of scale, motivation to sell more PCs, relation-specific investment) ⇒KFTC : no relation to the economy of scale, no motivation for buyers to sell more PCs, and the existence of less restrictive means of competition such as quantity rebates

20. Price-cost test for fidelity rebates analysis; comparison of Korea, EU, and the U.S. 3 • KFTC • Effective price test : not mandatory for exclusionary dealing analysis • KFTC’s effective-price test on Intel’s conditional rebates : so unstable and lacking in robustness that it could not be depended upon

21. Price-cost test for fidelity rebates analysis; comparison of Korea, EU, and the U.S. 3 • EU • EU Commission and the courts : no price-cost tests ( Hoffman-La Roche, Michelin I & II, and British Airways ) • Consideredthe purpose and nature of rebates, reference period, transparency, and other related circumstances • The EU Commission’s Guidance to Abusive Exclusionary Conduct by Dominant Undertakings (December 2008) • Would examine economic data relating to cost and prices • Cost benchmarks : average-avoidable cost (AAC) and long-run average incremental cost (LRAIC) • Failure to cover AAC => an equally efficient competitor cannot serve the targeted customers without incurring a loss • Failure to cover LRAIC => an equally efficient competitor could be foreclosed • Effective price that the rival will have to match : not average price of the dominant firm, but the normal price less the rebate it loses by switching

22. Price-cost test for fidelity rebates analysis; comparison of Korea, EU, and the U.S. 3 • U. S. • No single-product discount antitrust case has yet reached the Supreme Court • Lower courts : generally adopted below-cost pricing test (Barry Wright Corp., Concord Boat Corp., Virgin Atlantic Airway Ltd., and J.B.D.L. Corp.) • In Masimo Corp., the Court did not analyze or discuss about below-cost pricing • DOJ Reports on Single-Firm Conduct ( September 2008 ) • Standard predatory-pricing approach has advantages : administrability, clarity, and reduced risk of chilling precompetitive competition • DOJ : likely would apply this approach in most cases • Further assessment is necessary before applying this approach to all cases

23. Thank you