Michael Dell : Did He Violate Texas Antitrust Laws?

The artist as a young nerd: Michael Dell at Dell Computers production facility in Austin, 1989. At age 24 he was already a multi-millionaire. Photo by Rebecca McEntee / AP / Academy of Achievement.

Monopolies in Texas

A new era of antitrust regulation in Texas began with the enactment of the Texas Free Enterprise and Antitrust Act of 1983 (Texas Business & Commerce Code, ch. 15), which is based on federal antitrust law. Unlawful practices, defined as in the federal statutes, include: “every contract, combination, or conspiracy in restraint of trade or commerce;” to monopolize, or to attempt or conspire to monopolize, “any part of trade or commerce;” and tying arrangements and acquisition of stock or assets that lessen competition substantially…

The legislature… made it clear that the act would apply to Texas activities and conduct even if they also affect interstate commerce… The attorney general may sue for civil fines of up to $1,000,000 against a corporation… District attorneys may bring felony prosecutions against persons who enter into a contract, combination, or conspiracy in restraint of trade or commerce, or who monopolize, or attempt or conspire to monopolize, any part of trade or commerce. …The attorney general also was authorized to bring civil suits under federal antitrust laws.

The Handbook of Texas

Did Dell and Intel’s years of collusion
Violate U.S. and Texas antitrust laws?

By Bob Feldman / The Rag Blog / June 23, 2010

In recent years, Dell Inc. Chairman of the Board Michael Dell has been among the richest of the Texas Rich. Personally worth around $13.5 billion, Dell was ranked by Forbes magazine in 2010 as the 37th-wealthiest billionaire on earth.

Coincidentally, in his November 3, 2009, legal complaint against Intel, which alleges that U.S. antitrust laws were violated by Intel, New York Attorney General Andrew Cuomo also makes some interesting observations about how executives at Texas billionaire Dell’s firm have allegedly been doing business in recent years. According to the New York Attorney General’s complaint:

…Intel for years paid Dell lump-sum rebates…

…As Dell’s lead negotiator with Intel put it in a Dec. 7, 2004 email to his Intel counterpart, explaining that Michael Dell wanted an additional $400 million rebate payment from Intel. “This is really easy… MSD [Michael Dell] wants $400 M [million] more. I’ve been trying to figure out the structure.”

Dell’s profitability… came to depend on Intel rebate payments. This was dramatically illustrated by internal Intel emails in April 2004, arriving from Dell’s need to finalize its earnings forecast for the coming quarter. Essentially Dell asked Intel for an additional $100 million…

Absent Intel’s anticompetitive acts, prices to consumers would have been lower…

As AMD [Advanced Micro Devices] was beginning to threaten Intel’s dominance, Dell and Intel formed a partnership in which, in exchange for exclusivity, Intel paid Dell billions of dollars, assured it of a preferred supply of chips over its competitors, and collaborated with Dell to submit below-cost bids in strategic contests against AMD’s products…

This arrangement lasted for at least five years, from 2001 to 2006… As Intel’s payments increased, Dell became more and more dependent on Intel for its reported profits…

In pure dollar terms, Dell was far and away the leader in receiving Intel’s largess. For example, over the four year period from February 2002 to January 2007, it received approximately $6 billion in “rebates.” Most of this money was furnished to Dell under programs initially titled “MOAP” and then “MCP.” “MOAP” was an acronym standing for “Mother of all Programs.” The term MOAP was later replaced in the lexicon by another acronym “MCP” which purportedly (and misleadingly) stood for “Meet Competition Payments.” Both generally referred both to Dell’s global percentage based rebates and to lump-sum payments made by Intel to Dell during the relevant period…

Intel also assured Dell of “preferred” supply… Internal Intel emails show that satisfying 100% of Dell’s demand was a top priority for Intel…

In return for exclusivity, Dell sought terms from Intel that were more favorable than those Intel extended to its other largest and most favored customers…

Intel did in fact grant Dell significant financial advantages…

…Intel encouraged Dell to make below-cost bids, with Intel subsidies, when competing against AMD-based server products…

Over the coming years, Intel and Dell fell into a pattern of negotiating the amount of Intel’s subsidies to Dell on a nearly continuous basis… In each successive round of negotiations, the groundwork was usually laid by mid-level executives at both companies tasked with conveying messages and “positioning” to and from the other so that top executives at both firms would know what to expect when they met…

After the meeting on July 9, 2002, [former Dell Inc. Chief Operating Officer] Kevin Rollins reported to Michael Dell that the result of the meeting was that Intel was willing to increase payments to Dell and seemed willing to do “whatever it takes” to keep Dell from purchasing from AMD. Rollins wrote “They got the message that we were very serious… and seem to want to do whatever it takes to persuade us… Initial word is that our MOAP should increase from $70 M this qtr to $100 mm.”…

