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Dell's Intel Bias Caused By Under the Table Cash?

Posted by Zonk on Fri Feb 02, 2007 12:58 PM
from the that-certainly-would-explain-it dept.
Intel Hardware
swschrad writes "There's a story up on Reuters today saying Dell faces a class-action lawsuit for finagling the books to hide under-table money from Intel. The hidden cash, up to a quarter-billion dollars a quarter, is alleged to have been paid to keep competing CPUs out of Dell PCs. Dell, their accountants at PriceWaterhouse, company founder Michael Dell, and former CEO Kevin Rollins are all avoiding comment on the pending litigation."
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  • Only Intel? (Score:4, Insightful)

    by Lockejaw (955650) on Friday February 02 2007, @01:01PM (#17861880)
    I could have sworn I've seen Dell selling machines with AMD CPUs.

    • Re: (Score:3, Informative)

      by rob1980 (941751)
      You have. My brother just bought a new Dell with an Athlon 64 in it a couple of weeks ago, in fact.
    • Dell spent years refusing (the then better performing and equally compatible) AMD CPU's for it's various PC's... It is only recently that AMD has gotten a fair chance with Dell. I'm assuming by this article that Intel stopped paying and that's why the finally relented last year and introduced AMD based systems.

      • Re: (Score:3, Interesting)

        by Sylvak (967868)
        Too bad they waited that long... because in my opinion, amd was superior for a good while when they brought in the 64bit CPUs and dual cores (and before then too). Now that intel has caught up (even surpassed) AMD, Dell now offers AMD.

        It's almost like Intel knew their product wasn't as good as AMD, and they were willing to pay big $$ to Dell in order to prevent the social masses from accepting AMD as the better product. But now, maybe Intel knows they have the better product, so they are not bending over

    • Re: (Score:2, Insightful)

      by eriklou (1027240)
      Before they opened up to AMD, 6+ months ago?, Dell would only sell Intel based systems and Intel only. I think the only reason that they opened up to AMD was the demand (Intel fell behind the tech curve) and that the whole Intel deal was found out.

      Due to their Tech support Script monkeys (I told you I don't have Windows installed five times now...) the over all quality drop (You need a new HD for that Computer you just bought 4 months ago...) and their lackluster cookie cutter builds, (Yay I have to reinsta

    • Re:Only Intel? (Score:4, Interesting)

      by Red Flayer (890720) on Friday February 02 2007, @01:46PM (#17862708) Journal

      I could have sworn I've seen Dell selling machines with AMD CPUs.
      You have. This is historical, not current activity -- and was stopped when AMD started filing complaints under Competition Law in many jurisdictions -- Japan, the EU, etc.

    • None of this is surprising (Score:5, Funny)

      by Dr. Cody (554864) on Friday February 02 2007, @03:29PM (#17864364)
      Bias-free semiconductors never really took off.

      • Bias-free semiconductors never really took off.
        That whooshing sound was the noise of this joke whizzing over the heads of the moderators... Clearly, they are without potential.

        Cheers,
        Toby Haynes

  • What is that supposed to mean? They are two companies free to negotiate whatever price they want with each other. It's their business and their right to do so. What the f**k?

    • Re:under the table? (Score:5, Informative)

      by MindStalker (22827) <jlarsen@fs[ ]du ['u.e' in gap]> on Friday February 02 2007, @01:06PM (#17861972) Journal
      Yea but a publicly traded company has to reveal income. If Intel was actually giving them cash instead of just lowering their prices then this income has to be accounted for legally

      • Re:under the table? (Score:4, Insightful)

        by Jeff DeMaagd (2015) on Friday February 02 2007, @01:09PM (#17862040) Homepage Journal
        I don't understand why "under the table" cash is even necessary. Why do that if they can just get a discount? Do public filings even show which company is getting Dell's money? I don't think they are broken down that far.

        • Re:under the table? (Score:4, Interesting)

          by Anonymous Coward on Friday February 02 2007, @01:12PM (#17862106)
          Discounts go to the company (shareholders). Under the table cash goes to the ones who arranged the deal (executives).

        • Re:under the table? (Score:4, Insightful)

          by click2005 (921437) on Friday February 02 2007, @01:17PM (#17862172)
          A discount will be shown in finacnial records allowing other companies to see. If HP knows what kind of discount Dell gets, they can try to demand a similar discount.

