Regulating Network Industries: A Look at Intel

Abstract

This paper examines the Federal Trade Commission's recent settlement with Intel. Evaluating the FTC's case against Intel turns on tricky issues regarding the dynamics of cross-licensing. These are essentially barter transactions, and we have only a weak understanding of when firms will turn to barter. Interfering with cross-licensing will make it more difficult for these transactions to take place, and to understand the importance of that, we need to have a better handle on the relative importance for a licensor of cash returns versus the in-kind returns that are obtained from cross-licenses.

We can say with more confidence that the FTC's case appears to give very little weight to the benefits that arise from royalty-free cross-licenses. These licenses eliminate the double monopoly problem that can arise when two patent holders hold essential patents. Royalty-free cross-licensing eliminates through a contract an externality between the patent holders that would otherwise push up prices, to the detriment of the patent holders and their customers. The settlement may very well make it more difficult for Intel to negotiate royalty-free cross-licenses and may harm society in doing so.

The licensing regime that emerges from the settlement may have the benefit of making it possible for prospective PC makers who might not deal with Intel to do so -- though this point does not appear to have figured in the FTC's calculus. These prospective PC makers will have less reason to fear that Intel will later pressure them into a cross-license. This will increase the pool of PC makers, though the benefits of this are quite speculative. Equally speculative is whether the settlement will foster R&D on microprocessors -- the chief focus of the FTC's complaint -- though there is little public evidence to suggest that outcome.

JEL Classification: L51