When Contract Terms Represent Abuse …

So New York State has now filed suit against Intel, claiming anti-competitive sales practices. This follows suits in the EU and in South Korea, both of which resulted in massive fines (currently under appeal).

Big companies always face a dilemma in assesssing the boundaries of sales and commercial policy. Terms that can be popular with customers may not be approved by competition authorities. Many of these cases relate to discounting policies – and especially in areas like rebates (outlawed by the EU some 20 yeaars ago, but still potentially allowable in the US).

“Rather than compete fairly, Intel used bribery and coercion to maintain a stranglehold on the market,” according to New York Attorney General Andrew Cuomo. It is alleged that rebates amounted to as much as $2bn a year for major manufacturers and depended on their loyalty to Intel. If true,  such sums would obviously act as a major incentive for Procurement to ensure that orders were not placed with competitors. In case this approach was not sufficient, it is claimed that Intel threatened to end joint development with customers who strayed.

Traditional Procurement measurements often play into the hands of companies that seek to stifle competition. If ‘savings’ are the main goal for Procurement, then large rebates, hefty discounts and ‘loyalty bonuses’ are very attractive. Once achieved, it becomes very difficult to switch to a competitor since they are unlikely to be able to match these terms. The fact that competition is being stifled or that innovation is being lost is not immediately evident – and when it becomes so, it is often too late.

Such tactics are only effective in situations where a supplier has relative dominance in the market. For the competition authorities, the concern is that commercial policies of this sort stifle competition, leading over time to less innovation and higher prices. The case indicates that US authorities are perhaps becoming more vigilant in their oversight of anti-trust rules – and therefore represent a warning to many large corporations as they assess their terms and conditions.

AS AN ADDENDUM to this article, it has been announced (November 12th) that Intel has agreed an out-of-court settlement with its major rival, AMD, resulting in a payment of $1.25bn. In addition, Intel has committed to a set of ‘revised business practices’, on which I will comment once they become public.