          • Financial records are private (Score:5, Informative)

            by donutello (88309) on Friday February 02 2007, @01:25PM (#17862326) Homepage
            Financial statements are public and they never include per-unit prices for raw materials and parts. They include a lump sum "Cost of Goods Sold" which includes the total price for all raw materials and parts consumed per business (if it's broken down that way). If Dell is worried that other companies can read their financial records they have more serious problems to worry about.
            • Come on, we're talking about HP here. Of course they read Dell's financial records.
        • I don't understand why "under the table" cash is even necessary. Why do that if they can just get a discount? Do public filings even show which company is getting Dell's money? I don't think they are broken down that far.

          Well, while I think such a payment should be used to reduce the cost of the components and as a result widen the profit margin (and hence the taxes paid) Dell may want to account for it differently. They could, for example, be offering copay money to advertise Intel chips; which would be a
      • The article is vague on details but it sounds like they are alleging that Dell recorded the Intel money as part of their revenue instead of discounting it from the COGS as they are supposed to do. I still don't see how it could inflate their profits as the suit alleges.

        • Re:under the table? (Score:5, Insightful)

          by nuzak (959558) on Friday February 02 2007, @01:37PM (#17862580) Journal
          Actually, that's naked insider trading. It's more like "we're investing in a new company X, and we could send them your way as their systems vendor, that is, with our cash. So what about that purchasing deal we were talking about before?"

        • I was with you up until:
          Very similar to the concept of a government security clearance.

          How do you mean? Speaking as someone who had a security clearance, it doesn't entitle you to free stock tips on the golf course, or really anything else particularly interesting. It's more just a prerequisite for employment; the biggest benefit is that it makes you look like a more attractive employee when certain companies are looking for staff.
    • Come on. They're two companies in the US. It's not like there's any sort of a free market.
    • I suspect that there are some anti-dumping laws here that are being circumvented. It's the only thing I can think of that makes it illegal to lower prices below a certain level (which is what the end-result of that transaction is).

      • Re:Anti-dumping laws (Score:5, Informative)

        by udderly (890305) on Friday February 02 2007, @01:26PM (#17862348)

        It's called predatory pricing [wikipedia.org]. Mainly it's when a larger company with more marketshare prices their products below profitability in order to bankrupt their competitor.

        It's one of the main reasons that straight free markets don't work.

        • Re: (Score:3, Funny)

          by Anonymous Coward
          What about those that swing both ways?

    • Re:under the table? (Score:5, Interesting)

      by Red Flayer (890720) on Friday February 02 2007, @01:35PM (#17862514) Journal
      Ahh, nope. I suggest you do some research on anti-monopoly laws, as well as US regulations of publicly traded companies. Companies in a position of market dominance (as Intel was at one time) are not allowed to pay resellers to not use competitor products. The money was likely paid under the table to avoid investigation in re: Intel paying to keep AMD out of Dell products; the other reason for the payments being on the sly was to manipulate stock prices, which is also illegal.

      From AMD's complaint about Intel's unfair business practices, emphasis mine:

      Intel's conduct has unfairly and artificially capped AMD's market share, and constrained it from expanding to reach the minimum efficient levels of scale necessary to compete with Intel as a predominant supplier to major customers. As a result, computer manufacturers continue to buy most of their requirements from Intel, continue to pay monopoly prices, continue to be exposed to Intel's economic coercion, and continue to submit to artificial limits Intel places on their purchases from AMD. With AMD's opportunity to compete thus constrained, the cycle continues, and Intel's monopoly profits continue to flow.

      Consumers ultimately foot this bill, in the form of inflated PC prices and the loss of freedom to purchase computer products that best fit their needs. Society is worse off for lack of innovation that only a truly competitive market can drive. The Japanese Government recognized these competitive harms when on March 8, 2005, its Fair Trade Commission (the "JFTC") recommended that Intel be sanctioned for its exclusionary misconduct directed at AMD. Intel chose not to contest the charges.

      It's pretty likely, IMO, that Intel used these unfair business practices in countries other than Japan.

      Let alone the reporting issues for public companies that other posters have addressed.

  • Say it ain't so! (Score:5, Funny)

    by TheJerg (1052952) <jr_g_2006@yahoo.com> on Friday February 02 2007, @01:02PM (#17861904)
    A large technology company trying to make sure the competition stays out of the game by pushing the retailers? Preposterous! Next you'll tell me that Microsoft is trying to rule the world by forcing everyone on the planet to use their products.

  • My God... (Score:5, Funny)

    by MidVicious (1045984) on Friday February 02 2007, @01:03PM (#17861914)

    Under the table money from Intel?

    Wait... is that why the Opinion Center colors are so... I dunno... currency like?

    Reuters gets slashdotted... Slashdot gets Intel'ed!

