A Micro Battleground

Move over Microsoft. It is time for Intel to take the heat. As the west coast behemoths of software and semiconductors, Microsoft and Intel play dominant roles in their respective industries. Until now, only Microsoft has seen its success lead to a public backlash.

Now it is Intels turn. In a sweeping patent infringement lawsuit filed this week by Digital Equipment, one of the largest US computer manufacturers, Intel has been accused of unlawfully using patented microprocessor

technology. This comes just days after the embarrassing revelation of a flaw in Intels latest Pentium II chips. To cap it all, Cyrix, a small Texas chipmaker, has weighed in with its own patent lawsuit.

 

Intel is a big target. With 1996 profits of $5.2bn (3.2bn) on revenues of $20.8bn, the company is often called Silicon Valleys money machine. The joke is that Intel should give up making chips and simply print dollar bills.

With 85 per cent of the world market for general purpose microprocessor chips, its position appears unassailable. To drive its technology forward, Intel plans to spend $4bn on new plants and equipment this year and $2.5bn on research and development. No other company comes close to this rate of spending.

Intels technology - the semiconductor chip, the microprocessor and the dynamic random access memory chip are all Intel inventions - has won it worldwide acclaim. It is regularly listed among the most admired companies in the US. Its financial performance wins accolades on Wall Street and its management style is reknowned in business schools.

Yet Intel has its critics. On Internet newsgroups and in Silicon Valley eateries, Intels obscene profits are a constant topic. Just as Microsoft has been branded the evil empire by its critics, so Intel is depicted by some of its competitors as the dark force because of its pervasive influence.

Digitals lawsuit has brought debate over Intels role in the computer industry to the fore. Digital has charged Intel with wilfully and deliberately infringing 10 of its patents that cover elements of microprocessor technology designed to enhance performance.

Mr Robert Palmer, Digital chairman and chief executive, on Tuesday said that Intels remarkable growth over the past four years had been achieved by using misappropriated technology. We dont mind competing against anyones technology except our own.

Digital is seeking an injunction to force Intel to withdraw products that allegedly infringe its patents. It is also seeking huge damages which it suggests could run into billions of dollars. In an effort to win support for its attack on Intel from customers and the public, Digital took out full page advertisements in newspapers reiterating these sentiments.

The move is out of character for Digital, which has filed few lawsuits in the past and never one of this magnitude. It is all the more surprising because Intel is one of Digitals biggest chip suppliers and also a Digital customer.

Privately, Digitals competitors describe the lawsuit as a move of desperation. Digital, which was a pioneer in the era of minicomputers, has struggled since the mid-1980s to adapt to rapid changes in technology brought on largely by the success of Intels microprocessors.

Digitals action reflects its frustration at being unsuccessful in competing with Intel in the microprocessor field, some analysts say. Digital has spent heavily to develop its own microprocessors, called Alpha, which are faster than any manufactured by Intel. Alpha, however, has achieved only limited commercial success. Even Digital sells more computers based on Intel chips than on its own microprocessors, says Mr Terry Shannon, publisher of an industry newsletter.

Digitals action is also a pre-emptive strike, says Mr Shannon, against Intels effort jointly to develop high-speed microprocessors with Hewlett-Packard, the second largest US computer company. These chips, codenamed Merced, are a threat to Digital because they could marginalise any competitive advantage it gained from Alpha devices.

If the lawsuit sent the Merced design team back to the drawing board [to eliminate design elements covered by Digitals patents] that would cause heartburn for both Intel and Hewlett-Packard, says Mr Shannon.

The merits of Digitals claims are difficult to assess. Digital says it has found substantial similarities between Alpha and Intels chips, but such similarities are not uncommon. Microprocessors are highly complex and often have many similarities to other microprocessors that are developed independently, says Mr Linley Gwennap, senior analyst at MicroDesign Resources. Even Intel, with its wealth of microprocessor experts, has completed only a preliminary analysis of the Digital patents. Based on this analysis, though, Intel says it has found no infringement and has vowed to vigorously defend itself against Digitals charges.

Digital cannot expect an easy fight. Intel is reknowned as a tough litigant. It pursued legal battles against Advanced Micro Devices, a Silicon Valley rival, for nearly a decade. Many industry analysts also expect Intel to launch a counter attack against Digital, probably in the form of a matching patent infringement suit. Intel appeared to hint at this when it noted it had been granted more than 1,000 patents covering semiconductor and microprocessor technology over the past three years.

The legal battles could drag on for years. Unless these parties get together and quickly resolve it, you suspect that the lawyers are going to make more money than their clients, says one Silicon Valley intellectual property lawyer.

Aside from the legal wrangling, Digital has also raised issues that may present a more difficult challenge for Intel. In announcing the lawsuit, earlier this week, Digitals chairman went beyond the legal complaint to raise the spectre of alleged anti-competitive behaviour by Intel.

Intel had achieved a monopoly position in the market for microprocessors in personal computers and was now attempting to extend this monopoly to high-performance workstations and servers, Mr Palmer asserted. This is a threat to the competitive environment essential for innovation and growth in our industry. Intels conduct not only threatens the general competitive environment, it directly threatens those companies that invest in innovation, like Digital, he said. The time has come for these unlawful practices to stop and Digital is determined to see that they do.

In the early 1990s, the US Federal Trade Commission conducted an anti-trust investigation of Intel, but took no action. Yet as Microsoft knows well, public criticism by competitors can sometimes rouse the interest of competition authorities. After years of investigation, Microsoft settled anti-trust charges with a consent decree that demanded some changes in their software licensing contracts. It would not be surprising if Intels overwhelming market dominance, which has advanced considerably since the FTC investigation, once again came under scrutiny.

Intel does have competitors, albeit distant ones. The company acknowledges that its competitors are a useful defence against monopoly charges. Moreover, Intel claims to have assiduously avoided predatory action against these chipmakers. Our strategy is to grow the market as a whole.

Ironically, Intels direct competitors are no longer its most virulent critics. Advanced Micro Devices, which makes chips that mimic the functions of Intels microprocessors, buried the hatchet with Intel in 1995 after a long and bitter legal battle. Before the peace treaty AMD regularly accused Intel of monopolistic behaviour and unfair dealings. Even Cyrix, which filed a separate patent infringement suit against Intel on Tuesday, is refraining from public criticism.

Intel does, however, face discontent among its customers in the personal computer industry. With its dominant market share, Intel is in a position to influence industry-wide pricing. The chipmaker is also able to allocate sometimes scarce chips to individual customers, giving it enormous power over PC manufacturers.

What is more, Intel increasingly competes with the very companies that rely upon it for chips. Intel is sucking profits out of the infrastructure of the PC industry, says one critic. Intel, for example, is now reputed to be the worlds largest producer of PC motherboards, the main circuit boards of PCs. It has also become a large-scale producer of network interface cards used to link PCs to corporate networks. A recent price cut on Nics by Intel took its toll on competitors including 3Com.

There can be few large companies that do not attract some criticism. For Intel, this is the price of extraordinary success. Yet as Microsoft has learned from its tangles with the US Justice Department, being unpopular can sometimes be bad for business.

Louis Kehoe

Digital has charged Intel with wilfully and deliberately infringing 10 of its patents.

Intel claims to have assiduously avoided predatory action against other chipmakers.