[Federal Register Volume 63, Number 85 (Monday, May 4, 1998)]
[Notices]
[Pages 24544-24547]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-11798]


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FEDERAL TRADE COMMISSION

[File No. 981-0040]


Digital Equipment Corporation; Analysis to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreement.

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SUMMARY: The consent agreement in this matter settles alleged 
violations of federal law prohibiting unfair or deceptive acts or 
practices of unfair methods of competition. The attached Analysis to 
Aid Public Comment describes both the allegations in the draft 
complaint that accompanies the consent agreement and the terms of the 
consent order--embodied in the consent agreement--that would settle 
these allegations.

DATES: Comments must be received on or before July 6, 1998.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary, 
Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT: William Baer or Willard Tom, FTC/H-
374, Washington, D.C. 20580 (202) 326-2932 or 326-2786.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Section 2.34 of 
the Commission's Rules of Practice (16 CFR 2.34), notice is hereby 
given that the above-captioned consent agreement containing a consent 
order to cease and desist, having been filed with and accepted, subject 
to final approval, by the Commission, has been placed on the public 
record for a period of sixty (60) days. The following Analysis to Aid 
Public Comment describes the terms of the consent agreement, and the 
allegations in the complaint. An electronic copy of the full text of 
the consent agreement package can be obtained from the FTC Home Page 
(for April 23, 1998), on the World Wide Web, at ``http://www.ftc.gov/
os/actions97.htm.'' A paper copy can be obtained from the FTC Public 
Reference Room, Room H-130, Sixth Street and Pennsylvania Avenue, N.W., 
Washington, D.C. 20580, either in person or by calling (202) 326-3627. 
Public comment is invited. Such comments or views will be considered by 
the Commission and will be available for inspection and copying at its 
principal office in accordance with Section 4.9(b)(6)(ii) of the 
Commission's Rules of Practice (16 CFR 4.9(b)(6)(ii)).

Analysis To Aid Public Comment

I. Introduction

    The Federal Trade Commission (``Commission'') has accepted from 
Digital Equipment Corporation (``Digital'') an Agreement Containing 
Consent Order (``Proposed Consent Order''). The Proposed Consent Order 
is designed to remedy anticompetitive effects likely to occur in three 
product markets as a result of the acquisition by Intel Corporation 
(``Intel'') of certain assets of Digital. The Order requires that 
Digital License its Alpha microprocessor technology to two Commission-
approved companies to ensure that there are independent suppliers and 
developers of Alpha. The Order ensures that Intel will not have 
exclusive control over the technology, and that Alpha will remain 
competitive.

II. Description of the Parties and the Transaction

    Digital is a Massachusetts corporation headquartered in Maryland, 
Massachusetts, with sales of approximately $13 billion and net income 
of over $140 million for the fiscal year ended June 28, 1997. Digital 
manufactures and sells computer systems, and develops, manufactures, 
and sells microprocessors based on its proprietary 64-bit \1\ Alpha 
architecture.
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    \1\ The number of bits generally correlates with the amount of 
data that a microprocessor can process during one clock cycle. 
Intel's current Pentium microprocessors have a 32-bit architecture 
(known as IA-32), while Digital's alpha chip has a 64-bit 
architecture.
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    The Alpha microprocessor is widely regarded as among the highest 
performing general purpose microprocessors available and is the only 
non-Intel microprocessor architecture that can run the Windows NT 
operating system in ``native'' mode.\2\ Digital is the largest consumer 
of Alpha chips, which it uses in its computer systems.
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    \2\ Windows and Windows NT are operating systems. Operating 
systems are a type of software that acts as an intermediary between 
applications software and the microprocessor. An operating system 
runs in ``native'' mode when it is specifically written to interact 
optimally with the particular microprocessor architecture. 
Microsoft, the developer of Windows NT, today supports only two 
microprocessor architectures--Intel's and Digital's--to run Windows 
NT in native mode. Other microprocessor architectures today must use 
translation software in order to run Windows NT, significantly 
reducing performance and speed.
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     Intel Corporation (``Intel''), a Delaware corporation 
headquartered in Santa Clara, California, is the world's leading 
semiconductor manufacturer. Intel reported 1996 sales of approximately 
$20.8 billion and net income of more than $5 billion. Intel supplies a 
broad