    I for one welcome our--- AGH! [tackled and beaten to death by slashdotters]

  • Opinion Center (Score:5, Funny)

    by corby (56462) on Friday February 02 2007, @01:04PM (#17861938)
    Sounds like a great article for the Intel Opinion Center! [slashdot.org]
  • So what?

    Isn't that what lobbying is all about?

    It's called deal making. If Intel offered me cash to use their CPUs only, I would take it.

    It's called a rebate.

    • It's called a rebate.

      No, if it was they'd have to submit all of the UPCs and receipts; and then get an email denying the rebate because they forgot to send in the left bottom flap from all of the boxes.

  • why under the table? (Score:3)

    by venicebeach (702856) on Friday February 02 2007, @01:06PM (#17861984) Homepage Journal

    The lawsuit accuses Dell of artificially inflating profits "by secretly receiving approximately $250 million a quarter in likely illegal rebate kickbacks payments" from Intel in return for an exclusive deal to purchase Intel's microprocessors, class-action lawyer William Lerach told Reuters.
    I can see why hiding such a transaction is illegal. But why is the deal itself illegal in the first place? Why do they need to hide that? Why can't Dell make a deal with Intel to use only Intel chips in exchange for a good price if they want to?

    • Big deals sometimes have provisions (Score:5, Informative)

      by alexhmit01 (104757) on Friday February 02 2007, @01:20PM (#17862238)
      One way in which a monopolist controls the market is with public price matching. For example, if Intel publishes all their pricing, and guarantees that anyone going exclusively Intel will not pay more than say, Dell, then if Intel drops the price to Dell, they have to refund money to other all-Intel shops... perhaps Apple or other players that agreed to go all Intel to get price breaks.

      If Intel gives Dell a 250m rebate, then they are actually charging below the price, and would have to match it elsewhere. However, by hiding the rebate, they can keep charging Dell a book value and collecting the premium elsewhere.

      When big players negotiate big contracts, they often put in protections to not be worse off than the competition. I would expect the deal to be illegal because by not disclosing it, they MAY be in material breach to other companies. Further, Intel has signed consent decrees with the Feds over alleged anti-trust violations, and non-disclosed payments to keep competition out may violate those agreements.

      This isn't a local computer shop contracting with a wholesaler, these are two Fortune 50 companies, sometimes they have arrangements covering them.

      Also, what if a state government agreed to a deal where Dell was the exclusive provider in exchange for cost-plus accounting. Dell would bill on the reported cost, plus profit margin, and then collect the rebate.

      There are a bunch of reasons why this might be illegal because it is potentially defrauding other companies IF their deals are dependent on Intel or Dell's pricing structure.

      • Re: (Score:3, Informative)

        by qaqa (980561)

        When big players negotiate big contracts, they often put in protections to not be worse off than the competition. I would expect the deal to be illegal because by not disclosing it, they MAY be in material breach to other companies. Further, Intel has signed consent decrees with the Feds over alleged anti-trust violations, and non-disclosed payments to keep competition out may violate those agreements.

        In my experience as an accountant, I have seen several such contracts too.

        1) Even if Intel had entered

        • Re: (Score:3, Interesting)

          by alexhmit01 (104757)

          1) Even if Intel had entered into such contracts,Intel would only be guilty of breach of contract and would be liable for damages. It would still not be an illegal act.

          To clarify, I meant illegal as in violating a legal agreement, subject to legal action, not criminal behavior.

          4) GAAP does not require rebates to be separately disclosed. It is perfectly correct accounting to account for such rebates as a reduction from purchase cost. In fact, if they didnt do so, they would be overvaluing their inventory, t

  • An accountant, a Lawyer, and an Engineer are all interviewing for a CEO job. As part of their respective interviews, the Board of Directors asks them what 2 + 2 is.
    The Lawyer answers that it generally considered to be 4, but there could be precendants in which that answer may vary.
    The Engineer takes out a slide rule, works for a bit, and answers that it is 4.000000000000000000000000000000000000000
    The Accountant looks at the Board and asks, "What would you like it to be?"
  • I'd put cantaloupes as the processors on my computers for a quarter billion dollars per quarter!
  • As un-/. as it seems, I actually read the article, and I don't get it.

    OK, this is probably illegal. But defrauding the shareholders by artificially increasing profits? Huh? If a company finds a way to make an extra billion and change each year, don't shareholders usually consider that a good thing?

