Ad-Hoc Expert Group on the Role of Competition Law
and Policy in Promoting Growth and Development
Geneva, 15 July 2008
Abuse of Dominance
by
Deuk-soo CHANG
Korea Fair Trade Commission
The views expressed are those of the author and do not necessarily reflect the views of UNCTAD.
Case Study : Korean Experience
The Abuse of Market Dominant Power
By Intel Corporation
Deuk-soo CHANG
Korea Fair Trade Commission
2
I Summary
II Findings
III Judgment of illegality
1.Applied statutes
2. Requirement of illegality
3. Judgment of illegality
IV Corrective measures
V Significance
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I. Summary
4
Progress of investigation and deliberation
The KFTC suspects Intel’s abuse of dominant position through the provision of rebate (’05.Apr)
- suspicion arises through the JFTC’s announcement concerning the Intel Case
The KFTC launches the written inquiries into Intel Korea (’05.Jun)
- based on the JFTC’s decision, the inquiries to Intel Korea and the Korean PC OEMs include
the CPU transaction process and amount of rebate, etc.
The KFTC conducts dawn raids on Intel Korea and the Korean PC OEMs (’06.Feb)
- after written inquiry review, 5 units comprising 26 investigators including IT experts
conduct dawn raids on Intel Korea, the Korean PC OEMs and home shopping companies
for 5 days
- after dawn raids, the KFTC obtains several giga bites of electronic data and
e-mails exchanged between the related parties and other documents
5
Progress of investigation and deliberation
The KFTC reviews electronic data and hears statement from the related parties
(’07.Jan~July)
- reviews electronic data including e-mails exchanged between the related parties
and internal plans from Intel Korea and the PC OEMs and hears statements
from about 20 related people
The KFTC presents Intel case to the full-member committee and sends
Examination Report to Intel(’07.Sep)
The KFTC receives comments from Intel (’07.Dec, ’08.Mar)
- along with its comments, Intel submits opinions of leading economic and legal experts
from home and abroad
* Dr. Shapiro, Hovenkamp, Elhague, Whilsh
The KFTC receives the Complaint from AMD (’08.Apr)
The KFTC holds the full-member committee(’08.May, ’08.Jun), which issues a final decision
(’08.Jun)
- over 2 rounds of full-member committee, the Vice Presidents from Intel and AMD and
Professor Ordover (AMD side) express opinions, holding fierce debates
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Relevant enterprises
Examinee : Intel
- Intel Corporation (Intel’s US headquarters) : makes the final determination
on production and sales
- Intel Semiconductor Limited (Intermediary for CPU sales) : sells CPUs
- Intel Korea (Intel’s Korean subsidiary) :supports Intel’s CPU sales in Korea
Its main competitor : AMD (Advanced Micro Devices)
- the only competitor of Intel in the PC CPU market
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Relevant products
PC-based x86 CPU
- x86 line running on Windows OS mainly used for desktop and laptop PC
- developed first by Intel and manufactured mostly by Intel and AMD
Worldwide market shares of PC-based x86 CPU
2002
2003
2004
2005
Intel
80.8%
80.2%
81.2%
79.3%
AMD
16.9%
17.7%
16.8%
18.5%
8
Distribution chart for PC-based CPUs
Korean OEM
Intel
PC
AMD
consumer
small PC
assembly
companies
Distributors
Wholesalers
/retailers
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II. Findings
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Findings concerning Company A
Intel provided rebates to Company A, a Korean PC OEM, between the
Q3 of 2003 and the Q2 of 2005 on the condition that it stops the
purchasing of AMD-based CPUs or that it only purchases Intel-based CPUs.
As Company A purchased CPUs from AMD in the Q1 and Q2 of
2002, Intel significantly cuts down on its rebate, consistently requesting
to terminate the purchase of AMD-based CPUs.
On May 30 2002, Intel and Company A agreed that Company A would stop
purchasing CPUs from AMD by Q3 of 2002 and switch to Intel CPUs and use
them only thereafter. In return, Intel would provide the quarterly rebate.
In fact, Company A did not purchase CPUs from AMD from the Q4 of 2002 to
the Q2 of 2005.
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Findings concerning Company B
From the Q3 of 2003 to the Q2 of 2004, Intel provided rebates to
another Korean PC OEM Company B on a condition that B purchase
the CPUs for home shopping channel only from Intel.