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line of semiconductor devices used as computer system components, 
including x86-compatible microprocessors \3\ such as the Pentium line, 
which are used primarily in conjunction with Microsoft's Windows and 
Windows NT operating systems. Intel has been working with other 
companies to develop a 64-bit microprocessor (currently known by the 
project name Merced) with a new 64-hit architecture (known as IA-64), 
which is intended to extend Intel's current x86 architecture and 
compete with Digital's Alpha architecture.
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    \3\``X-86 architecture'' generally refers to the original line 
of Intel microprocessor products for personal computers and includes 
successive generations such as the 8096, 286, 386, 486 and the 
Pentium family of chips.
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    The proposed transaction resolves three pending lawsuits between 
Digital and Intel relating to microprocessor intellectual property and 
technology rights. Digital initiated that litigation in May 1997, 
claiming the Intel infringed ten Digital patents by making and selling 
Intel Pentium chips. Intel countersued, claiming, among other things, 
that Digital is infringing nine Intel patents by making and selling 
Alpha microprocessors.
    On October 26, 1997, the parties agreed to settle the litigation 
and grant each other broad patent cross-licenses. Intel would also buy 
Digital's microprocessor production facilities (such a facility is 
known in industry parlance as a ``fab'') for net book value 
(approximately $650 million). In addition, Intel agreed to produce 
Alpha microprocessors for supply exclusively to Digital. Digital agreed 
to endorse publicly these IA-64 architecture and design some Digital 
computer systems based on Intel 64-bit microprocessors. Digital will 
retain the intellectual property rights and design assets for Alpha, 
including the design engineers who conduct research and development for 
the Alpha architecture.

III. Competitive Concerns

A. Relevant Markets
    The draft Complaint alleges three relevant markets: (1) The 
manufacture and sale of high-performance, general-purpose 
microprocessors that are capable of running the Windows NT operating 
system in native mode; (2) the manufacture and sale of all general-
purpose microprocessors and (3) the design and development of future 
generations of high performance, general-purpose microprocessors.
    The Complaint alleges that microprocessors designed to run the 
Windows NT Operating system and its complementary application programs 
constitute a relevant antitrust product market. The demand for 
microprocessors is determined indirectly by the demand for operating 
systems, which is determined in part by the software applications that 
run on those systems. Applications are designed for specific operating 
systems; operating systems can optimally run application programs only 
when the operating system is written for the microprocessor 
architecture (so that the microprocessor runs native on that operating 
(system). Consumers cannot readily switch between computer systems that 
use different microprocessor architectures, because in most cases such 
a switch also requires changing the operating system and application 
programs, an expensive proposition and one that may not yield the same 
level of functionality enjoyed by consumers on their former systems.
    Windows NT is currently written in two versions, so that only the 
Alpha microprocessor and the Intel-based microprocessors can run it in 
native mode.\4\ Windows NT will also be compatible with Merced, Intel's 
64-bit chip, which will not be commercially available until 1999. Thus, 
consumers using software optimized for use with Windows NT must choose 
between Intel-based and Alpha-based systems. Thus, if the price of 
Alpha and high-end Intel microprocessors were to increase by 5 percent, 
consumers using Windows NT would not readily switch to computer systems 
built with alternative microprocessors.
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    \4\ See fn. 2.
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    The Complaint also alleges that a second relevant product market 
includes all general-purpose microprocessors, a category that includes 
devices based on the Intel and Alpha architectures, as well as 
microprocessors based on other rival architectures such as those 
developed by Hewlett-Packard (PA-RISC), Sun Microsystems (SPARC), IBM 
(PowerPC), and Silicon Graphics (MIPS). Because only Alpha and Intel 
microprocessors can optimally run Windows NT, however, these two 
microprocessors are the closest substitutes in this broader, 
differentiated product market.
    Finally, the Complaint alleges that the transaction will reduce 
competition in the innovation market for the design of microprocessors. 
Intel and Digital are two of a very few competitors developing next-
generation, high-performance microprocessors. Computer makers choose 
microprocessors based, in part, on the ``roadmap'' provided by each 
microprocessor manufacturer--that is, the manufacturer's projection of 
future expected increases in performance and functionality for 
successive generations of microprocessors based on the same 
architecture. Roadmaps therefore provide an essential element of 
microprocessor competition. Intel and Digital compete for sales to 
computer manufacturers, based on their roadmaps, and they use each 
other's roadmaps as benchmarks for developing next-generation products 
to leapfrog the performance of the rival company's chips.
B. Barriers to Entry
    The Complaint alleges there are significant barriers to entry in 
the market, including incurring large sunk costs to build a fab and 
design a microprocessor, overcoming the network externalities and 
Intel's installed base, obtaining Microsoft support to obtain Windows 
NT-compatibility, building a reputation as a reliable microprocessor 
manufacturer and innovator.
    Building a new microprocessor facility requires the expenditure of 
substantial fixed and sunk costs and takes many years. A new entrant 
must also design the microprocessor, an expensive and lengthy process.
    Most important, a successful entrant would need to convince 
computer system manufacturers to design their systems around the new 
microprocessor. Entrants, however, face a significant ``Catch-22'' in 
this endeavor because of ``network externalities.'' Externalities exist 
where consumers place more value on a particular technology 
(microprocessor, operating system, peripherals, applications, etc.) 
that is more widely adopted than other technologies. Software 
developers and computer system manufacturers are unwilling to support a 
new microprocessor technology unless they first see that it enjoys 
consumer interest. Because of these network externalities and 
reputational effects, however, consumers are unwilling to switch to a 
new microprocessor technology unless they first see that it has 
compatible operating systems, software, and peripherals. In this 
environment, consumer and industry expectations about the degree to 
which a manufacturer will be able to get network externalities and 
reputational effects working for it in the near future are critical.
    The importance of these expectations is illustrated by Intel's 
recent marketing efforts on behalf of the Merced, its new 64-bit 
microprocessor. Even though

