In an industry sea change, Intel to pay Nvidia $1.5B in patent license agreement

Intel has agreed to pay $1.5 billion to graphics chip maker Nvidia in a new six-year patent license agreement. The deal represents a huge sea change in the future of the chip industry.

The payment is a huge win for Nvidia, whose investors have been wondering if the company’s saber-rattling with the world’s biggest chip maker was ever going to pay off. It gives Nvidia plenty of money to keep investing in its own graphics and processor plans, which have come into clear focus in the past week. The deal removes a lot of clouds from Nvidia’s future.

The deal settles acrimonious litigation between Intel and Nvidia over chip sets. It also allows Intel to proceed with a license to Nvidia’s graphics chip technology. Intel desperately needed that to clear the way for its Sandy Bridge chips, which combine graphics and a microprocessor in the same piece of silicon.

In a conference call, Nvidia chief executive Jen-Hsun Huang said that the agreement allows Intel to integrate graphics technology (which may be subject to Nvidia patents) into its microprocessors as Intel is doing in its Sandy Bridge microprocessors. Nvidia also gains the right to make processors in general, including the ARM-based processor that Nvidia announced last week. It does not, Huang said, give Nvidia the right to make an Intel-compatible x86 microprocessor.

Intel will pay the licensing fee in five annual installments starting Jan. 18. All outstanding legal disputes will be dropped.

“This agreement signals a new era for Nvidia,” said Huang (pictured) in the call. “This marks a return to a healthy cooperative relationship we previously had with Intel for many years. We are pleased to have closed this chapter in Nvidia’s history and to have opened another.”

Nvidia is also free of any patent claims by Intel. In addition to the exclusion of Intel-compatible microprocessors, Nvidia will not have the right to the intellectual property in Intel’s flash memory and certain chip sets. The previous agreement between the companies was set to expire in March. The fees from Intel will translate into an estimated $233 million in operating income per year for Nvidia and 29 cents a share in net income.

Nvidia doesn’t need a microprocessor license from Intel because Huang announced last week at the Consumer Electronics Show that Nvidia was making an ARM-based microprocessor. That chip, code-named Project Denver, will be out within a couple of years and will focus on high-performance computing. It will likely run on the next version of Windows, which Microsoft said would now be compatible with ARM chips in addition to Intel-based x86 chips.

“Building yet another x86 processor when the world is a flood with them is a pointless exercise,” Huang said. “We are building a processor for the future.” He said ARM would be the largest processor architecture in the world and is attractive because it is open and growing the fastest.

Huang said the license payment was the biggest in Nvidia’s history. He also said that license fees from Sony related to Nvidia’s technology in the PlayStation 3 have amounted to $500 million since 2004.

“This agreement ends the legal dispute between the companies, preserves patent peace and provides protections that allow for continued freedom in product design,” said Doug Melamed, Intel senior vice president and general counsel, in a statement. “It also enables the companies to focus their efforts on innovation and the development of new, innovative products.”

With the exception of one “confidential” clause, the agreement is here.