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No Financial Meltdown

Intel suffered only minimal pain in the stock market following revelations about the ‘Meltdown’ hardware vulnerability. But if the market won’t compel

Publishing date
15 January 2018

On January 3, it became public that almost all microprocessors that Intel has sold in the past 20 years would allow attackers to extract data that are not supposed to be accessible. This hardware vulnerability termed “Meltdown” is depicted as one of the largest security flaws in recent chip designs.

Financial markets were relatively unimpressed with the news; Intel’s stock price fell initially by 5% but stabilised afterwards. This contrasts sharply with the Volkswagen diesel scandal of 2015, which saw the car company’s value fall by almost 40% within a week. The two cases have more differences than similarities, but the striking resilience of Intel’s market valuation to the revelation that most Intel CPUs are vulnerable to specific attacks raises an interesting question:

Do hardware providers have sufficient incentives to make sure their products are as safe as possible?

Intel – having been made aware of the flaw more than six months ago – was able to provide guidance in how to address this security problem, so that patches to millions of computers could be rolled out. However, it is the providers of operation systems (such as Microsoft in the case of Windows) that provided these patches and that have to bear substantial cost.

We have already learned about the incompatibility of the original patch with AMD-processors or certain standard antivirus software. Administrators of complex IT infrastructures in particular will have to expend substantial resources on testing and adapting any patch on their critical hardware. Moreover, to date it remains unclear how severe the implications for processor performance are. As the security flaw lies in a feature to increase a processor’s computing power, modifying this feature could cost speed. First reports do not agree over the expected performance losses: some expect significant speed reductions, while Intel and Google claim that effects will most likely be minimal.

However, the reaction of the stock market suggests that Intel will not be held fully accountable for this incident, therefore will not have to bear the full cost of the flaws in its processors. This is somewhat worrisome, as it indicates that producers of essential IT hardware seem not be incentivised by the stock market to provide secure products, while the costs of the flaws in their products have to be paid by others.

Intel’s domination in the market of desktop and server processors could partly explain the gentle reaction of its stock. In a more competitive market, consumers would have more product choices and consequences for Intel would have been more severe. In contrast to Intel’s case, the stark drop of Volkswagen’s stock price could be explained – among other factors – by the more competitive market environment.

The question, however, of whether more competition in the processor market would have prevented a flaw such as “Meltdown” remains very much disputed. It is unlikely that higher investments by Intel, induced by stronger competition, would have prevented “Meltdown” – which has remained undetected by the entire chip industry for 20 years.

The most worrying aspect of the Intel case remains, though, the implication that providers of essential hardware might have more to lose from continuously searching for problems that do not exist, than from occasionally failing to spot a potential threat.

About the authors

  • Georg Zachmann

    Georg Zachmann is a Senior Fellow at Bruegel, where he has worked since 2009 on energy and climate policy. His work focuses on regional and distributional impacts of decarbonisation, the analysis and design of carbon, gas and electricity markets, and EU energy and climate policies. Previously, he worked at the German Ministry of Finance, the German Institute for Economic Research in Berlin, the energy think tank LARSEN in Paris, and the policy consultancy Berlin Economics.

  • Alexander Roth

    Alexander Roth, a German citizen, works as a Research Intern at Bruegel in the area of climate and energy policy. He holds a BSc and MSc in Economics from the University of Mannheim and an MSc from the Free University of Brussels (ULB).

    Prior to joining Bruegel, Alex worked on the European Carbon Trading System at DG Climate Action in the European Commission. He conducted research at the Centre for European Economic Research (ZEW), Commerzbank AG and the University of Mannheim.

    Alex's research interests include empirical microeconomics, focusing on climate, energy, and environmental economics and policies.

    He is fluent in German, English and French, and has a good knowledge of Spanish.

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