In September 2003, Intel’s then Chairman and CEO Craig Barrett met with Michael Dell to address the basic relationship between the companies. He reported back to his Intel colleagues that he and Michael Dell “shook hands on the deal. MD [Michael Dell] agreed to quarterly mtgs… to make sure we are aligned in our strategic issues and coordinated in spending the monies. He had no issue with the win/win nature of the agreement. I clearly committed our long range support regardless of competition… Nice work you guys!”…

An internal Dell email reported that under the new arrangement, Intel was making a $40 million lump sum payment in order to maintain Dell’s status as an Intel-only CPU [Central Processing Unit] buyer…

…A Dell executive wrote on January 19, 2004: “This is very scary… HP (and IBM) can bracket our server business by using AMD to beat us on price…” Another Dell executive agreed, writing that Intel had “better be down here sucking up with a bag-o-money.”…

Top Dell and Intel executives met and Intel again agreed on substantial increases in rebate levels; Dell would now receive a “base” rebate of 11% of its processor purchases from Intel, up from 7%, for not switching to AMD. In addition, they also agreed on another 3% in “incremental” or “variable” rebates, for a total of up to 14%. Dell’s lead negotiator estimated that the “new MCP” would be worth $400 million to Dell over the twelve month period from April 1, 2004 to March 31, 2005. Indeed, around that time, Intel’s payments to Dell started to reach figures of $100 million per quarter or more.

…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 Intel, 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. 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).

In one instance, Dell asked Intel to retroactively increase the size of its payment to stabilize Dell’s forecasted earnings. In several early Sunday morning emails in April 2004, Intel’s Austin-based Dell lead negotiator alerted top Intel executives to an urgent Dell request regarding “our meet comp response for Dell considering new data from msd [Michael Dell] on Friday.” Dell needed to finalize its margin forecast for the coming quarter, but needed “direction” from Intel: “dell is finalizing their call the qtr today. They need direction from us. They are asking for $100 upside to old MC deal…”…

Later the same day, another Intel executive clarified Dell’s request in an email directed to [current Intel Chairman of the Board] Paul Otellini who was Intel’s chief operating officer at the time. He informed Otellini that Dell had assumed that its new agreement with Intel for increased subsidies would be retroactive to the beginning of the current fiscal year in February.

In an April 8 email to Michael Dell and Kevin Rollins, Dell’s lead negotiator with Intel described the outcome of Dell’s request to Intel as follows: “…We got what we needed to meet expectations ($60M) in the form of increased MCP and programs… I think we got all we could in one 30 day period.”

As this episode shows, Intel’s payments to Dell did not benefit consumers through better products… or lower prices…

By September 2004, Dell’s tone was becoming strident…

On December 6, 2006, Intel’s Otellini emailed Intel’s Dell account representative about his concern that Dell would defect to AMD… The next day, the Intel executive promptly forwarded this email on to Dell’s lead negotiator with a plea for help in securing “incremental support” for Dell…

…Dell’s lead negotiator emailed back: “This is really easy. MSD [Michael Dell] wants $400 M more. I’ve been trying to figure out the structure…”

…What the payment bought was Dell’s commitment to “maintain” exclusivity…

In fact, Intel’s payments to Dell shot upward, roughly doubling in less than one year…

…Intel subsidized below-cost bids by Dell when it was bidding against competitors selling AMD-based computers and servers to large businesses or other “enterprise” customers…

…Over a period of approximately two years, from approximately mid-2004 to mid-2006, the reports show tens of thousands of bids…

In the summer of 2005, Intel and Dell held another round or rebate negotiations…

…Intel increased its payments to Dell to an unprecedented level. According to figures provided by Dell, Intel’s payments ($471 million) amounted to 78% of Dell’s reported net income ($606 million) for the period August to October of 2005.

…In May [2006], Intel sought a deal with Dell… Under that deal, Intel was to make further payments to Dell in return for continued exclusivity outside the multi-processor server segment. Dell’s Rollins wrote in a June 1, 2006 email that he was trying to get $250 million still from Intel…

Despite this agreement, by September of 2006, Dell… announced further AMD products…

…For February, March and April 2006, Intel had paid Dell approximately $800 million in rebates…

Besides allegedly accepting around $6 billion in secret rebates from Intel between 2002 and 2007 (in apparent violation of U.S. and Texas antitrust and anti-monopolization laws), Texas Billionaire Dell’s firm also was the target of a lawsuit by the New York Attorney General a few years ago, on charges of having violated New York State’s consumer protection laws. As a September 15, 2009 press release of the Office of New York’s Attorney General noted:

Attorney General Andrew M. Cuomo today announced that Dell and its subsidiary, Dell Financial Services (DFS), have agreed to pay the Attorney General’s Office $4 million in restitution, penalties and costs to resolve charges of fraudulent and deceptive business practices that scammed consumers across New York State.