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Merced has yet to be tested and will not be available for more than a 
year, Intel has already successfully obtained commitments from a large 
share of the software vendors and computer system manufacturers to 
write software and build computers for it.
C. Competitive Effects
    Intel has market power in both relevant microprocessor product 
markets. Intel accounts for nearly 90 percent of dollar sales and 
nearly 85 percent of unit sales of microprocessors for Windows NT and 
for nearly 90 percent of dollar sales and 80 percent of unit sales of 
general-purpose microprocessors. No firm other than Intel accounts for 
more than 4 percent of dollar sales of microprocessors or for more than 
10 percent of unit sales of microprocessors. Finally, the competitive 
significance of other high-performance microprocessors--such as 
Hewlett-Packard's PA-RISC, Sun Microsystems' SPARC, PowerPC from the 
Motorola/IBM/Apple venture, and Silicon Graphics' MIPS 
microprocessors--has been declining.
    The transaction also threatens to increase concentration 
significantly in the relevant innovation market. Digital and Intel are 
two of the most significant innovation competitors in the design and 
development of high-performance microprocessors. Even with its 
comparatively small share of the relevant markets, the Alpha 
architecture (because of Alpha's superior processing performance) 
represents the most significant threat to Intel's continued market 
dominance. Intel's documents refer repeatedly to the competitive threat 
posed by Alpha, which is acknowledged by many as possibly the best 
performing and fastest microprocessor in the world. Innovation and 
actual competition between the two companies is likely to increase in 
the future because of the growing popularity of Microsoft's Windows NT 
operating system, which currently supports only Digital's Alpha and 
Intel's advanced microprocessors. As the demand for and functionality 
of Windows NT grow, the competition between the Alpha and Intel 
architecture is likely to intensify.
    On these facts, it is clear that an acquisition of Digital by Intel 
would substantially lessen competition. Although the transaction at 
issue here does not involve an outright acquisition of Alpha 
technology, it nevertheless threatens competition in the relevant 
markets. Under the terms of the settlement, Intel will acquire 
Digital's Alpha fabrication plant (known as Fab 6) and will produce 
Alpha chips for Digital. Digital will retain its Alpha intellectual 
property and design team and is, therefore, only receiving ``foundry'' 
services (that is, a supply agreement where one company manufactures 
the product for another) from Intel. The parties will also end the 
patent litigation and sign a patent cross-license agreement.
    The proposed transaction has positive implications for the future 
of Digital's Alpha systems. The supply agreement frees Digital from 
operating a plant that it was not able to utilize efficiently. Because 
Intel manufactures a vast line of semiconductor products, it can 
utilize the plant more efficiently than Digital. As a result, overall 
manufacturing costs will go down and, under the Digital-Intel 
agreement, those cost reductions will be passed on to Digital. Under 
the agreement, Digital will also be able to bring the next generation 
of Alphas--based on an improved .18 micron process technology--to 
market earlier than it would have absent the transaction.
    Digital's move to this ``fabless'' business model of operation is 
not unprecedented. Other successful companies--like Sun Microsystems, 
Inc. and Silicon Graphics--have designed high performance 
