Intel sweeteners made up 76% of Dell's income

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By Nicole Kobie

Posted on 26 Jul 2010 at 16:25

Court documents released after a $100 million antitrust settlement have shown how Dell's operating income was propped up by Intel for years.

Dell is one of a few PC makers that received payouts from Intel to keep them from using chips from AMD. Intel has since offered its smaller rival $1.25 billion, after being fined $1.45 billion by the European Union.

Dell's apparent success was hostage to Intel's willingness to continue paying Dell hundreds of millions of dollars

According to documents from the US Security and Exchange Commission, Dell received payments to "remain monogamous" with Intel. Part of its so-called Meet Competition Programme (MCP), those payments were used to set up "cookie jar" reserves and make up for shortfalls in quarterly results.

"Dell would often seek additional rebates from Intel in order to close a gap between its forecasted results and its earnings targets," the SEC said. "Dell was quite open with Intel about the reasons it was requesting additional money."

Over 20 quarters starting with the financial year 2003, Dell met or exceeded its earnings per share expectations every time. Without the Intel payments, it would have missed every one. "Dell's apparent success was hostage to Intel's willingness to continue paying Dell hundreds of millions of dollars," the SEC report said.

In 2003, the payments made up only 9% of Dell's operating income. At their peak in the first financial quarter of 2007, the payments from Intel made up 76% of Dell's quarterly operating income, $723 million against an operating income of $949 million.

That leap in payments "coincided almost exactly with AMD's introduction of its Opteron CPU, that was, in the view of many, technologically superior to Intel's competing CPU," the SEC noted.

"Get off their drug"

The setup did concern Dell executives. Former CEO Kevin Rollins eventually advised Dell to diversify its business, saying the reliance on Intel was "a bad way to run the railroad." He later said in an email: "We are going to have to get off their drug."

In May 2006, Dell finally introduced AMD-based products. Shortly after, Intel stopped its payments to Dell and the firm saw its operating income dive 36% for that quarter, the third for financial year 2007. At the time, Dell's executives told investors the blame lay with the firm pricing its products too "aggressively" despite slowing demand and high component costs.

Dell isn't the only firm to be caught up in Intel's lock-in, with Acer, HP, Lenovo and NEC also highlighted by the European Union as receiving payments from the chip maker. However, the SEC document suggests Dell at one point believed it was being paid as much as 50% more than rival retailers.

Following the five-year investigation, the SEC fined Dell $100 million. It also fined chief executive Michael Dell and Rollins $4 million each and former CFO James Schneider $3 million for disclosure violations, though they neither admitted nor denied the charges. Dell acted as CEO until 2004, when Rollins took over until his return in January 2007.