Some Economics of Royalty Bundling

Vol. 4 No. 5

By

Jeffrey Cohen is a managing principal and Divya Mathur is a manager in the Chicago office of Analysis Group, an economics, finance, and strategy consulting firm. David Giardina is a partner in the Chicago office of Sidley Austin LLP. The authors wish to thank Adam Rolph, formerly an associate at Analysis Group, for his significant contributions to this article.

In 2003, after accusing Microsoft Corporation of infringing an “embedded program” patent on its browser system, Eolas Technologies won one of the largest patent awards in history.1 Though the jury award of $1.47 per copy of Windows amounted to only 2.5 percent of the price of Windows at the time ($60), the volume of Windows sales meant that this “small” royalty was transformed into a damage award of $521 million.

Windows at that time was a bundle of more than 100 different technological innovations. Moreover, Internet Explorer, the product that made use of the allegedly infringing technology, was sold only bundled with Windows. The jury had to consider whether the Eolas technology drove the demand for not only Internet Explorer but also the entire Windows bundle.

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