microprocessors while relying on third-party foundries for 
manufacturing. None of the other fabless microprocessor companies, 
however, placed manufacturing in the hands of such a dominant 
competitor.
    Because of this unique characteristic, the proposed transaction 
creates the opportunity for Intel to slow down or otherwise impair the 
supply of Alpha microprocessors, harming competition in the relevant 
markets. In particular, the transaction presents a risk that Intel will 
not provide the necessary level of coordination between the design and 
manufacturing processes, and that Intel may take other steps to reduce 
quality and slow the supply of Alpha microprocessors to Digital. Every 
foundry arrangement requires design engineers and manufacturing process 
engineers to coordinate their efforts. The development of a 
microprocessor involves conforming that design to the process 
technology and vice-versa. The Digital-Intel settlement separates these 
functions and provides no incentive for Intel to ``tweak'' its own 
processes to conform to Digital's products.
    Furthermore, the transaction as proposed threatens the continued 
viability of Digital's sales of Alpha to the ``merchant market.'' \5\ 
As part of this transaction, Digital is selling off most of its 
semiconductor business to Intel and thus will have no economic need for 
a marketing staff, which includes people who market Alpha to other 
computer system manufacturers. Without a marketing staff to service and 
pursue the merchant market, the loss of competition would be 
significant.\6\ Computer system manufacturers using Alpha 
microprocessors have pioneered the opening of new market segment for 
Alpha-based systems, such as media graphics. With the expected growth 
of Windows NT, Alpha and Intel should go head-to-head in competition in 
these market segments for these systems. The uncertainty created by the 
proposed transaction, had it not been addressed by the proposed 
consent, could have reduced competition between Intel and Alpha 
processors, resulting in higher prices, reduced consumer choice, and 
lower rates of innovation.
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    \5\ Merchant market means sales of separate microprocessor chips 
to computer system manufacturers, who then use them as a component 
in their own computer systems.
    \6\ As explained more fully below, as part of this consent 
agreement, Digital will be licensing Alpha to Samsung, a company 
that plans to sell the Alpha chip in the merchant market through a 
U.S. subsidiary.
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    The Complaint concludes that, unless remedied, the transaction is 
likely to create uncertainty regarding the future competitive viability 
of Alpha, thereby maintaining and enhancing Intel's market power, which 
could result in increased prices and reduced quality and innovation in 
each of the relevant markets for the following reasons: (1) By making 
it less likely that Digital would maintain the sales force to continue 
``merchant market'' sales of Alpha microprocessors and other products 
to other computer system manufacturers, it would reduce competition 
between Intel and Digital for such sales; and (2) putting Digital's 
supply of Alpha solely in the hands of Intel would give Intel the 
opportunity to delay production of Alpha microprocessors, impede the 
development of new generations of Alpha microprocessors, and otherwise 
undermine the competitiveness of Alpha. In these ways, according to the 
Complaint, the consummation of the proposed transaction, without any 
changes, would violate Section 5 of the Federal Trade Commission Act, 
as amended, 15 U.S.C. 45, and Section 7 of the Clayton Act, as amended, 
15 U.S.C. 18.

