UNITED STATES OF AMERICA
In the Matter of
DIGITAL EQUIPMENT CORPORATION, a corporation.
DOCKET NO. C-3818
Pursuant to the provisions of the Federal Trade Commission Act, and by virtue of the authority vested in it by said Act, the Federal Trade Commission, having reason to believe that an agreement between Intel Corporation and Digital Equipment Corporation whereby Intel will acquire certain assets of Digital Equipment Corporation violates Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45, and it appearing to the Commission that a proceeding in respect thereof would be in the public interest, hereby issues its complaint, stating its charges as follows:
A. THE RESPONDENT
1. Respondent Digital Equipment Corporation ("Digital") is a corporation organized, existing, and doing business under and by virtue of the laws of the Commonwealth of Massachusetts, with its principal executive offices located at 111 Powdermill Road, Maynard, Massachusetts 01754.
2. Digital is an international corporation with worldwide sales of approximately $13 billion in 1997. Digital designs, develops, manufactures, markets, and sells computer hardware and software systems, including personal computers, workstations, and servers. Digital also designs, develops, manufactures, markets, and sells a variety of semiconductor products, including certain microprocessor products that are generally known, marketed, and sold under the trade name Alpha.
3. At all times relevant herein, Digital has been, and is now, a corporation as "corporation" is defined in Section 4 of the Federal Trade Commission Act, 15 U.S.C. § 44; and at all times relevant herein, Digital has been, and is now, engaged in commerce as "commerce" is defined in Section 4 of the Federal Trade Commission Act, 15 U.S.C. § 44.
B. THE PROPOSED TRANSACTION
4. Intel Corporation ("Intel") is a corporation organized, existing, and doing business under and by virtue of the laws of the State of Delaware, with its office and principal place of business located at 2200 Mission College Boulevard, Santa Clara, California 95052. Intel has annual worldwide sales of approximately $20.8 billion.
5. Intel designs, develops, manufactures, markets, and sells a variety of semiconductor products, including a line of microprocessor products that are generally known, marketed, and sold under the trade names Pentium, Pentium with MMX, Pentium Pro, and Pentium II (the "Pentium microprocessors").
6. Digital and Intel are currently litigating three pending lawsuits involving intellectual property and technology rights relating to microprocessors. Digital initiated that litigation on May 12, 1997, by filing a lawsuit in Massachusetts alleging that Intel has willfully infringed ten Digital patents by making and selling Pentium microprocessors. On May 27, 1997, Intel filed a related lawsuit in California alleging that Digital breached certain contractual duties and violated Intel's trade secret rights by refusing to return certain technical information about Intel microprocessors. In August and September 1997, Intel filed counterclaims in Digital's Massachusetts lawsuit and a lawsuit in Oregon alleging that Digital willfully infringed fifteen Intel patents by, among other things, making and selling Alpha microprocessors.
7. On October 26, 1997, Digital and Intel executed a proposed Settlement Agreement, which provides for, among other things, the settlement of all pending litigation between Digital and Intel, the cross licensing of Intel and Digital patents for a period of ten (10) years, the sale of Digital's semiconductor business and operations to Intel, the establishment of contractual relationships pursuant to which Intel will serve as an Alpha microprocessor foundry for Digital and supply Alpha microprocessors to Digital, the retention by Digital of all intellectual property rights relating to Alpha microprocessor architecture and technology, and the retention by Digital of those Digital employees supporting the design and development of Alpha products. Since the execution of the Settlement Agreement, Digital and Intel have negotiated all of the subsidiary agreements that are contemplated by, and intended to implement the terms of, the Settlement Agreement (the "Implementing Agreements").
8. The proposed Settlement Agreement and Implementing Agreements provide, among other things, that Digital shall sell, and Intel shall acquire, Digital's semiconductor business and operations, including the facilities and manufacturing assets now used by Digital to produce Digital semiconductor products, including Alpha microprocessors. The proposed Settlement Agreement and Implementing Agreements require Intel to produce and supply exclusively to Digital Alpha microprocessor products for a period of seven (7) years from the closing date of the transactions contemplated by those Agreements, but do not restrict Digital's rights to establish or further develop any relationship or relationships with other semiconductor manufacturers to produce Alpha microprocessor devices, as a foundry for Digital or otherwise. In connection with the proposed Settlement Agreement, Digital also agreed to announce that it would support Intel's forthcoming IA-64 microprocessor devices by building computer systems designed around such devices.
9. The proposed Settlement Agreement and Implementing Agreements further provide, among other things, that Intel shall hire, and Digital shall facilitate and encourage Intel's efforts to hire, all current employees of the Digital semiconductor business, with the exception of those Digital employees who currently support the design and development of Alpha microprocessor products. Among the Digital personnel to be hired by Intel under the Settlement Agreement are those Digital employees who currently conduct or support Digital's efforts to market and sell the Digital semiconductor product line, including Alpha microprocessor products, to the merchant market for semiconductor devices.
10. The proposed Settlement Agreement and Implementing Agreements further provide that Digital shall retain ownership of all intellectual property and technology rights relating to Alpha microprocessor architecture and devices, and contemplate that Digital will continue to develop the Alpha architecture and future generations of Alpha microprocessor products. Those Agreements also expressly give Digital the right to license Alpha intellectual property or technology rights to third parties, and do not prevent Digital from augmenting or establishing strategic alliances with third parties for the development of Alpha microprocessor technology.
C. THE RELEVANT MARKETS
11. One relevant line of commerce in which to analyze the likely competitive effects of the proposed Settlement Agreement is the manufacture and sale of high-performance, general- purpose microprocessors that are capable of running the computer operating system software in native mode that is currently being developed and sold by Microsoft Corporation ("Microsoft") under the trade name Windows NT.
