[Federal Register Volume 63, Number 85 (Monday, May 4, 1998)]
[Notices]
[Pages 24544-24547]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-11798]
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FEDERAL TRADE COMMISSION
[File No. 981-0040]
Digital Equipment Corporation; Analysis to Aid Public Comment
AGENCY: Federal Trade Commission.
ACTION: Proposed Consent Agreement.
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SUMMARY: The consent agreement in this matter settles alleged
violations of federal law prohibiting unfair or deceptive acts or
practices of unfair methods of competition. The attached Analysis to
Aid Public Comment describes both the allegations in the draft
complaint that accompanies the consent agreement and the terms of the
consent order--embodied in the consent agreement--that would settle
these allegations.
DATES: Comments must be received on or before July 6, 1998.
ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,
Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.
FOR FURTHER INFORMATION CONTACT: William Baer or Willard Tom, FTC/H-
374, Washington, D.C. 20580 (202) 326-2932 or 326-2786.
SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Section 2.34 of
the Commission's Rules of Practice (16 CFR 2.34), notice is hereby
given that the above-captioned consent agreement containing a consent
order to cease and desist, having been filed with and accepted, subject
to final approval, by the Commission, has been placed on the public
record for a period of sixty (60) days. The following Analysis to Aid
Public Comment describes the terms of the consent agreement, and the
allegations in the complaint. An electronic copy of the full text of
the consent agreement package can be obtained from the FTC Home Page
(for April 23, 1998), on the World Wide Web, at ``http://www.ftc.gov/
os/actions97.htm.'' A paper copy can be obtained from the FTC Public
Reference Room, Room H-130, Sixth Street and Pennsylvania Avenue, N.W.,
Washington, D.C. 20580, either in person or by calling (202) 326-3627.
Public comment is invited. Such comments or views will be considered by
the Commission and will be available for inspection and copying at its
principal office in accordance with Section 4.9(b)(6)(ii) of the
Commission's Rules of Practice (16 CFR 4.9(b)(6)(ii)).
Analysis To Aid Public Comment
I. Introduction
The Federal Trade Commission (``Commission'') has accepted from
Digital Equipment Corporation (``Digital'') an Agreement Containing
Consent Order (``Proposed Consent Order''). The Proposed Consent Order
is designed to remedy anticompetitive effects likely to occur in three
product markets as a result of the acquisition by Intel Corporation
(``Intel'') of certain assets of Digital. The Order requires that
Digital License its Alpha microprocessor technology to two Commission-
approved companies to ensure that there are independent suppliers and
developers of Alpha. The Order ensures that Intel will not have
exclusive control over the technology, and that Alpha will remain
competitive.
II. Description of the Parties and the Transaction
Digital is a Massachusetts corporation headquartered in Maryland,
Massachusetts, with sales of approximately $13 billion and net income
of over $140 million for the fiscal year ended June 28, 1997. Digital
manufactures and sells computer systems, and develops, manufactures,
and sells microprocessors based on its proprietary 64-bit \1\ Alpha
architecture.
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\1\ The number of bits generally correlates with the amount of
data that a microprocessor can process during one clock cycle.
Intel's current Pentium microprocessors have a 32-bit architecture
(known as IA-32), while Digital's alpha chip has a 64-bit
architecture.
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The Alpha microprocessor is widely regarded as among the highest
performing general purpose microprocessors available and is the only
non-Intel microprocessor architecture that can run the Windows NT
operating system in ``native'' mode.\2\ Digital is the largest consumer
of Alpha chips, which it uses in its computer systems.
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\2\ Windows and Windows NT are operating systems. Operating
systems are a type of software that acts as an intermediary between
applications software and the microprocessor. An operating system
runs in ``native'' mode when it is specifically written to interact
optimally with the particular microprocessor architecture.
Microsoft, the developer of Windows NT, today supports only two
microprocessor architectures--Intel's and Digital's--to run Windows
NT in native mode. Other microprocessor architectures today must use
translation software in order to run Windows NT, significantly
reducing performance and speed.
