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Intel paid Dell $6 billion to not use AMD products

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SAN FRANCISCO (Dow Jones)--Dell Inc. (DELL) allegedly received billions of dollars in payments over a four-year period to use chips made by Intel Corp. (INTC), payments that sometimes totaled more than the computer maker's reported profits for a fiscal quarter, according to a lawsuit filed on Wednesday.

Dell, the world's third-biggest computer maker based on shipments, was allegedly paid about $6 billion between February 2002 and January 2007, according to the lawsuit. In one fiscal quarter, the lawsuit says payments from Intel constituted 116% of Dell's reported net income.

The allegations against Intel are part of an 83-page lawsuit filed by New York State Attorney General Andrew Cuomo. The lawsuit alleges Intel paid computer makers to discourage them from using chips made by competitor Advanced Micro Devices Inc. (AMD). Other computer makers alleged to have dealt with Intel include Hewlett-Packard Co. (HPQ) and International Business Machines Corp. (IBM).

The lawsuit doesn't specify whether Dell is currently receiving payments similar to the ones alleged. But a footnote says "there is evidence that Intel continues to apply pressure to Dell to minimize AMD's ability to compete effectively."

The supposed payments raise questions about Dell's health, suggesting the Round Rock, Texas, company relied on subsidies from Intel to maintain its level of profitability. Dell has struggled to cut costs and streamline its operations to catch up with competitors, like H-P. The suit "could impact Dell's profitability," said Shaw Wu, an analyst at Kaufman Brothers.

Dell declined to comment. Intel said it would defend itself. A Hewlett-Packard spokeswoman declined to comment.

AMD said the suit "details explicit evidence of Intel's harm to U.S. consumers and computer manufacturers."

An IBM spokesman said the company cooperated with requests for information from the government and the company believes it conducted its business appropriately.

The lawsuit alleges that Dell received more money than any other computer maker.

"In pure dollar terms, Dell was far and away the leader in receiving Intel's largess," the lawsuit says. "Dell understood that the primary purpose of the various 'Intel Funds' was to keep AMD (central processing units) out of Dell computers and servers," it says later.

Under a secret arrangement once-called the "Mother of all Programs," Intel paid Dell a rebate based on the total value of chips the computer maker bought, according to the lawsuit. The percentage of the rebate varied but reached up to 16% as Dell contemplated using AMD products.

The payments were so large that in 2002 Dell stopped considering the introduction of some products using AMD chips when Dell worried that Intel would end about $250 million in payments and give them instead to competitors, according to the lawsuit.

As part of the agreement with Dell, Intel set up a "bid bucket," through which Intel subsidized below-cost bids by Dell against competitors selling AMD-based computers and servers to large businesses, the lawsuit says. The program's purpose was to "stop AMD" from successfully winning new accounts, according to the suit.

The alleged payments dropped off in 2006 after Dell began using AMD chips in some of its products. Still, Intel paid Dell around $200 million between November 2006 and January 2007, about 29% of the Dell's net income for the fiscal quarter ending Feb. 2, 2007.

On Wednesday, Dell shares fell a penny to $14.58, Intel added 1.3% to $18.59, and IBM rose 0.1% to $121.29. H-P rose 0.5% to $47.76.

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