Not With a Bang, But a Whimper

NOT WITH A BANG, BUT A WHIMPER by Michael S. Malone

Not with a bang, but a whimper.  One of the biggest corporate feuds in the history of American business seemingly ended a couple weeks ago with barely a mention in the headlines.

Perhaps it was the fact that, in this dreadful year, that there are so many stories competing for news coverage – even ‘Climate-gate’ can’t seem to get coverage in the traditional media – that a mere settlement between two giant chip companies after forty years of war isn’t going to see much traction.  Still, given that the two companies are Intel and Advanced Micro Devices, and the product under dispute, the microprocessor, is arguably the most important piece of hardware on the planet, at least a little attention must be paid to the announcement.

Here, in summary, is the official announcement:  On November 12^th, after more than six months of negotiations, the last of them taking place in Hawaii (because that’s where the mediator lived) Intel agreed to pay AMD $1.25 billion in settlement of various anti-trust allegations made by the latter, smaller chip maker.  And that, it seems, is that.  But behind that announcement hides decades of history – and a competitive battle between the two companies that helped define the modern world.

I’m not exaggerating when I say that.  With tens of billions of microprocessors in use around the world, bringing intelligence to everything from games to computers to the Internet, these little devices, invented at Intel in 1969, have set the boundaries of modern life.  They’ve also set the pace, thanks of course to Moore’s Law, named after Intel’s co-founder.  Our view of the technological world as constantly becoming more powerful, cheaper and more ubiquitous, is mostly due to the microprocessor.

None of that may have been true – and the world might have been a very different place – without the Intel-AMD feud.  It began simply enough:  in the early 1980s, Intel finally overcome its initial reluctance to divide its attention between memory chips and microprocessors and decided to focus on the processors, where it had (and thirty years later, continues to have) market and technological dominance.  But there was one problem:  customers, from NASA to IBM to the latest hot consumer electronics maker, refused to put their fate in the hands of a single supplier, especially not one in an industry as volatile as semiconductors. 

So, Intel needed a ‘second source’ supplier to license and sell its chips.  Intel chose its struggling Silicon Valley neighbor, Advanced Micro Devices, in part because it was unlikely to ever be a competitive challenge, but also because Intel co-founder Robert Noyce had a soft spot for his old Fairchild employee, Jerry Sanders, whom he looked upon almost as a son.  The brash and flamboyant Sanders, one of the greatest marketers in high tech history, had struggled heroically to build AMD and Noyce knew that an Intel second-source agreement would help get the company out of the financial woods.

It all went as planned for the first decade.  AMD grew healthy, and Intel went on to rule the world as the most successful and powerful company of the age.  But then AMD got into financial trouble – and, desperate, Sanders dug into the company’s library of contracts, dug out the old Intel second source agreement, and decide to go full-bore into the microprocessor business by cloning Intel’s own design.  The move saved the company, but understandably enraged Intel, which sued for contract and patent violation.  AMD countered by charging Intel with monopolistic behavior . . .and the war was on.

It has been raging ever since, with Intel acting like an angry bull trying to shake off the ferocious badger clamped to its back, and AMD hanging on for dear life.  At least that was the public image.  In reality, for all of their feuding, the two companies desperately needed each other.  AMD wouldn’t have existed without having Intel’s innovations, from one processor generation to the next, to build upon and modify.  It also essentially survived on Intel’s leavings – much of its revenues came from companies, such as Compaq, that didn’t want to work with Intel.

 

Intel’s need for AMD was more subtle.  The company so dominated this multi-billion dollar industry, often with hardball tactics, that it was at constant risk of having the Justice Department or similar international agencies, pursue it on anti-trust charges.  Having a nice, not-really-threatening foil like AMD, served Intel’s interests nicely – it could always point at it’s neighbor and say, “See?  We’re just fighting to survive in a highly competitive market.”

As for us consumers, we needed the two companies because, simply, AMD kept Intel honest.  As long as the smaller chip company existed, the far-more important and innovative Intel had to stay in a perpetual crisis mode, pushing the technology forward, maintaining Moore’s Law . . .and making all of us the beneficiaries.

But having a competitor take nearly a billion dollars per year in revenues using your own product patents was a constant irritation for Intel, especially its fiery CEO Andy Grove.  Hence the lawsuit, which dragged on amidst claims and counter-claims, for twelve years.  It was only after Intel’s senior management, weary of the distraction and worried about Intel’s growing image as a bully, finally mutinied in 1996 and brought the suit to an end in a comparatively fair agreement in which Intel retained its patents, and AMD got the right to sell its latest generation of Intel clones.

No one really thought the feud was over, though.  After all, AMD was now a billion dollar company and had developed the capacity to create its own products.  And that’s just what it did – and to the astonishment of the tech world, actually produced a superior processor to Intel with its 1999 introduction of the Athlon chip.

The miraculous Athlon, and its immediate successors, would prove to be the high-water mark of the AMD story.  Intel may have stumbled in its product development (underscoring the importance of having an AMD), but ultimately succeeded – where AMD – didn’t in the transition from its founders to a new generation of leaders.  And, by the middle of the decade, AMD was in trouble.  Last October, the company announced it would spin off its manufacturing operations in a deal with the Abu Dhabi government.

AMD is still in trouble – though Intel was no longer cheering at the news.  The chip giant now understood the value of competition . . .especially as a fading AMD put a predatory Intel in high relief.  Worse, a dying company is a desperate company, and AMD’s growing accusations about Intel’s behavior drew a ready audience in Washington, and especially in the EU, where there is always an interest in taking down successful US companies.

The result is that this year Intel has found itself pummeled from every direction.  In May, the European regulators slammed the company with a $1.45 billion anti-trust fine, the largest in EU history.  Then, on November 4^th, New York state attorney general Andrew Cuomo, filed a federal anti-trust suit against Intel.  It was becoming obvious to Intel that the lingering lawsuit with AMD was now not just a thorn in its side, but was providing support for all of the other litigation as well.  Intel needed to get that piece off the board, and within days, that’s exactly what it did.  [For a terrific description of the entire six month negotiation, see this Business Week story.  BW was one of the few media outlets to give this story the coverage it deserved.]

That $1.25 billion payment by Intel to AMD may seem like a lot of dough, but I’m betting the big winner on the deal is Intel.  As much as it needs operating capital, AMD even more needs good management – otherwise that money will get burned up quickly to no great end.  Intel meanwhile has neutralized its chief antagonist.

With Intel humbled and AMD funded, why shouldn’t the endless feud go on?  Why am I suggesting that this, at last, is the end?  It’s because I can’t help thinking that AMD’s days are numbered, and the money is now just going to delay the inevitable.  And when the end arrives, Intel may find that without AMD it may have to invent a new competitor.  As for the rest of us, we will be the losers.

[For a decade of Michael S. Malone’s columns on technology, culture and society, visit www.abcnews.com]