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Intel Corporation (``Intel''), a Delaware corporation
headquartered in Santa Clara, California, is the world's leading
semiconductor manufacturer. Intel reported 1996 sales of approximately
$20.8 billion and net income of more than $5 billion. Intel supplies a
broad
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line of semiconductor devices used as computer system components,
including x86-compatible microprocessors \3\ such as the Pentium line,
which are used primarily in conjunction with Microsoft's Windows and
Windows NT operating systems. Intel has been working with other
companies to develop a 64-bit microprocessor (currently known by the
project name Merced) with a new 64-hit architecture (known as IA-64),
which is intended to extend Intel's current x86 architecture and
compete with Digital's Alpha architecture.
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\3\``X-86 architecture'' generally refers to the original line
of Intel microprocessor products for personal computers and includes
successive generations such as the 8096, 286, 386, 486 and the
Pentium family of chips.
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The proposed transaction resolves three pending lawsuits between
Digital and Intel relating to microprocessor intellectual property and
technology rights. Digital initiated that litigation in May 1997,
claiming the Intel infringed ten Digital patents by making and selling
Intel Pentium chips. Intel countersued, claiming, among other things,
that Digital is infringing nine Intel patents by making and selling
Alpha microprocessors.
On October 26, 1997, the parties agreed to settle the litigation
and grant each other broad patent cross-licenses. Intel would also buy
Digital's microprocessor production facilities (such a facility is
known in industry parlance as a ``fab'') for net book value
(approximately $650 million). In addition, Intel agreed to produce
Alpha microprocessors for supply exclusively to Digital. Digital agreed
to endorse publicly these IA-64 architecture and design some Digital
computer systems based on Intel 64-bit microprocessors. Digital will
retain the intellectual property rights and design assets for Alpha,
including the design engineers who conduct research and development for
the Alpha architecture.
III. Competitive Concerns
A. Relevant Markets
The draft Complaint alleges three relevant markets: (1) The
manufacture and sale of high-performance, general-purpose
microprocessors that are capable of running the Windows NT operating
system in native mode; (2) the manufacture and sale of all general-
purpose microprocessors and (3) the design and development of future
generations of high performance, general-purpose microprocessors.
The Complaint alleges that microprocessors designed to run the
Windows NT Operating system and its complementary application programs
constitute a relevant antitrust product market. The demand for
microprocessors is determined indirectly by the demand for operating
systems, which is determined in part by the software applications that
run on those systems. Applications are designed for specific operating
systems; operating systems can optimally run application programs only
when the operating system is written for the microprocessor
architecture (so that the microprocessor runs native on that operating
(system). Consumers cannot readily switch between computer systems that
use different microprocessor architectures, because in most cases such
a switch also requires changing the operating system and application
programs, an expensive proposition and one that may not yield the same
level of functionality enjoyed by consumers on their former systems.
Windows NT is currently written in two versions, so that only the
Alpha microprocessor and the Intel-based microprocessors can run it in
native mode.\4\ Windows NT will also be compatible with Merced, Intel's
64-bit chip, which will not be commercially available until 1999. Thus,
consumers using software optimized for use with Windows NT must choose
between Intel-based and Alpha-based systems. Thus, if the price of
Alpha and high-end Intel microprocessors were to increase by 5 percent,
consumers using Windows NT would not readily switch to computer systems
built with alternative microprocessors.
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\4\ See fn. 2.
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The Complaint also alleges that a second relevant product market
includes all general-purpose microprocessors, a category that includes
devices based on the Intel and Alpha architectures, as well as
microprocessors based on other rival architectures such as those
developed by Hewlett-Packard (PA-RISC), Sun Microsystems (SPARC), IBM
(PowerPC), and Silicon Graphics (MIPS). Because only Alpha and Intel
microprocessors can optimally run Windows NT, however, these two
microprocessors are the closest substitutes in this broader,
differentiated product market.
Finally, the Complaint alleges that the transaction will reduce
competition in the innovation market for the design of microprocessors.
Intel and Digital are two of a very few competitors developing next-
generation, high-performance microprocessors. Computer makers choose
microprocessors based, in part, on the ``roadmap'' provided by each
microprocessor manufacturer--that is, the manufacturer's projection of
future expected increases in performance and functionality for
successive generations of microprocessors based on the same
architecture. Roadmaps therefore provide an essential element of
microprocessor competition. Intel and Digital compete for sales to
computer manufacturers, based on their roadmaps, and they use each
other's roadmaps as benchmarks for developing next-generation products
to leapfrog the performance of the rival company's chips.