The settlement follows a decision of the New York Supreme Court, Albany County, which sustained Attorney General Cuomo’s claims that Dell had engaged in fraud, false advertising, deceptive business practices, and abusive debt collection practices. The court’s decision came as a result of the original lawsuit filed by Cuomo’s Office, which charged that Dell engaged in bait and switch advertising with respect to its “no interest” financing promotions, misled consumers to believe they had qualified for promotional financing, failed to adequately disclose the terms of its “next day” service contracts and failed to provide consumers with warranty service and promised rebates…

According to the Court’s decision upholding the Attorney General’s lawsuit, Dell deprived consumers of the technical support to which they were entitled under their warranty or service contract by: (1) repeatedly failing to provide timely on site repair to consumers who purchased service contracts promising “on site” and expedited service; (2) pressuring consumers, including those who purchased service contracts promising “on site” repair, to remove the external cover of their computer and remove, reinstall, and manipulate hardware components; and (3) discouraging consumers from seeking technical support: those who called Dell’s toll free number were subjected to long wait times, repeated transfers, and frequent disconnections.

The court concluded that Dell lured consumers to purchase its products with advertisements that offered attractive “no interest” and/or “no payment” financing promotions. In practice, however, the vast majority of consumers, even those with very good credit scores, were denied these deals. In a classic “bait and switch” scheme, DFS instead offered consumers financing at high interest rates, which often exceeded 20 percent. Dell and DFS frequently failed to clearly inform these consumers that they had not qualified for the promotional terms, leaving many to unwittingly finance their purchase at high interest rates.

The decision also held that DFS incorrectly billed consumers on cancelled orders, returned merchandise, or accounts they did not authorize Dell to open, and then continually harassed these consumers with illegal billing and collection activity. Although many consumers repeatedly contacted Dell and/or DFS to advise them of the errors, DFS did not suspend its collection activity and Dell failed to expeditiously credit consumers’ accounts, even after assuring consumers it would do so. As a result, many consumers have been subjected to harassing collection calls for months on end and have had their credit ratings harmed.

In addition to allegedly accepting $6 billion in secret rebates from Intel (whose board of directors currently includes Harvard Business School Professor David Yoffie, University of California-Berkeley Vice-Chancellor Frank Yeary, Stanford University Professor James Plummer, Dartmouth College Trustee John Donahoe, former Yahoo President Susan Decker, former FCC Chairman Reed Hundt, former U.S. Trade Representative Charlene Barshefsky, and members of the Berkshire Hathaway, Estee Lauder, American Express, McKesson corporate boards), Dell also accepted $853 million worth of U.S. War Machine contracts in 2009, making it the 51th-largest recipient of juicy Pentagon contracts these days.

One reason NBC News, MSNBC, CNN, and Time Magazine might not be that eager to broadcast or print many exposes about either Dell’s alleged acceptance of secret rebates from Intel or its violations of U.S. consumer protection laws is that former U.S. Senator and current Dell Inc. board member Sam Nunn also sits on the board of GE — the parent company of NBC News and MSNBC (in addition to also sitting on Chevron/Unocal’s corporate board); and a recent Dell Inc. board member named Michael Miles sits on the board of Time-Warner — the parent company of CNN and Time Magazine.

Yet in recent months the U.S. Securities and Exchange Commission (S.E.C.) has also apparently begun to look into the legality of the relationship between Texas billionaire Dell’s firm and Intel. As the New York Times (6/10/10) recently observed, “the disclosure that the S.E.C. has been investigating aspects of the relationship between the two companies is new, as is its focus on Mr. Dell” and “a person briefed on the case, who agreed to speak on the condition of anonymity because the investigation is confidential, said that the S.E.C.’s allegations related to how Dell accounted for payments and rebates that it had received from Intel.”

As long ago as 1998, Current Biography noted that Michael Dell owned “about 16 percent of his company’s stock” and was “thus a multi-billionaire and the richest man in Texas.” So it’s not surprising that despite Dell Inc.’s alleged acceptance of rebates from Intel in apparent violation of U.S. anti-trust laws, many U.S. politicians have apparently been accepting a lot of money in campaign contributions from Texas billionaire Dell during the last 16 years.

Since 1994, for example, U.S. politicians have accepted nearly $900,000 in campaign contributions from Michael Dell (and $330,000 in campaign contributions from his wife, Susan), according to the Center for Responsive Politics website.

So it’s not likely that many U.S. politicians are going to ask the Texas Attorney General to look into whether or not Dell Inc.’s alleged acceptance of about $6 billion in secret rebates from Intel between 2002 and 2007 violated state law.

[Bob Feldman is an East Coast-based writer-activist and a former member of the Columbia SDS Steering Committee of the late 1960s.]

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