    • Bribes are not sustainable, see (Score:5, Interesting)

      by hirschma (187820) on Friday February 02 2007, @01:32PM (#17862472)
      It is the same thing as if Dell was selling cocaine, and claiming that the proceeds from that were due to their super-fine computer business. People would be investing in them because they had such great metrics in the sustainable, legal business of selling computers. This is apparently not the case.

      It also means that they will likely perform poorly compared to previous quarters. Stock value is about looking forward, not back - the price rises on what people think will happen next. In other words, speculation. Lots of folks will lose money because of these secret, and likely, illegal dealings. Hence the lawsuit.

      Moreover, this behavior may open Dell to substantial unrelated lawsuits - which means that the folks in charge of Dell were neglecting their fiduciary responsibility to shareholders. Again, a perfectly valid reason for shareholders to sue.

      I hope that Dell is gutted for this.

        • Re: (Score:3, Insightful)

          by hirschma (187820)
          Actually, the deal was almost certainly illegal. It is just a matter of who is guilty, and what the actual transgression was. Take your pick:

          * Dell is nailed for cooking the books - it appeared to everyone that they were doing great SELLING COMPUTERS. It isn't just about doing well.

          * Intel and Dell are nailed on uncompetitive practices.

          * Intel is nailed for monopolistic practices, with Dell as an accomplice. Might be the same thing as the previous bullet, IANAL.

          No matter what, someone is going to hang. Publ
  • I've seen the Vista ads in which Microsoft compares Vista to the fall of the Berlin wall and the man-moon shot (ooookay) and in this end instead of an Intel logo, we get an AMD logo. Kinda interesting. But off-topic...
  • I found it sort of funny that Dell finally started offering computers with AMD chips around the time that Intel finally caught back up to AMD performance-wise. There were a good 2-3 years (at least) when AMD was the clear leader in terms of both price and performance when you couldn't get AMD from Dell. Now that Intel is back on top (at least in terms of performance), Dell has finally gotten around to offering AMD.

    I'm not at all surprised to hear about the lawsuit - it seemed to me that the only reason De
  • Seems a bizarre way to bribe them.

    Why not just have an agreement, and then heavily discount the price of CPUs?

    I don't know whether having such an agreement would be illegal, but I doubt selling CPUs cheap is.

    • Microsoft
    • Intel
    • Dell

    Relax, it's just a little joke.

  • Consider the source (Score:5, Insightful)

    by John Jorsett (171560) on Friday February 02 2007, @01:45PM (#17862678)
    The plaintiffs also contend that the company and its executives participated in a "widespread, long-running scheme to defraud" shareholders and inflate Dell's stock price, said Lerach, head of law firm Lerach Coughlin Stoia Geller Rudman & Robbins LLP in San Diego.

    This is the firm that's made a tidy living sueing the hell out of public companies whose stock drops suddenly. Guess the stock market is doing so well that they've decided to sue for prices going in the upward direction as well. Usually the target settles out of court because winning the legal battle would cost them more. A few years back they sued a company whose stock I own. In that case the company fought them off, but it cost me and the other stockholders (in whose names Lerach was sueing, thank you so much) several million. May Lerach and his ilk rot in hell.

  • In other news (Score:4, Funny)

    by gosand (234100) on Friday February 02 2007, @01:53PM (#17862808) Homepage
    Michael Dell has handed the CEO reins back to Kevin Rollins.
    • > What's wrong with paying another company to carry only your products? Is it considered anti-competitive?

      Yes, but not all anti-competitive behavior is unlawful. Dell and Intel are big enough, however, that it probably would be.

      Additionally, this was a secret payment which is a very very big no-no. For all we know, it could have been a direct kickback to executives, which is the "go directly to jail" kind of illegal.

    • Re: (Score:3, Insightful)

      by zzatz (965857)
      What's wrong with paying another company to carry only your products?

      If you have a dominant position in the market, it may violate antitrust law.

      Selling at a low price is fine, always. But if you have a dominant position in the market, there are things that you aren't allowed to do:

      You can't sell below cost, called dumping. The tactic is to bankrupt the competition and raise prices after they're gone.

      You can't bundle products together so as to create a monopoly in a new area by tying to products from an e

    • Re: (Score:3, Interesting)

      by Red Flayer (890720)

      Well, if the USD250 mn received was accounted for (thus "inflating profits") how can it be secret?

      Because it wasn't tied in to the product it applied to (as reduced COGS, as rebates should be applied). Instead, it was classed as revenue, which then overstates both their gross income and their COGS. While the net is the same, key ratios are thrown off, thus changing the valuation analysts give to the stock.

      Last time I checked, it was not "illegal" to offer quantity discounts/rebates to large customers.

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