B. Barriers to Entry
The Complaint alleges there are significant barriers to entry in
the market, including incurring large sunk costs to build a fab and
design a microprocessor, overcoming the network externalities and
Intel's installed base, obtaining Microsoft support to obtain Windows
NT-compatibility, building a reputation as a reliable microprocessor
manufacturer and innovator.
Building a new microprocessor facility requires the expenditure of
substantial fixed and sunk costs and takes many years. A new entrant
must also design the microprocessor, an expensive and lengthy process.
Most important, a successful entrant would need to convince
computer system manufacturers to design their systems around the new
microprocessor. Entrants, however, face a significant ``Catch-22'' in
this endeavor because of ``network externalities.'' Externalities exist
where consumers place more value on a particular technology
(microprocessor, operating system, peripherals, applications, etc.)
that is more widely adopted than other technologies. Software
developers and computer system manufacturers are unwilling to support a
new microprocessor technology unless they first see that it enjoys
consumer interest. Because of these network externalities and
reputational effects, however, consumers are unwilling to switch to a
new microprocessor technology unless they first see that it has
compatible operating systems, software, and peripherals. In this
environment, consumer and industry expectations about the degree to
which a manufacturer will be able to get network externalities and
reputational effects working for it in the near future are critical.
The importance of these expectations is illustrated by Intel's
recent marketing efforts on behalf of the Merced, its new 64-bit
microprocessor. Even though
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Merced has yet to be tested and will not be available for more than a
year, Intel has already successfully obtained commitments from a large
share of the software vendors and computer system manufacturers to
write software and build computers for it.
C. Competitive Effects
Intel has market power in both relevant microprocessor product
markets. Intel accounts for nearly 90 percent of dollar sales and
nearly 85 percent of unit sales of microprocessors for Windows NT and
for nearly 90 percent of dollar sales and 80 percent of unit sales of
general-purpose microprocessors. No firm other than Intel accounts for
more than 4 percent of dollar sales of microprocessors or for more than
10 percent of unit sales of microprocessors. Finally, the competitive
significance of other high-performance microprocessors--such as
Hewlett-Packard's PA-RISC, Sun Microsystems' SPARC, PowerPC from the
Motorola/IBM/Apple venture, and Silicon Graphics' MIPS
microprocessors--has been declining.
The transaction also threatens to increase concentration
significantly in the relevant innovation market. Digital and Intel are
two of the most significant innovation competitors in the design and
development of high-performance microprocessors. Even with its
comparatively small share of the relevant markets, the Alpha
architecture (because of Alpha's superior processing performance)
represents the most significant threat to Intel's continued market
dominance. Intel's documents refer repeatedly to the competitive threat
posed by Alpha, which is acknowledged by many as possibly the best
performing and fastest microprocessor in the world. Innovation and
actual competition between the two companies is likely to increase in
the future because of the growing popularity of Microsoft's Windows NT
operating system, which currently supports only Digital's Alpha and
Intel's advanced microprocessors. As the demand for and functionality
of Windows NT grow, the competition between the Alpha and Intel
architecture is likely to intensify.
On these facts, it is clear that an acquisition of Digital by Intel
would substantially lessen competition. Although the transaction at
issue here does not involve an outright acquisition of Alpha
technology, it nevertheless threatens competition in the relevant
markets. Under the terms of the settlement, Intel will acquire
Digital's Alpha fabrication plant (known as Fab 6) and will produce
Alpha chips for Digital. Digital will retain its Alpha intellectual
property and design team and is, therefore, only receiving ``foundry''
services (that is, a supply agreement where one company manufactures
the product for another) from Intel. The parties will also end the
patent litigation and sign a patent cross-license agreement.
The proposed transaction has positive implications for the future
of Digital's Alpha systems. The supply agreement frees Digital from
operating a plant that it was not able to utilize efficiently. Because
Intel manufactures a vast line of semiconductor products, it can
utilize the plant more efficiently than Digital. As a result, overall
manufacturing costs will go down and, under the Digital-Intel
agreement, those cost reductions will be passed on to Digital. Under
the agreement, Digital will also be able to bring the next generation
of Alphas--based on an improved .18 micron process technology--to
market earlier than it would have absent the transaction.
Digital's move to this ``fabless'' business model of operation is
not unprecedented. Other successful companies--like Sun Microsystems,
Inc. and Silicon Graphics--have designed high performance
microprocessors while relying on third-party foundries for
manufacturing. None of the other fabless microprocessor companies,
however, placed manufacturing in the hands of such a dominant
competitor.
