Intel has been fighting a vicious antitrust battle in Europe for years, is battling AMD in US court, and now New York Attorney General Andrew Cuomo has opened up an American front in the Intel war by filing an antitrust suit against the chipmaker. The allegations in the suit will be old hat to veteran PC market watchers, because there's almost nothing in the 87-page filing that Intel hasn't been accused of at least once over the past decade, either openly as part of the EU proceedings, in the course of AMD's antitrust lawsuit, or discretely in the form of gossip at industry conferences.

The complaint itself is actually a good read—it's not dry at all, and it provides a great introduction to how the PC market actually works for those who don't follow it. In fact, if you read this filing, you'll know more than 90 percent of those who mouth off online about computers. But for those who don't want to read the whole thing, here's the CliffsNotes version (via Jane Austen).

The story as told by AG Cuomo's legal team is essentially a love triangle involving Intel, Dell, and AMD. Intel and Dell are "married" (seriously, Intel's language), and Intel plays the part of the jealous, controlling husband with Dell as the wife who gets seduced by the younger and, for a time, handsomer AMD. Intel retaliates, and there's a bunch of stuff about margins and rebates and partnerships and concubines, but that's the gist of it. If you're thinking that none of this sounds like it has much to do with actual microprocessors and benchmark bakeoffs, then you're right—it doesn't, and that's the point of the suit. Cuomo wants the story to read like a drama about greed, jealousy, and manipulation, and not like a story about products competing on the merits.

Spreading the love (or not)

The aforementioned stuff about margins and rebates, as dry as it is, is worth getting into, because it's at the core of Intel's long antitrust troubles both here and abroad. Here's a brief summary of the alleged practices that are at the core of the antitrust suit.

Intel charges a fat markup on its high-end parts, so that an Intel processor accounts for a decent-sized chunk of the cost of a new PC. But instead of looking at a PC from, say, Dell, as a bundle of costs on which Dell turns a profit, it's much more instructive to look at it as bundle of profit margins that go to different component makers.

Let's say that Intel's profit margin on a CPU is 50 percent. An OEM like Dell might be expected to pass that markup onto consumers, so that Intel sells a CPU to Dell at a 55 percent markup, and then Dell sells a whole system to the consumer at, say, at 20 percent markup.

I've tried to depict these percentages for a single PC with the very crude, simplified diagram below. The picture on the left would be a typical Intel-Dell relationship, where Intel's markup inflates Dell's costs and leaves Dell to eke out a profit from what's left, mainly by squeezing the other component makers (not depicted) in the system, like the GPU, chassis, motherboard, etc. All of the rest of the vendors—and this is something that NVIDIA has griped about—have to either suck it up and accept the lower prices and lower profits that Dell offers them, or the computer maker will drop them for a competitor who will. Dell and Intel are the only two essential ingredients here, so they make the rules and take lion's share of the upside.

The orange part is profit, the gray is cost, and the total is the price of a PC.

A moment's reflection will show you just how big of a threat a bit of credible competition from AMD would be to Intel in this picture. Dell could use the same tactics that it uses on motherboard and GPU vendors—i.e., squeezing them on price by threatening to replace them—on Intel by threatening the company with defecting to AMD.

Starting in about 2001, according to the filing, Intel moved to forestall this eventuality by voluntarily surrendering some of its huge margin to Dell. (See the right part of the diagram above, where the profits are redistributed.) This was allegedly done via straight-up cash payments that were dressed as marketing rebates and other incentives. But regardless of how the payments were structured, the net effect was the same—Intel allegedly paid Dell (and HP and others) not to use AMD. And when keeping AMD out entirely became untenable, Intel allegedly negotiated market share caps with PC makers, so that AMD would never account for more than 5 percent of the vendor's shipments.

The impact of the "rebate" program on Dell's bottom line was dramatic. The quote below is from page 40 of the filing:

One of the reasons that Dell remained unwilling to offer AMD-based products was that Dell's quarterly profit margins had become dependent on Intel's payments. A comparison of Dell's reported net income with the rebates it received from Intel for some quarterly periods show that, by 2004, the rebate payments amounted to more than a third of Dell's earnings. For the 3 month period between August and October of 2004, Dell received approximately $304 million in rebates from Intel and reported income of $846 million, so that the rebates amounted to 36% of net income. Thereafter, the proportion of rebates to net income rose steeply. In 2006, Dell received approximately $1.9 billion in rebates from Dell, and in two quarterly periods of that year, rebate payments exceeded reported net income. From February to April of 2006, rebates ($805 million) amounted to 104% of net income ($776 million). The following 3 months, between May and July of 2006, the proportion was even higher, 116% ($554 million of rebates and $480 million in net income). [Emphasis added.]

So these Intel rebates accounted for anywhere from one-third to 116 percent of Dell's profits? If this is really how it went down, Intel was keeping the lights on at Dell for the better part of the last decade. No wonder Dell stayed away from AMD like the plague.

The circus that Cuomo is kicking off with this suit will probably last the better part of the next decade, and given the Obama Administration's avowed interest in trust-busting (unless you're really large bank, in which case they make you even bigger), this is likely to cause Intel a giant headache. So far, the chipmaker has remained silent in the face of the newest allegations, but we'll follow up once Intel responds.

Even if all of the allegations in this suit turn out to be true, and even if the New York AG is victorious, most of the damage to AMD has been done. My best guess is that we'll wind up with a repeat of the Microsoft antitrust circus of yesteryear, the end result of which was to make Microsoft perform a number of contortions that made little sense from an OS perspective in order to placate antitrust concerns.