Thursday, April 12, 2007

Loyalty Rebates

A pretty good overview of the loyalty rebates (used by Microsoft as well) is in this article, in this case referring to the loyalty rebates that Intel uses.
Here's how Intel allegedly dashes AMD's hopes for gradual growth. It tells XYZ that its price per processor is, say, $90, but that if XYZ ends up buying more than 80% of its processors from Intel that quarter, it will pay a rebate of $10 per processor, resulting in an $80 price.

The rebate, however, applies not just to the processors that put XYZ over the 80% target, but to every Intel processor XYZ purchases that quarter, back to the first one. That offer knocks AMD out of the box. Outside counsel Diamond explains why: "Effectively, what Intel's saying is, If you don't buy those ten incremental units from AMD, we'll give you them for free."

That's because 80 processors at $90 each cost the same as 90 processors at $80 each. "So in order to capture that business," Diamond continues, "AMD has to give away product for free. It's pretty axiomatic that you can't stay in any business if you're giving away your product free to pick up market share."

Intel's Sewell has a simple response: His company doesn't offer first-dollar rebates. "We offer a discount program," he asserts, "which is stepped at basically 20%, 40%, 60%, 80%. So if you buy below 20%, you get no discount. If you buy 20% to 40%, you get a discount, but it applies only to the units between 20% to 40%. By the time you get up to 80% or 100%, you're getting the highest discount. If you're at the highest discount rate, and you were to normalize that across all units, you get a better price across the board if you buy more parts from us, but you don't have this dramatic incentive, where you get nothing below 90%, and everything above 90%. In our view, this is a very traditional discount that scales with volume."

AMD's Diamond replies: "If, in fact, Intel's corporate policy is to use only reasonable, stepped discounts and no first-dollar rebates, that's a pretty recent innovation, and I guess we've earned part of our legal fees already. That has not been historically correct."

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