12. A second relevant line of commerce in which to analyze the likely competitive effects of the proposed Settlement Agreement is the manufacture and sale of all general-purpose microprocessors.
13. A third relevant line of commerce in which to analyze the likely competitive effects of the proposed Settlement Agreement is innovation in the design and development of high-performance, general-purpose microprocessors.
14. The relevant geographic market in which to analyze the likely competitive effects of the proposed Settlement Agreement is the world.
15. Intel has market power in the market for the supply of high-performance, general-purpose microprocessors that are capable of running the Windows NT operating system. Intel accounts for nearly 90 percent of dollar sales and nearly 85 percent of unit sales of such microprocessors. Digital accounts for approximately one percent of the dollar sales and unit sales of such devices. Moreover, Alpha microprocessors and Intel Pentium products are today the two closest substitutes -- and perhaps the only two viable devices -- available for computer system manufacturers and computer users who require a microprocessors capable of running in native mode the Windows NT operating systems.
16. Intel also has market power in the market for all general-purpose microprocessors. Intel accounts for nearly 90 percent of dollar sales and 80 percent of unit sales of general-purpose microprocessors. Digital accounts for approximately one percent of dollar sales and unit sales of such devices. No firm other than Intel accounts for more than four percent of dollar sales of microprocessors, and no firm other than Intel accounts for more than 10 percent of unit sales of microprocessors.
17. 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, Digital's Alpha microprocessor represents the greatest technological challenge to Intel, and stands as the most significant threat to Intel's continued market dominance. For the last several years Digital's Alpha devices have consistently demonstrated industry-leading performance as measured by processing speed and related performance criteria generally recognized in the industry. Intel recognizes that the Alpha microprocessor has superior performance characteristics, poses a competitive threat to Intel's products, and establishes performance benchmarks that serve as goals to which Intel aspires in the development of its own future microprocessor products. Indeed, a current major goal for Intel is the development of a new 64-bit Intel microprocessor architecture (known as IA-64) to compete with Digital's current 64-bit Alpha architecture, and the development of new IA-64-based microprocessors (currently known by project names such as Merced and McKinley) to compete with Digital's Alpha devices.
E. ENTRY CONDITIONS
18. Entry into the relevant markets would not be sufficiently timely or likely to deter or otherwise correct the anticompetitive effects of the proposed Settlement Agreement.
19. A new entrant would need to develop a relevant microprocessor product, which development requires substantial capital expenditures and several years of engineering work. The entry cost required for developing a new high-performance microprocessor would likely exceed $250 million. The development of such a product would require a minimum of two years, and a high-performance microprocessor comparable to Digital's Alpha microprocessors and Intel's Pentium products would likely require at least four years. For example, although Intel began development of its new IA-64 microprocessors in 1994, the first generation IA-64 device known as Merced is not expected to be commercially available before the second half of 1999.
20. New entry into the relevant markets is also deterred by the minimum viable scale requirements for a modern semiconductor fabrication facility. The cost of developing, building and equipping such a facility is approximately $1.6 billion. An entrant could not expect to begin shipping revenue microprocessor products for at least four to five years after starting the construction of such a facility. A new entrant could avoid significant fixed costs in buildings or equipment by contracting with an existing microprocessor producer to provide manufacturing and development services, but even such "fabless" entry would require approximately six months and a commitment of approximately 30 staff to the manufacturing area at a cost of $200,000 per person per year, in addition to significant costs for of foundry services.
21. A new entrant would also have to establish both product reputation and technical compatibility with a computer operating system and the applications software desired by a significant number of computer users. Buyers of computer systems and microprocessor components demand highly reliable products, and regard product reputation to be an essential purchasing criterion. Consumers also demand computer systems and microprocessor components that are capable of running the computer operating systems and applications software programs that are desired by computer end-users. Accordingly, a new entrant must attract support from software developers, who are generally reluctant to devote development resources to an unproven microprocessor product for which there is no demonstrated demand. The need simultaneously to secure a large number of users in order to make the product attractive to software developers and to secure the efforts of software developers in order to make the product attractive to users is often referred to as "network effects." The importance of these network effects is illustrated by Intel's recent success in obtaining commitments from many computer manufacturers and software vendors to build computers and write software for Intel's new 64-bit Merced microprocessor, even though the product will not be available for more than a year.
22. In order to enter the market for Windows NT-compatible microprocessors or the market for general-purpose microprocessors, any viable new microprocessor product must be compatible with the Windows NT operating system. Two other microprocessor architectures once enjoyed Windows NT support, but Windows NT support for those rival architectures was recently discontinued because of low system volumes. Any new entrant would likely need a very large volume of system sales in order to succeed in obtaining Windows NT support for the new microprocessor architecture.
F. EFFECTS OF THE PROPOSED TRANSACTION ON COMPETITION
23. Unless remedied, the proposed acquisition by Intel of Digital's semiconductor business and operations, including the facilities and assets used for microprocessor manufacturing, and of Digital's semiconductor sales and marketing organization, is likely to create uncertainty regarding the future competitive viability of Alpha and thereby maintain and enhance Intel's market power and thereby increase price and reduce quality and innovation in each of the relevant markets described above in paragraphs 11-14, for reasons that include, but are not limited to, the following:
G. VIOLATIONS CHARGED
24. The agreement between Digital and Intel, if consummated, 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.
WHEREFORE, THE PREMISES CONSIDERED, the Federal Trade Commission on this fourteenth day of July, 1998, issues its complaint against said Respondent.
By the Commission.
Donald S. Clark