CHIP OFF THE OLD BLOCK?

By MICHAEL KRANTZ

Behind every great fortune," Balzac wrote, "there is a crime." That's the contention of the stunning lawsuit filed last week by Digital Equipment Corp. against microchip giant Intel. The great fortune in this case comes courtesy of the Pentium microprocessing chip, which runs 85% of the earth's personal computers and helped feed Intel $6.45 billion in revenues in the first quarter of 1997 alone. The alleged crime is Intel's "willful infringement" on 10 Dig-ital patents in building the Pentium series. And the suggested punishment: damages that could run into the billions and an injunction against continued use of Digital technology.

Digital's surprise assault was impeccably timed: the previous week Intel had celebrated the launch of next-generation chip Pentium II. And the day of Digital's suit, microprocessor upstart Cyrix quietly filed its own patent-infringement claim against Intel. Digital followed a day later with full-page ads in the Wall Street Journal, New York Times and San Jose Mercury News. Wall Street took the bait, wrist slapping Intel's soaring stock down $6 and backslapping Digital up $2 in the belief that the microchip David wouldn't rile Goliath unless it had a really, really good case.

But by week's end analysts were asking whether the Digital action was an honest plea for justice or just the bared-fang attack of a cornered and wounded animal. The tottering hardware giant had bet heavily on its $2.5 billion Alpha microprocessor to return it to prosperity. Alpha is unquestionably the fastest chip on the market, but its speed hasn't overcome Intel's marketing clout. In 1996, according to Scottsdale, Ariz.-based Mercury Research, Intel shipped some 65 million Pentium chips, or 76% of the microprocessor market, compared with 200,000 Alphas. And this year looks grimmer still: 18 million Pentiums shipped through March, to 60,000 Alphas.

Two months ago, rival Hewlett-Packard allied with Microsoft to push the software giant's Windows NT program into corporate servers, the machines that link large computer networks. In 1995 Digital had cut its own Microsoft deal, looking to the burgeoning NT market to fuel its growth. Instead, it is losing ground in a market already dominated by Intel, rather than Digital, chips.

With the ramparts collapsing around him, Digital CEO Robert Palmer must have seen little choice but all-out attack. The lawsuit claims Intel infringed on 10 Digital patents related to Alpha and other chips--though Palmer doesn't claim this piracy occurred during negotiations between the companies in 1990 and '91. Intel was then considering licensing Alpha technology for its next-generation chip; after both companies signed a confidentiality agreement, Dig- gital revealed the Alpha design. But the talks fell apart, and Pentium, sans Alpha, went on to become the soul of the new PC.

By 1995 Palmer was noticing reviews of Intel's new Pentium Pro line that found it strikingly--even suspiciously--improved over its Pentium forebears. Intel itself provided the most damning hints that it had leaned on its competitors for the upgrade. "There's nothing left to copy," said chief operating officer Craig Barrett in an incendiary Wall Street Journal article in August 1996. "We're a big banana now," noted CEO Andrew Grove. "We can't rely on others to do our research and development for us."

Irritating though such glib sentiments might be to a vanquished rival--and there are many in Silicon Valley who would just love to see something nasty happen to Microsoft and Intel, if only for the change of pace--such bluster hardly constitutes proof of illegal behavior. "I don't think there's any question that the suit is a negotiating ploy," says Mercury Research analyst Mike Feibus. The current industry wisdom is that Digital's aim is to gain an out-of-court settlement that would give it a foothold in Intel's fortunes--either a cross-licensing agreement granting access to Intel innovations for Digital products or a role in the development of Intel's new 64-bit chip, code-named Merced and expected in 1999. "This is a serious issue," Digital's chief technology officer Bill Strecker insisted to TIME. "Our intention is to take this case through to trial." An Intel spokesman says the company is innocent and will defend itself with all due vigor.

The case, however, is considered unlikely ever to reach a jury, which would be about as capable of unraveling the programming parentage of a modern microprocessor as it would be of figuring out which Sierra mountain stream was the source of a glass of water taken from San Francisco Bay. In fact, some observers think the suit's lasting legacy could well be revision of a body of patent law increasingly inadequate to handle the staggering intricacies of digital technology.

"The microprocessor is the most complex man-made creation in history," says Michael Slater, principal analyst for MicroDesign Resources, based in Sebastopol, Calif. "Everything is built on everything that went before. It's a continuous stream of new ideas...but none of these ideas are broad. The broad ideas are almost all IBM's." Hey, maybe Big Blue ought to be calling its lawyer too.

--Reported by Daniel Eisenberg/New York

With reporting by DANIEL EISENBERG/NEW YORK