Because of this unique characteristic, the proposed transaction
creates the opportunity for Intel to slow down or otherwise impair the
supply of Alpha microprocessors, harming competition in the relevant
markets. In particular, the transaction presents a risk that Intel will
not provide the necessary level of coordination between the design and
manufacturing processes, and that Intel may take other steps to reduce
quality and slow the supply of Alpha microprocessors to Digital. Every
foundry arrangement requires design engineers and manufacturing process
engineers to coordinate their efforts. The development of a
microprocessor involves conforming that design to the process
technology and vice-versa. The Digital-Intel settlement separates these
functions and provides no incentive for Intel to ``tweak'' its own
processes to conform to Digital's products.
Furthermore, the transaction as proposed threatens the continued
viability of Digital's sales of Alpha to the ``merchant market.'' \5\
As part of this transaction, Digital is selling off most of its
semiconductor business to Intel and thus will have no economic need for
a marketing staff, which includes people who market Alpha to other
computer system manufacturers. Without a marketing staff to service and
pursue the merchant market, the loss of competition would be
significant.\6\ Computer system manufacturers using Alpha
microprocessors have pioneered the opening of new market segment for
Alpha-based systems, such as media graphics. With the expected growth
of Windows NT, Alpha and Intel should go head-to-head in competition in
these market segments for these systems. The uncertainty created by the
proposed transaction, had it not been addressed by the proposed
consent, could have reduced competition between Intel and Alpha
processors, resulting in higher prices, reduced consumer choice, and
lower rates of innovation.
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\5\ Merchant market means sales of separate microprocessor chips
to computer system manufacturers, who then use them as a component
in their own computer systems.
\6\ As explained more fully below, as part of this consent
agreement, Digital will be licensing Alpha to Samsung, a company
that plans to sell the Alpha chip in the merchant market through a
U.S. subsidiary.
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The Complaint concludes that, unless remedied, the transaction is
likely to create uncertainty regarding the future competitive viability
of Alpha, thereby maintaining and enhancing Intel's market power, which
could result in increased prices and reduced quality and innovation in
each of the relevant markets for the following reasons: (1) By making
it less likely that Digital would maintain the sales force to continue
``merchant market'' sales of Alpha microprocessors and other products
to other computer system manufacturers, it would reduce competition
between Intel and Digital for such sales; and (2) putting Digital's
supply of Alpha solely in the hands of Intel would give Intel the
opportunity to delay production of Alpha microprocessors, impede the
development of new generations of Alpha microprocessors, and otherwise
undermine the competitiveness of Alpha. In these ways, according to the
Complaint, the consummation of the proposed transaction, without any
changes, would violate Section 5 of the Federal Trade Commission Act,
as amended, 15 U.S.C. 45, and Section 7 of the Clayton Act, as amended,
15 U.S.C. 18.
IV. The Proposed Consent Order
The Commission has entered into an agreement containing a Proposed
Consent Order with Digital in settlement of the draft Complaint. The
Proposed Consent Order is designed to preserve Alpha's future viability
by ensuring alternative sources for production,
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marketing, and development of Alpha products. The Proposed Consent
Order requires Digital to enter into or to continue certain licensing
arrangements and alliances with Advanced Micro Devices, Inc. (``AMD''),
Samsung Electronics Co., Ltd. (``Samsung''), or some other Commission-
approved licensee, and to be begin the process of certifying
International Business Machines, Inc. (``IBM''), or some other
Commission-approved company, to become an Alpha foundry. The purpose of
these provisions is to establish two licensees and another foundry as
providers and developers of Alpha devices, independent of Intel.
The Proposed Consent Order binds Digital to comply with the terms
of agreements it already has entered into with Samsung. Under those
agreements, Samsung will obtain an architectural license and technical
support. Furthermore, Digital will grant to Samsung a non-exclusive
AlphaPowered trademark license and the assistance and support necessary
to enable Samsung to enter rapidly and expand the merchant market
segment for Alpha products.\7\ Under the current version of the
Samsung-Digital agreement, Samsung will be creating a U.S. subsidiary,
to be known as the Alpha Volume Company, that plans to market Alpha
chips to the merchant market segment. Furthermore, Digital has
committed to purchase substantial volumes of its Alpha products needs
at a competitive price from Samsung, thus reducing its reliance on
Intel.
