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FTC Settlement Finalized

The FTC settlement with Intel has been finalized with one change the Commission’s press release describes as follows:

After considering public comments, the FTC modified the proposed order to allow Intel to manufacture and sell a chip that it had in development before the proposed order was negotiated, but that would violate that order because it does not contain a required interface. The FTC modified the order to allow Intel to ship this product until June 2013. All future generations of this chip must fully comply with all specifications of the final Order.

One interesting point.  On an ABA-sponsored call earlier this month on the FTC settlement, and previously on TOTM, I shared my view that the settlement provisions giving the FTC oversight of Intel chip design would not prevent Intel from altering product design in a way that reduces interoperability so long as it could demonstrate any actual benefit from the design change.  Indeed, the settlement language in V.A reads:

IT IS FURTHER ORDERED that Respondent shall not make any engineering or design change to a Relevant Product if that change (1) degrades the performance of a Relevant Product sold by a competitor of Respondent and (2) does not provide an actual benefit to the Relevant Product sold by Respondent, including without limitation any improvement in performance, operation, cost, manufacturability, reliability, compatibility, or ability to operate or enhance the operation of another product; provided, however, that any degradation of the performance of a competing product shall not itself be deemed to be a benefit to the Relevant Product sold by Respondent. Respondent shall have the burden of demonstrating that any engineering or design change at issue complies with Section V. of this Order.

My interpretation of this language (emphasis added) was, in short, that “and” means that so long as Intel can show that the design change has any of these benefits, the change is not prohibited regardless of its impact on rivals.  Of course, the devil is in the details here for Intel with respect to what type of showing the Commission will require to qualify as an “actual benefit.”  Nonetheless, my interpretation attracted a few questions during the call.

Here’s the interesting point.  The Commission seems to adopt the same interpretation.  In its response letter to VIA, an Intel rival who submitted detailed comments on the settlement (which it generally viewed as not going far enough), the Commission discussed V.A.:

Section V of the Consent Order prohibits Intel from designing or engineering its CPU or GPU products to solely disadvantage competitive or complementary products. This provision addresses allegations in the Complaint that Intel engaged in predatory innovation by cutting off competitors? access to its CPUs and slowing down various connections to the CPU. The Proposed Consent Order would be violated if a design change degrades performance of a competitive or complementary product and Intel fails to demonstrate an actual benefit to the Intel product at issue. The burden is on Intel to demonstrate that any engineering or design change complies with the terms of Section V.

The emphasis is mine.  The Commission seems to agree with the plain meaning of the settlement language.  So I don’t think this is a surprise.  But I did want to highlight it because the interpretation generated some interesting debate previously.  Whether the “actual benefit” showing is a significant burden or not remains to be seen.  If it is not, whether the laxity of this provision is a good or bad thing, of course, turns on one’s view of Intel’s underlying business conduct and the settlement more generally.  As I’ve written previously, I’m a skeptic of the Commission’s antitrust claims against Intel and the proposition that the remedy here is going to make consumers better off.  In that sense, the suggestion that this provision will be essentially non-binding on Intel mitigates some of the damage here — especially in light of some of the contemplated relief (compulsory licensing of the x86 patent, prohibitions on volume discounts generally, etc.).  On the other hand, for those who believe the FTC was on the right side of the consumer welfare analysis (like VIA), I predict significant dissatisfaction with the outcome.

A colleague raised the possibility that perhaps a settlement that doesn’t make anybody happy is a sign of success?  I doubt it.  But it will be important to watch how some of the more intrusive provisions of the settlement are interpreted over time — and remember, the FTC has significant discretion to attempt to modify the terms as the market develops.

Filed under: antitrust, economics, federal trade commission, monopolization, patent, technology

Full post as published by Truth on the Market on November 02, 2010 (boomark / email).