John Hayes 15 May 2008 The 8th Annual Trans-Atlantic Antitrust Dialogue Economic Issues in the Commission’s Case Against Intel

2 BIICL 15 May 2008 AMD Files U.S. Complaint June 2005 Commission Announces Statement of Objections July 2007 Intel Submits Written Response to SO January 2008 Oral Hearing March Milestones

3 BIICL 15 May 2008 The Commission’s Allegations “First, Intel has provided substantial rebates to various Original Equipment Manufacturers (OEMs) conditional on them obtaining all or the great majority of their CPU requirements from Intel.” “Secondly, in a number of instances, Intel made payments in order to induce an OEM to either delay or cancel the launch of a product line incorporating an AMD-based CPU.” “Thirdly, in the context of bids against AMD-based products for strategic customers in the server segment of the market, Intel has offered CPUs on average below cost.” “These three types of conduct are aimed at excluding AMD, Intel's main rival, from the market.” Commission Press Release (27 July 2007)

4 BIICL 15 May 2008 AMD’s Impressive Performance Thirteen Consecutive Quarters of 20% Year-on-Year Growth –Microprocessor Sales More than Doubled In the Three Years Prior to AMD’s Antitrust Lawsuit Expanding R&D Capabilities –R&D Expenditures Increased Every Year, 2001 to 2006 –Grew from Two to Five Design Teams in 2004 –Added New R&D and Design Facilities in 2006, 2007 & 2008 Expanding Manufacturing Capacity –More than Doubled Capacity from 2004 to 2007 Successful New Products –Opteron 2003 –Dual Core 2005 AMD Microprocessor Share

5 BIICL 15 May 2008 Intel’s Discounts to OEMs Intel Negotiating Purchases with OEMs Some Discounts Focused on Encouraging Incremental Purchases –Commission Calls These “Conditional Discounts” Discounts Are a Form of Pricing Competition Key Issue: Were Intel’s Discounts for Contestable Units Too Large? –Variation on Predatory Pricing, With Focus on Contestable Units

6 BIICL 15 May 2008 Price/Cost Test to Distinguish Pro-Competitive vs. Exclusionary Discounts Lessons Learned From Predatory Pricing –Important Not to Discourage Pro-Competitive Discounting –Discounts Invariably: ­Provide Direct and Immediate Benefit to Customers ­Are Offered to Win Contestable Business ­“Harm” Rivals –Rules Against Discounting by a Dominant Firm Can Have the Unintended Consequence of Creating a Price Umbrella –Need Price-Cost Test to Distinguish the Rare Cases Where Consumers Are Likely to Be Harmed by the Dominant Firm’s Low Prices Same Principles Applicable to Conditional Discounts

7 BIICL 15 May 2008 “Effective Price” Test for Conditional Discounts Compares Intel’s Effective Price to Its Average Avoidable Cost (AAC) –Costs Avoided by Not Selling Contestable Units Focuses on “Contestable Sales” –Contestable Sales at Customer Over an Explicit Time Horizon Effective Price Test Is Equivalent to “Required Share” Test in EC Discussion Paper

8 BIICL 15 May 2008 Effective Price vs. Cost for Intel Extensive Analysis in Response to Statement of Objections –Adopt SO’s Allegations Regarding Conditionality of Discounts Review of Challenged Deals Confirmed Intel’s Effective Price is Uniformly Above Avoidable Cost –Intel Making Money When Winning Contestable Sales –Avoidable Costs Are a Small Fraction of Selling Price –Intel’s Discounts Easily Pass “Required Share” Test

9 BIICL 15 May 2008 Impact of Intel’s Discounts Evaluate Conduct Based on Impact on OEMs & Consumers Potential Theories of Harm –Direct Harm to Consumers from Reduced Variety (Short Run) –Indirect Harm Due to Reduced Innovation by AMD (Long Run)

10 BIICL 15 May 2008 (Direct) Impact of Discounts on Consumers Intel’s Discounts Lead to Lower Prices for Final Consumers –OEMs Pass On Discounts to Final Consumers to Some Degree –Consumers Benefit from Lower Prices, Regardless of Their Cause –CPU Prices Declining More Than 40% Per Year On a Quality- Adjusted Basis OEM Decisions to Achieve Lower Costs (and Sacrifice Some Product Variety) Are Motivated by Final Consumers –OEMs Compete to Serve Final Consumers –OEMs Make Product Choice Decisions All the Time –No Reason Why OEMs’ Line-up Decisions Do Not Represent the Interests of Consumers

11 BIICL 15 May 2008 (Indirect) Impact of Discounts on Innovation Claim: Discounts Reduce AMD’s Available Funds for R&D –Same Argument Could Be Applied Any Time One Firm Lowers Price to Compete Against Another –Lower Prices Inevitably Reduce Profits Earned by Rival –Argument Implies that Competition Reduces Innovation Theory: Competition Spurs Innovation by Rewarding the Firm with the Best Product, Lowest Cost Facts: AMD Had Access to Capital –Raised More than $9.7 Billion Between 2001 and 2007 –Raised More than $2 Billion in 2004 Alone –Invested Heavily in R&D & Expanded Manufacturing Capacity

12 BIICL 15 May 2008 Conclusions Price-Cost Test Needed to Distinguish Pro-Competitive from Exclusionary Discounts –Intel’s Effective Price for Contestable Units Was Above Cost Intel’s Discounts Directly Benefited OEMs –OEMs Negotiated Hard and Welcomed Intel’s Discounts Intel’s Discounts Generated Benefits for Final Consumers –Discounts Passed Through by OEMs Absence of Actual Effects with On-Going Conduct Is Telling –AMD Has Gained Share and Invested in R&D