As the market share of AMD CPUs in the home shopping channel exceeded 70% in
the first half of 2003, Intel provided rebates to Company B on the
condition that B converts its CPU purchase for home shopping channel
sales from AMD to Intel by the Q3 of 2003 and thereafter purchases Intel CPUs only.
From the Q4 of 2004 to the Q2 of 2005, Intel offered rebates to
Company B on the condition that B purchases more than 70% of
its domestic PC-based CPU demand from Intel.
As Company B increasingly expanded the purchase of CPUs for home shopping channel
sales from AMD, in the Q3 of 2004, Intel threatened the suspension of rebate and
eventually provided rebates to Company B on a condition that B purchases CPUs from Intel
for more than 70% of its domestic CPU demand.
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III. Judgment of illegality
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1. Applied statutes
Article 3-2 of the MRFTA(Prohibition on abuse of market dominance)
① No market-dominating enterpriser shall commit acts
falling Under any of the following subparagraphs:
5. An act unfairly excluding competitive enterprisers, or
which might considerably harm the interests of consumers.
Article 5 of the Enforcement Decree (type or criteria of abuse)
⑤ Pursuant to Article 3-2 (1) 5 of the MRFTA (Prohibition
on abuse of market dominance), an act unfairly excluding
competitive enterprisers refers to the following cases.
2. unfairly transacting with a partner under the condition
that the partner does not transact with a competing
Enterprise.
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2. Requirement of illegality
I. Is Intel a company that has the market
dominant power?
II. Did Intel deal with the Korean PC OEMs on the
condition that they do not purchase CPUs from
its competitor?
III. Did Intel’s conduct have an anti-competitive
effect in the relevant market?
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Criteria of being a dominant enterprise
Relevant market :PC-based x86 CPU market (for direct supply
to local PC OEMs)
① Product market : PC-based x86 CPU market
-x86 CPUs set apart from other CPUs (ARM, MIPS, PowerPC,
SPARC),
In terms of control word design, operating system, and main
usage, constitutes an individual product market
- As server CPUs and PC CPUs have remarkably different functions
- and stability-wise, there exists no demand substitutability
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Relevant market : PC-based x86 CPU market (for direct supply
to local PC OEMs)
② Geographical market : Domestic Market
- Intel and AMD are competing globally, but the geographical boundary
of the competition is the territory of a country.
- As a dominant enterprise in the CPU market, Intel manages the
world market by dividing it up geographically. Thus it is difficult for the
Korean PC OEMs to purchase CPUs from overseas markets even in
case of an increase in CPU prices at home.
- Intel CPU prices are different depending on each region.
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Intel is a dominant enterprise in the relevant market.
① As the share of Intel in the relevant market is 80~90%,
Intel is presumed to be a dominant enterprise pursuant
to the MRFTA.
Whether the relevant market is domestic or global, the market share
of Intel is 70% or more. Thus Intel is presumed to be a dominant
enterprise under the MRFTA.
② In the negotiations on prices or terms of trade with PC OEMs,
Intel sets them to its advantage free of competitive pressure
from its competitors.
Concerning a significant number of CPUs, Intel has not accepted the
request of rebate provision from its counterparties but instead stuck to
the sales prices it originally set.
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Whether Intel made a deal conditional upon the exclusion of its competitor
Considering Intel’s internal data, consistency of the related
parties statements, and the actual transaction pattern, it is
apparent that Intel offered local PC OEMs the rebates
conditional upon them not transacting with AMD.
① e-mails between the staffs of Intel and Korean PC OEMs,
internal review and meeting materials evidently show that
Intel provided rebates to Korean PC OEMs Company A
and
B conditional upon them not transacting with AMD.
② Several staffs of Intel and Korean PC OEMs testified that
Intel’s provision of rebates was contingent upon the
OEMs not using the AMD-based CPUs.
③ But for Intel’s condition of not transacting with its
competitor, the actual transaction pattern would have
been impossible to formulate.
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Actual transaction pattern I (Company A)
MSS of AMD in Company A
14.0%
Agrees to suspend the sales
of PCs with AMD-based CPUs
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
’01
Q1
’02 ’02 ’02 ’02 ’03 ’03
Q1 Q2 Q3 Q4 Q1 Q2
’05 ’05 ’05
Q2 Q3 Q4
20yy
Actual transaction pattern II (Company B]
MSS in Home shopping channel of Company B
100.0%
Intel
80.0%
Agrees to suspend the sales
60.0%
of PCs with AMD-based CPUs
40.0%
AMD
20.0%
’02
Q1
’02
Q2
’02
Q3
’02
Q4
’03
Q1
’03
Q2
’03
Q3
’03
Q4
’04
Q1
’04
Q2
’04
Q3
’04
Q4
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Anti-competitive effect
1. Intel’s act caused AMD’s market share to significantly drop.
① As Company A began to purchase AMD CPUs starting from the Q1 of 2002,
AMD’s market share rose from less than 1% to 8%. But Intel’s provision
of conditional rebates drove it back to a 1% range after the Q3 of 2003.
