Cheap as Intel chips? Not if EU gets its way

INTEL’S chief executive recently travelled to Brussels to defend his company against government attack. The EU’s two-day closed-door hearing comes just one month after the European authorities had stormed Intel’s offices in a surprise early morning raid.

And what crime had the world’s dominant computer-chip manufacturer committed to warrant such heavy-handed tactics? According to the European Commission (EC), Intel’s prices are too good to be true. That may be good for consumers – but it frustrates Intel’s chief rival.

For more than six years, anti-trust officials have investigated complaints by Advanced Micro Devices (AMD) that competitive pricing threatens struggling competitors. Unlike the US system, in which winners and losers are the hallmarks of a thriving market, European anti-trust regulators view them as symptoms of failure.

Under this counter-intuitive system, the logic is that forcing Intel to raise its prices would actually benefit consumers, by ensuring that no competitor became too powerful.

This argument neglects the severe consequences of handicapping market leaders. If regulators punish success, they remove the incentive to create groundbreaking innovations.

Governments reward mediocrity by propping up faltering firms that produce inferior products.

Coincidentally, the EC’s latest assault on Intel comes just one week after the company unveiled the fastest microchip ever created, more than doubling the computing power of its predecessors.

Rather than innovate to match Intel’s achievement, AMD persuades the Commission to foist slower computers on the consumer.

While accusing Intel of using low prices to compete unfairly, AMD simultaneously colludes with the EU to receive special treatment. In the past five years, the company has received more than $1billion (GBP500million) in direct government subsidies. By offering protection from failure, these policies ensure companies remain beholden to the government, not consumers. In addition to sheltering weak competitors with subsidies, the EC relentlessly harasses successful technology firms.

Investigations can proceed indefinitely with little evidence, forcing companies to endure the constant threat of burdensome business disruptions or exorbitant fines. After an exhaustive three-year probe of Intel’s business practices, the EC concluded in 2002 that no evidence existed to substantiate AMD’s allegations of unfair pricing.

Only six months after AMD announced plans in 2003 to locate a $2.4billion factory in Germany, however, regulators suddenly reconsidered their decision and began investigating Intel anew. Why are bureaucrats in Brussels so eager to bully US technology titans? European politicians, much like their counterparts across the Atlantic, are often driven by money and power. If the government successfully prosecutes Intel for violating competition law, it could reap nearly $700million in fines, more than 10 per cent of the EC’s annual budget. After collecting a similar windfall from Microsoft in September, the competition cops have become increasingly bold in extortion from the US technology sector.

If innovators fail to satisfy European demands, they could be barred from competing in an increasingly global digital economy.

With this power, the EC is rapidly becoming the world’s gatekeeper for new technologies.

In recent months, EU regulators have forced Apple to accept price controls on its popular iTunes music store and launched three attempts to dictate the features Microsoft can offer in software products. Later this month, EU commissioners will release guidelines mandating how internet companies such as Google and Yahoo! can collect, use and profit from information online.

The EC’s willingness to manipulate the technology industry makes Europe the venue of choice for companies looking to cripple their competitors and gain an unfair advantage. By repeatedly coaxing regulators to investigate Intel, AMD hopes to compensate for its own mistakes.

AMD, plagued by poor business strategy and technical errors, recently stumbled in bringing its latest products to market. The company also overpaid by more than $1.6billion to acquire fellow chipmaker ATI. The company’s chief executive was forced to admit in December: “We blew it, and we’re very humbled by it.” Despite this candour with shareholders, AMD executives cry foul to regulators in Europe, blaming their woes on Intel. In taking this bait, the EC creates a perverse system of incentives in which winners are fined and losers subsidised. As a result, bureaucrats win and consumers lose.

The European obsession with protecting competition at all costs is shortsighted and ineffective.

Companies succeed not merely by competing, but by out-competing.

Customers will benefit from better choices and lower prices if regulators step back and let the chip-makers compete to compute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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