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Intel’s $1.1B Euro Slap On the Wrist, Must Sell 2.3M Chips

May 13, 2009

May 13th, 2009  – besides being my birthday – marks the day that the European Competition Commission drew a $1.1B Euro fine (about $1.4B US dollars) on Intel for going “to great lengths to cover up its anti-competitive actions” and in the process “harmed millions of European consumers.” This according to the EU commissioner Neelie Kroes, in an address in Brussels today. The fine could have been as large as $4B Euros, and will go to the EU’s annual budget – not consumers.

Commissioner Kroes was seen holding up an Intel PII/PIII processor card (SECC2) during the news conference, giving some scope to what has been a very long and drawn-out process: going back to 2000. At the heart of the matter has been Intel’s “llegal anticompetitive practices to exclude competitors from the market for computer chips called x86 central processing units (CPUs)” – namely AMD. These were apparantly manifested in behind the scenes rebates and discounts in exchange for a reduction or termination of AMD-based products.

In a press release from Intel’s President and CEO, Paul Otellini, the fined chip maker offered this defense:

Intel takes strong exception to this decision. We believe the decision is wrong and ignores the reality of a highly competitive microprocessor marketplace – characterized by constant innovation, improved product performance and lower prices. There has been absolutely zero harm to consumers. Intel will appeal.

Intel must cover their fine immediately with a bank guarantee which will stay sequestered until their appeal is either exhausted or the decision reversed. Based on EU’s hunger for this type of commercial justice, the money could be tied-up for many years. But the question remains, does Intel have a history of anti-competitive behavior beyond the test of rigorous competition?

Intel’s history tells a compelling story: the EU joins Japan (2004) and South Korea (2008) in finding Intel engaged in anti-competitive behavior. The question remains: how will the EU’s decision play in the US courts as AMD’s ongoing antitrust suit (2005) against Intel continues to unfold? Delayed until 2010 due to the lenghty list of depositions scheduled for the case, the EU’s decision will likely do more to tarnish Intel’s new “Promoting Innovation” Campaign than settle the dispute.

So what does Intel need to do to weather the EU’s wrath? In product terms, Intel needs to move 2,262,752 of its Nehalem-EP (5500-series) chips to cover the loss. Based on a predicted 40M unit replacement market in the US, thats less than 5% and it’s under 2.5% of the market if they are 2P systems. However, Intel’s promised a 9:1 value for the replacement with some estimating that number moves to 18:1 with good results for SMT (depending on the workload).

What does this mean from an Intel 5500-series sales perspective? Here’s our estimate, using Intel’s 9:1 and 18:1 math (not forgeting the 4.5:1 for the dual-core):

Nehalem Units Needed Retail Value 9:1 18:1
W5580 12,545 $20,072,000.00 0.56%
X5570 121,713 $168,694,218.00 5.48%
X5560 168,227 $197,162,044.00 7.57%
X5550 174,450 $167,123,100.00 7.85%
E5540 531,715 $395,595,960.00 23.93%
E5530 419,636 $222,407,080.00 18.88%
E5520 183,533 $68,457,809.00 8.26%
E5506 262,704 $69,879,264.00 5.91%
E5504 250,051 $56,011,424.00 5.63%
E5502 106,312 $19,986,656.00 1.20%
L5520 10,516 $5,573,480.00 0.24%
L5506 21,350 $9,031,050.00 0.96%
Total 2,262,752 $1,399,994,085.00 12.97% 73.49%

By these estimates, Intel will need to close 86.5% of the total replacement market to be able to cover the EU fines. All this assumes, of course, that they don’t offer discounts off of their “published” per-1000 chip prices. Good luck, Intel, on an exciting marketing campaign!

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