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\7\ The Proposed Consent Order also includes provisions for an
``Interim Trustee'' (i.e., an auditor) and a licensing trustee. The
Interim Trustee provision assures early assessment and monitoring of
Digital's agreements with the licensees and continuing monitoring
and reporting to the Commission of how the provisions are working.
The licensing trustee provision is triggered if the parties to a
licensing agreement fail to agree within the requisite time.
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The Proposed Consent Order also requires Digital to enter into a
broad license with AMD, or a Commission-approved licensee, that
includes a license to the Alpha architecture and software tools that
enable AMD to develop microprocessors compatible with the Alpha
architecture. Digital must provide technical and engineering support
until AMD is capable of independently developing and producing products
based on the Alpha architecture, but in no event for more than two
years.
The licenses with AMD and Samsung (or two other Commission-approved
companies) are architectural licenses, meaning that the license is to
the Alpha architecture, as defined by convention in Digital's official
reference manual. Under such license, the licensee is free to create
its own implementations and derivative works--that is, to design
original chips around the architecture--with the one caveat that it
maintain backward compatibility with the existing Alpha
architecture.\8\ In this way, a licensee will have every incentive to
develop the merchant market aggressively because it will have the
ability to create Alpha-derivative innovations that can give it
profitable ``design wins''--that is, agreements with computer system
manufacturers by which the computer system manufacturers will design a
computer line around the licensee's chip. These architectural licenses
also provide assurance to customers who commit to the Alpha
architecture because the licenses provide independent sources of supply
and innovation for these microprocessors.
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\8\ An architectural integrity provision in the Order preserves
backward compatibility for existing applications written to exploit
the architecture, and to make designing easier for applications
developers that have not yet ported applications to Alpha. If
Digital fails to innovate and improve the performance of the Alpha
architecture, however, the Order allows AMD to modify the base
architecture without Digital approval.
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The Proposed Consent Order also requires Digital to enter into an
agreement, subject to Commission approval, with IBM or some other
Commission-approved company to evaluate that company as a potential
foundry for Alpha parts and to inform that foundry partner of the steps
necessary to become a qualified supplier of Alpha products. Submission
of that agreement is required within six months of Commission approval
of the Proposed Consent Order. Alternatively, the Proposed Consent
Order permits Digital to demonstrate why such an agreement is
unnecessary.
Samsung is a leading supplier of DRAM technology, is considered to
have excellent manufacturing quality, and will receive marketing
assistance from Digital. Samsung is already in the merchant market and
the Order should empower Sumsung to further its marketing efforts in
this important segment. AMD is the leading challenger to Intel for x86-
compatible microprocessors and already a major merchant market
supplier, with excellent design capabilities. Though AMD does not yet
produce Alpha chips, it should have every ability to do so. AMD is a
major supplier of microprocessors and should have significant
incentives to develop an Alpha-based business because it does not
otherwise have a 64-bit architecture capable of challenging the
upcoming Intel IA-64 architecture. IBM is an established high-
performance microprocessor foundry, likely to be capable of producing
Alpha products. All three of these companies, or other licensees, help
to ensure adequate and independent supplies of Alpha microprocessors.
V. Opportunity for Public Comment
The Proposed Consent Order has been placed on the public record for
sixty (60) days for receipt of comments by interested persons about
both the appropriateness of the relief provided herein as well as the
suitability of Samsung, AMD, and IBM as licensees who can ensure
alternative sources for the manufacture, marketing, and development of
Alpha products. Comments received during this period will become part
of the public record. After sixty days, the Commission will again
review the Proposed Consent Order and the comments received and will
decide whether it should withdraw from the Proposed Consent Order or
make it final.
By accepting the Proposed Consent Order subject to final approval,
the Commission anticipates that the competitive problems alleged in the
Complaint will be resolved. The purpose of this analysis is to invite
public comment on the Proposed Consent Order, including the proposed
licenses and alliances, to help the Commission determine whether to
make final the Proposed Consent Order contained in the agreement. This
analysis is not intended to constitute an official interpretation of
the Proposed Consent Order, nor is it intended to modify the terms of
the Proposed Consent Order in any way.
By direction of the Commission.
Donald S. Clark,
Secretary.
[FR Doc. 98-11798 Filed 5-1-98; 8:45 am]
BILLING CODE 6750-01-M
