Keio Jean Monnet COE Research Centre for EU Studies
The 4th International Symposium, 26 June 2010, Keio University

Intel Decision and the EU’s
New Standards for Behaviours
by Dominant Firms
Dr Kuo-lien Hsieh

Associate Professor of Law
Shih Hsin University, Taiwan
PhD, University of Edinburgh

1 Problematic trends• The Commission of theEuropean Union on 21
September 2009 publishedthe non-confidential versionof its 13 May 2009 Decision.

• According to the Decision,
Intel Corporation committed
an infringement of Article 102
TFEU (former Article 82 EC) by
implementing strategies
aimed foreclosing competitorsfrom a Central Processing
Unit (CPU) market.

• This study analyses the 517page Commission Decision,
which has drawn
tremendous attention fromthe cross-national hightechnology companies, inparticular those operating inEurope.

• This Decision is of great
controversy because, first,
the fine of €1.06 billion has
been the largest everimposed on a firm by theCommission.

• Two years prior to the Intel
Decision, the Court of First
Instance in September 2007
adopted the decision ofMicrosoft v. the Commission.
• This judgment confirmed thefine of over €497 million
imposed by the Commission.• Since Intel and Microsoft are
U.S. companies, the Intel
Decision and the Microsoft
case have rendered many
entrepreneurs doubt thatwhether the European Union
has enforced competition
rules in a discriminatory
manner.

• Also, these astonishing
figures have madecompetition law an area of
EU law that probably has
strongest and most direct
impact on multinational
enterprises.

• Second, the Commission held
the Intel rebates scheme
constituted an abuse of
dominant position under Article
102 TFEU, but the distinction
between pro-competitive
discounting and exclusionary
rebates system is vague.

• Third, “as efficientcompetitor” test, arevolutionary economicapproach employed by theCommission in the field of
EU competition law, gives
cause for concern.

• A major concern is that theenterprises operating on
the technology markets in
Europe are not at all
familiar with the approach,
information of which was
not available in the TFEU
nor in EU legislation.

• On 22 July 2009, Intel
initiated court proceedings
against the Commission
before the General Court,
seeking an annulment of
the Commission Decision.

• This study aims to focus
the main issues regarding
the Intel Decision,particularly the myths
relating to as efficientcompetitor test.

Facts• Advanced Micro Devices, Inc.
(“AMD”) made complaints tothe Commission, alleging
that Intel had violated Article
102 TFEU (former 82 EC),
which prohibits abuses ofdominant market positions.

Relevant market(s)• In the Intel Decision, there
could be one relevantmarket of x86 CPUs for allcomputers, namely desktop,laptop, and server
computers.

• Or there could be three
relevant markets of (1) x86
CPUs for desktop
computers; (2) x86 CPUs for
laptop computers; and (3)x86 CPUs for servercomputers.

Market power• As to the market power ofIntel in the relevantmarket(s), Intel consistently
held very high market
shares in an overall x86 CPU
market and in any of thesub-markets.

• The Commission also
identified certain barriers
to entry and expansion in
the relevant market(s).

Abusive conducts• According to the Decision,
Intel should be responsible
two kinds of abusive
conduct.

• The first is theimplementation of arebates scheme by Inteland the other is the “nakedrestrictions” imposed byIntel on three OEMs,
including HP, Acer, andLenovo.

The Commission’s viewson the rebates scheme• As regards the rebates
scheme, the reasoning
behind the Decision is simpleand clear:• Intel is a dominant firm on
the markets of x86 CPUs andthis CPU producer abused its
dominant position by
operating an exclusionary
rebates scheme.

• The application of as
efficient competitor test
indicates that the effective
prices of Intel products
were below Average
Avoidable Costs (“AAC”),
therefore an as efficientcompetitor might not beable to compete with Intel.

An example• Suppose that a dominant
CPU producer produces
1,000 CPUs at a variable
cost of €700 each with nofixed costs.

• Then the dominant firm
produces additional 800CPUs at a variable cost of€850 each to compete withthe major competitor.

• Since the dominant CPU
producer would have sold1,000 CPUs without making
an attempt to compete withthe rival firm, thepotentially foreclosing
increment is 800 CPUs.

• The dominant firm’s AVC isapproximately €767 perCPU.
(1,000 CPUs at €700 each +800 CPUs at €850 each)divided by 1,800 units.

• The dominant firm’s AAC
is €850 per CPU.
(800 CPUs at €850 each)divided by 800 units.

