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Breaking the Technology Bottleneck: The FTC's Intel Case Is Critical to Innovation

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As the U.S. economy has begun to come out of its economic downturn, we have recognized the stiff price we pay for lax antitrust enforcement permitting industries to be dominated by a single or handful of firms. The penalties to economic growth from the lack of competition can be stiff: higher prices, less innovation, and fewer economic opportunities. As Harvard Professor Michael Porter has observed America's economic engine rests on the fact that it has a steadfast "commitment to competition and free markets," and crucial to that commitment is a dedication to active antitrust enforcement. The Obama Administration rightfully has sought to reinvigorate antitrust enforcement and it has begun with the crucial microprocessor market, challenging Intel's exclusionary practices which have forced U.S. consumers to pay more for inferior products.

Last fall, Intel settled a case with its rival AMD, paying a staggering $1.25 billion to put an end to their antitrust showdown. The suit focused on Intel's anticompetitive practices in the market for microprocessors, where Intel has prevented AMD's innovative microprocessors from reaching more consumers, driving down prices, and offering speedier computers. Though the settlement did require some changes to Intel's business practices, the case did not directly address the huge impact Intel's practices had on consumers across the country, who were denied access to better and cheaper products. In December, the Federal Trade Commission stepped in and filed its own suit to take on Intel on consumers' behalf.

Antitrust is a critical tool to making sure that markets perform effectively and produce the highest-quality products at the lowest cost. That role is even greater in technology driven markets like microprocessors where price may be no where near as important as innovation. The role of an antitrust enforcer is to ensure that there are no artificial barriers to competition. This is particularly important when the economy is in downturn. Some say that FDR's focus on trust-busting played a large role in reviving the US economy after the Great Depression. Effective antitrust enforcement can help the forces of competition break out in tired markets and get stagnant industries growing again.

It is critical that antitrust enforcers focus on industries with the biggest impact on economic growth. Over the past few decades, computers and telecommunications are the most dynamic and critical sectors of the economy. With the U.S. still trying to recover from its severe recession, the DOJ and FTC should place the greatest priority on these markets, one where competition is absolutely critical and should be protected at all costs.

The FTC's case against Intel follows on the heels of AMD's settlement and a number of international actions against Intel by the FTC's counterparts in Korea, Japan and the European Union. Each of those foreign authorities after careful fact gathering and review found that Intel's practices led to higher prices and stifled innovation. The EU imposed a fine of over $1.45 billion, the highest fine in history.

What is critically essential and different about the FTC action is that unlike the foreign cases it does not focus solely on microprocessors, but extends to the increasingly essential market for graphic processing units ("GPUs"). GPUs have remarkably powerful processing capability such that they perform many key tasks far more rapidly and effectively than microprocessors. The FTC alleges that Intel has sought to thwart competition from GPU manufacturers because "these products have lessened the need for [microprocessors], and therefore pose a threat to Intel's monopoly power." The FTC alleges that to forestall the threat from this lower cost, more powerful computing alternative, Intel engaged in deception, degraded connections between GPUs and microprocessors, refused to deal with a key GPU manufacturer (Nvidia Corp.) and unlawfully bundled Intel's GPUs with its microprocessors, resulting in below-cost pricing.

It is this aspect of the FTC case -- attempting to prevent Intel's efforts to forestall new product development and innovation that makes this case essential to the Obama Administration's efforts to restore antitrust enforcement. Because history has demonstrated that the antitrust enforcement actions that have had the most profound effect on the economy are those that attack efforts to forestall innovation and dynamic competition. Antitrust enforcement is most essential where it eliminates barriers imposed by dominant firms and enhances the opportunity for technological growth and innovation.

Take the Department of Justice's case against the AT&T monopoly in the 1980s. AT&T used its control over long distance lines to create a bottleneck on telecommunications innovation - fundamentally it dictated the pace of innovation and who would prevail. Breaking AT&T's monopoly was critical to the advent of the Internet and fiber optic technologies. Prior to the DOJ's case, AT&T's control over the entire country's telephone network allowed it to prevent new technologies - like modems - from making use of their network. It rejected fiber optic technology, taking the position that it would not purchase the technology, and when it did, not purchase it from a disruptive entrant eliminating any outlet for this critical innovation. The DOJ's challenge allowed innovators to enter these markets and provide entirely new products that AT&T may never would have created or provided in its comfortable role as a monopolist.

Similarly, the DOJ removed barriers to entry and to competition in the operating system and Internet browser markets with its challenge to Microsoft in the 1990's. As Deputy Assistant Attorney General Phil Weiser described in a speech this past January, "U.S. v. Microsoft raised the core concern that a dominant firm used its monopoly power to squelch the threat posed by disruptive technologies." Microsoft blocked the ability of competing browsers to arise my manipulating technical requirements which deteriorated the ability of these browsers to interact with its operating system. The remedy DOJ secured provided access to open interfaces (in this case, application programming interfaces and communications protocols) as a means of ensuring that Microsoft could not use its control over them to prevent browser rivals from arising in the future.

Appropriately, the FTC's challenge to Intel is the Obama Administration's most important case. In the vital GPU market rather than compete head-on, Intel has instead stifled the spread of GPU's through a variety of techniques. Should the FTC succeed in forcing competition to break out here, the spread of the GPU threatens to displace microprocessors prevalence and, with that, we can expect greater competition and superior products.

The FTC case goes to trial early this fall. The result of the litigation could not be more important for consumers. If the FTC prevails, we may see lower priced microprocessors leading to lower cost and faster computers. Even more important we may see the blossoming of new competition from GPUs, leading to enhanced computer capability. Without Intel's anticompetitive practices, the possibilities for innovation and growth in this space are endless.

With its challenge to Intel's dominance, the FTC has the opportunity to open up this critically important market to new competition. New innovation here could lead to new or improved processing capabilities or wider access to these products through lower prices.

As important as this action in the microprocessor and GPU markets is the principle the FTC seeks to establish. Exclusionary conduct especially in dynamic high technology markets dampen innovation and stifle economic growth. Antitrust enforcement is a bulwark to the protecting the free market and effective enforcement can spur an upsurge in innovation and economic growth, with far-reaching effects on the economy.

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