IV. The Proposed Consent Order

    The Commission has entered into an agreement containing a Proposed 
Consent Order with Digital in settlement of the draft Complaint. The 
Proposed Consent Order is designed to preserve Alpha's future viability 
by ensuring alternative sources for production,

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marketing, and development of Alpha products. The Proposed Consent 
Order requires Digital to enter into or to continue certain licensing 
arrangements and alliances with Advanced Micro Devices, Inc. (``AMD''), 
Samsung Electronics Co., Ltd. (``Samsung''), or some other Commission-
approved licensee, and to be begin the process of certifying 
International Business Machines, Inc. (``IBM''), or some other 
Commission-approved company, to become an Alpha foundry. The purpose of 
these provisions is to establish two licensees and another foundry as 
providers and developers of Alpha devices, independent of Intel.
    The Proposed Consent Order binds Digital to comply with the terms 
of agreements it already has entered into with Samsung. Under those 
agreements, Samsung will obtain an architectural license and technical 
support. Furthermore, Digital will grant to Samsung a non-exclusive 
AlphaPowered trademark license and the assistance and support necessary 
to enable Samsung to enter rapidly and expand the merchant market 
segment for Alpha products.\7\ Under the current version of the 
Samsung-Digital agreement, Samsung will be creating a U.S. subsidiary, 
to be known as the Alpha Volume Company, that plans to market Alpha 
chips to the merchant market segment. Furthermore, Digital has 
committed to purchase substantial volumes of its Alpha products needs 
at a competitive price from Samsung, thus reducing its reliance on 
Intel.
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    \7\ The Proposed Consent Order also includes provisions for an 
``Interim Trustee'' (i.e., an auditor) and a licensing trustee. The 
Interim Trustee provision assures early assessment and monitoring of 
Digital's agreements with the licensees and continuing monitoring 
and reporting to the Commission of how the provisions are working. 
The licensing trustee provision is triggered if the parties to a 
licensing agreement fail to agree within the requisite time.
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    The Proposed Consent Order also requires Digital to enter into a 
broad license with AMD, or a Commission-approved licensee, that 
includes a license to the Alpha architecture and software tools that 
enable AMD to develop microprocessors compatible with the Alpha 
architecture. Digital must provide technical and engineering support 
until AMD is capable of independently developing and producing products 
based on the Alpha architecture, but in no event for more than two 
years.
    The licenses with AMD and Samsung (or two other Commission-approved 
companies) are architectural licenses, meaning that the license is to 
the Alpha architecture, as defined by convention in Digital's official 
reference manual. Under such license, the licensee is free to create 
its own implementations and derivative works--that is, to design 
original chips around the architecture--with the one caveat that it 
maintain backward compatibility with the existing Alpha 
architecture.\8\ In this way, a licensee will have every incentive to 
develop the merchant market aggressively because it will have the 
ability to create Alpha-derivative innovations that can give it 
profitable ``design wins''--that is, agreements with computer system 
manufacturers by which the computer system manufacturers will design a 
computer line around the licensee's chip. These architectural licenses 
also provide assurance to customers who commit to the Alpha 
architecture because the licenses provide independent sources of supply 
and innovation for these microprocessors.
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    \8\ An architectural integrity provision in the Order preserves 
backward compatibility for existing applications written to exploit 
the architecture, and to make designing easier for applications 
developers that have not yet ported applications to Alpha. If 
Digital fails to innovate and improve the performance of the Alpha 
architecture, however, the Order allows AMD to modify the base 
architecture without Digital approval.
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    The Proposed Consent Order also requires Digital to enter into an 
agreement, subject to Commission approval, with IBM or some other 
Commission-approved company to evaluate that company as a potential 
foundry for Alpha parts and to inform that foundry partner of the steps 
necessary to become a qualified supplier of Alpha products. Submission 
of that agreement is required within six months of Commission approval 
of the Proposed Consent Order. Alternatively, the Proposed Consent 
Order permits Digital to demonstrate why such an agreement is 
unnecessary.
    Samsung is a leading supplier of DRAM technology, is considered to 
have excellent manufacturing quality, and will receive marketing 
assistance from Digital. Samsung is already in the merchant market and 
the Order should empower Sumsung to further its marketing efforts in 
this important segment. AMD is the leading challenger to Intel for x86-
compatible microprocessors and already a major merchant market 
supplier, with excellent design capabilities. Though AMD does not yet 
produce Alpha chips, it should have every ability to do so. AMD is a 
major supplier of microprocessors and should have significant 
incentives to develop an Alpha-based business because it does not 
otherwise have a 64-bit architecture capable of challenging the 
upcoming Intel IA-64 architecture. IBM is an established high-
performance microprocessor foundry, likely to be capable of producing 
Alpha products. All three of these companies, or other licensees, help 
to ensure adequate and independent supplies of Alpha microprocessors.

V. Opportunity for Public Comment

    The Proposed Consent Order has been placed on the public record for 
sixty (60) days for receipt of comments by interested persons about 
both the appropriateness of the relief provided herein as well as the 
suitability of Samsung, AMD, and IBM as licensees who can ensure 
alternative sources for the manufacture, marketing, and development of 
Alpha products. Comments received during this period will become part 
of the public record. After sixty days, the Commission will again 
review the Proposed Consent Order and the comments received and will 
decide whether it should withdraw from the Proposed Consent Order or 
make it final.
    By accepting the Proposed Consent Order subject to final approval, 
the Commission anticipates that the competitive problems alleged in the 
Complaint will be resolved. The purpose of this analysis is to invite 
public comment on the Proposed Consent Order, including the proposed 
licenses and alliances, to help the Commission determine whether to 
make final the Proposed Consent Order contained in the agreement. This 
analysis is not intended to constitute an official interpretation of 
the Proposed Consent Order, nor is it intended to modify the terms of 
the Proposed Consent Order in any way.

    By direction of the Commission.
Donald S. Clark,
Secretary.
[FR Doc. 98-11798 Filed 5-1-98; 8:45 am]
BILLING CODE 6750-01-M