• The standard price of anx86 CPU produced by thedominant firm is €1,000.

• This firm implements arebates scheme.
• Some OEMs receive a 20
percent discount on thecondition that theypurchase CPUs from thedominant firm exclusively
or almost exclusively.

• The discounted price is €800.
• To sell its CPUs to theseOEMs, a hypothetical as
efficient competitor mustsell a CPU at a price of lessthan €800, which may be€780.

• The rationale: Even if the major
competitor is as efficient as thedominant firm, it must set its
price at a level that cancompensate the loss of therebate.
• Otherwise the OEMs would
never be interested inpurchasing the CPUs producedby the competitor.

• Since €800 is well below
the AAC, namely €850, therebates scheme as a result
potentially causes
anticompetitive foreclosure.

The Commission’s viewson the naked restrictions• As regards the nakedrestrictions, Intel paid theOEMs to restrict thecommercialisation ofplanned AMD-based
products.

• The Commission also notedthe conduct of Intel had amaterial effect on thedecision-making of OEMs inthat they restricted theircommercialisation of theAMD-based computers.

Critical analysis• This study indicates that
the Intel Decision issignificantly flawed.

• First of all, in the present
case, the Commission did
not take into serious
account the dynamics ofthe relevant markets.

• The Commission was correct
only to the extent that Intel
held large market shares of
the relevant markets, but themarket power evaluation by
the Commission was flawed
mainly because Intel was notable freely to exercise themarket power.

• Second, the Commission’sexplanations for the theoryof as efficient competitor
test do not help the public
have a full understanding of
how the Commission
performed this test.

• On the one hand, theCommission does notprovide an example
illustrating how the test
was performed.

• On the other hand, thecrucial figures concerning
the rebates scheme wereunavailable owing toconfidentiality concerns.

• The myth of how the test
was applied by theCommission would
presumably create chilling
effects on numerous firms
in various Europeanmarkets, particularly thoseholding dominant positions.

• Third, this study argues
that the rebates system inquestion was a scheme
made under the influences
exercised by Intel, AMD,and the OEMs.

• It is worth noting that Inteland the OEMs made every
effort to alter the level ofrebates with a view to
reduced their costs on therelevant market(s).

• Fourth, in February 2009, theCommission published“Guidance on the Commission’s
enforcement priorities inapplying Article 82 of the EC
Treaty to abusive exclusionary
conduct by dominant
undertakings”.

As to whether this Guidance
Paper applies to this case, …
• the Commission noted that:“[t]he Commission considers
that the guidance paper does
not apply to this case. TheCommission nevertheless takes
the view that this Decision is inline with the orientations set
out in the guidance paper”.

• Given the huge portion ofeconomic analysis based on
as efficient competitor test in
the Decision, it is obvious that
the Commission applied theGuidance Paper, in particular
as efficient competitor test
set out in the document, tothe Intel case.

• The Court should focus onwhether it was possible for Intelto realise that the test would beapplied to assess the rebates
scheme at issue, which could
eventually led to the conclusionthat the implementation of thescheme constituted an abuse ofdominant position.

• According to the Decision,
the Commission publishedthe Guidance Paper afterIntel implemented therebates scheme.

The principle of legal
certainty• This principle requires inparticular that rules
involving negative
consequences forindividuals should be clear
and precise and theirapplication predictable forthose subject to them.

• As it was impossible forIntel to get access to theunpublished document, theIntel Decision should beannulled for that theapplication of as efficientcompetitor test violated theprinciple of legal certainty.

• Where the Commission isentitled to make use of any
economic tools in dealing
with an Article 102 TFEU
case, such enforcement
may jeopardise the very
core of the competition lawsystem.

• This study argues that as
efficient competitor test
can be applied if it is in thefuture incorporated into
relevant Treaty provisions
or legislation in the Union.

• Intel is under no legal
obligation to perform thetest to assess its own
rebates scheme, as there isso far no such legal
requirement under EU
competition law.

• As regards the issues of
naked restrictions, theCommission failed topresent sufficient evidence
to support its view that Intel
paid the OEMs to restrict thecommercialisation ofplanned AMD-basedproducts.

• Also, the Commission failed
to prove that the conduct ofIntel had a material effecton the decision-making ofOEMs in that they restricted
the commercialisation ofAMD-based computers.

Conclusion• This study indicates thatthe Intel Decision should be
annulled by the General
Court since it issignificantly flawed.

Thank you very muchfor your attention!
Kuo-lien Hsieh
kuolien@cc.shu.edu.tw