Dogging Intel

Dogging Intel

Dogging Intel

Moneybox
Commentary about business and finance.
June 3 1998 6:08 PM

Dogging Intel

Intel's announcement that it will be delaying its next-generation Merced chip is interesting not just, as I suggested yesterday, because of the stock market's sharp reaction, but also because it reveals just how tenuous the company's supposed "monopoly" really is.

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Intel chips still run something like 90 percent of the world's PCs, and the company's Pentium chips are the benchmark for the microprocessor market as a whole. The Federal Trade Commission, in what is hard to see as anything other than an attempt to keep up with the Joneses (that is, the Department of Justice), is getting ready to use that market share as the basis for an antitrust suit against Intel. The FTC argues that because Intel is a monopolist, it was legally proscribed from withholding technical information from customers with whom it was squabbling.

Ordinarily, of course, a company isn't forced to disclose all the secrets of its coming product lines to corporations that it believes will use those secrets to nefarious ends (as Intel believed in the three cases at issue in the FTC complaint). But if a company has a monopoly, it does have to disclose the secrets, lest the left-out corporations find themselves unable to make workable products.

The problem is that Intel doesn't have a monopoly in the classic sense of the word. Unlike, say, AT&T, which was once the only company that could offer phone service, or even Microsoft, which is the only company that can sell a Windows operating system, Intel is not the only company making chips that can run so-called Wintel computers. Its chief high-end competitor, Advanced Micro Devices, has claimed for the past two years that its K6 chips offer superior performance to Intel's, and the inroads made by Cyrix, Intel's chief low-end competitor, actually prompted Intel to bring out its own low-priced chip, Celeron. More than that, Intel's stock has been in a downdraft in the last three months precisely because people are so concerned that competition is eroding its profit margins at an alarming rate. The Merced announcement would not have been taken so seriously if Intel weren't wagering so much of its future on the kind of qualitative product improvement that monopolists simply don't have to make.

What's particularly frustrating about the FTC's assessment of Intel is that it's clear that the company's huge share of the market was built on the two most valuable things a business can offer the economy as a whole: technological innovation (Intel was the first to market with Pentium-level chips) and manufacturing prowess. Advanced Micro Devices, for instance, has been on the verge of becoming a real challenger to Intel for almost this entire decade, but has continually come up short because of its failure to make chips reliably in mass quantities. And the same has been true of Cyrix, which had high hopes for its most recent generation of chips but has watched them vanish in a haze of production-line woes.

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For capitalism to work, companies have to be able to make monopoly profits in the short-term, since otherwise there's no incentive to introduce a new product. That's why we allow people to patent invention. And in cases where the combination of continual innovation and assembly-line efficiency--plus, in the case of Intel, a strong brand name--allows a company to retain strong pricing power, antitrust law is a ridiculously blunt instrument with which to enforce competition. The FTC should just call off the dogs, right now.

RANDOM NOTES: How's this for the toughest sales job imaginable? The Russian government went to the markets today to sell $1.2 billion of government bonds. How should they pitch it? "Look, it took World War I to topple the Tsar. Relatively speaking, we're just fine"? Actually, the auction serves as evidence that you can sell anything if the price is right. The bonds have a maturity of less than a year, and carry an interest rate of 65%, which when you think about is a rather nice return on your investment. Plus the bondbuyers have the satisfaction of knowing that they're keeping Russia from...well, I guess the point is no one knows exactly what they're keeping it from.

The most interesting business news of the week was Xerox's launch of its Books On Time service, which connects publishers' Internet sites with Xerox's digital printing machines. In theory, you'll be able to go to an Internet site and order a book, and the Xerox machines will print it up almost immediately. Or publishers will be able to order print runs of up to several thousand copies. So far, only two small publishing houses have signed up for the service, but literally every publisher should embrace it, since it will help the industry move toward the kind of just-in-time inventory management that would reduce book returns and save publishers huge printing costs.