② AMD started to slightly regain its market share, in particular, in the home
shopping channel market to reach 3.2% in the Q2 of 2003. In response, Intel
provided conditional rebate to Company B mainly for the home shopping
channel sales, pushing AMD’s market share back to less than 1%.
③ As AMD-based CPUs were embedded in Company B’s low-cost
lap-top computers, AMD’s market share rose greatly. Thus, Intel again offered
Company B conditional rebates for domestic PCs, thereby sending AMD’s
market share to less than 4%.
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Change in market share of AMD in the relevant market
50.0%
Company B agrees to maintain
Intel MSS at 70%
40.0%
30.0%
Company A agrees to drop
AMD CPUs
Company B agrees to drop
AMD CPUs for home shopping
Sales
agency
channel
20.0%
10.0%
Relevant
market
’01 ’02 ’02 ’02 ’02 ’03 ’03 ’03 ’03 ’04 ’04 ’04 ’04 ’05 ’05 ’05 ’05
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
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2. Economic analysis of Intel’s rebates shows that it is virtually
impossible for AMD to supply its CPUs to the Korean PC OEMs at a
cheaper price to compensate Intel’s rebates.
The possible reduction in the amount of rebate caused by Company A’s purchase of
AMD CPUs was analyzed based on the actual market share (AMD’s market share:
3%) in the Q1 of 2002.
→ The analysis shows that to counter the Intel’s rebate, AMD would have been
forced to sell its CPUs at $4.56, which is a 94% discount of its average supply price
per unit in the Q4 of 2002.
For the 7 quarters between the Q4 of 2002 and the Q2 of 2005, it was found
that AMD could have not countered Intel’s rebate even by offering
its CPUs for free and for the rest of the quarters except the Q1 of 2004,
at
least more than 70% of discount (probably below cost) was found to be
required to counter the Intel’s rebate.
„ It is virtually impossible for AMD to counter the Intel’s rebate.
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Intel CPU’s actual price considering the rebate offered
to take away a market share (3%) from AMD (AMD’s counter price)
(unit : dollars)
Period
AMD’s counter price
(discount rate)
Period
AMD’s counter price
(discount rate)
2002
2003
2004
Q4
Q1
Q2
Q3
Q4
Q1
4.56
(94%)
-
-
-
21.91
(73%)
80.16
(2%)
2005
2004
Q2
Q3
Q4
Q1
Q2
-
-
22.96
(72%)
-
-
Average
-
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3. Intel’s conduct hampered AMD’s launch of the world’s first
64-bit CPUs for desktop PCs in 2003 for a period of 6 months to
1 year → Undermines technological innovation
4. Intel’s conduct constrained the right of choice for consumers
to choose AMD CPUs.
Consumers who prefer Company A’s PC manufacturing technology and
customer service but favor AMD’s CPUs were denied the right to purchase
AMD-based CPU PCs manufactured by Company A.
5. During the period which Intel’s rebate provision lasted, AMD, its only
rival in the relevant market, suffered severe hardship in its business
to face a risk being driven out in the market.
There is a big difference in AMD’s sales amount and operating profit
between pre-and post- rebate provision.
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IV. Corrective
measures
27
cease and desist order
The KFTC ordered Intel to stop offering to the Korean PC OEMs the
rebates on the condition that they purchase Intel’s CPUs above
a certain percentage level in consideration of its MSS in each OEM.
surcharge imposition
around 26 billion won (USD $26 million), a certain percentage
of the affected turnover of Intel
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V. Significance
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First, the competition in the Korean CPU market is expected to be
promoted, driving PC CPU prices down quickly and sparking a race to
develop the CPU-related products to accelerate technological innovation.
Second, the Korean PC consumers will benefit with a broader range of
products to choose as they will have an easier access to the non-Intel
CPU-based PCs.
Corre
ction
of
Intel’s
condu
ct
More
competition
in the CPU mkt
Lower CPU price
Tech innovation
Broader product
choice for consumers
Benefit
to
consumers
& PC OEM
30
Thank You
(dschang@ftc.go.kr)
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