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Microsoft Freshman Course: How To Monetize Patents

I watched Microsoft as a leading-edge company make has-beens out of those who couldn't keep up with its frenetic pace of Windows development. WordPerfect and Lotus 1-2-3 spring to mind. Now Microsoft, a little longer in the tooth itself, has found a way to make has-beens out of a new set of companies -- those that agree to pay Microsoft royalties on open source code.

In the late 1980s and early 1990s, WordPerfect word processing and Lotus Development's 1-2-3 spreadsheet were the dominant applications. But those firms forgot they were dominant on MS DOS only. They didn't realize the customer base was about to shift to Windows 3.0, leaving Microsoft the opportunity to beat them at their own game by coming out with Windows applications before they did. Microsoft did so and never looked back.

We now appear to be in the midst of another platform shift, and Microsoft is exhibiting some elements of the WordPerfect syndrome. The existing application is the best there is right where it is. No need to move it to the new platform. But if there's a bunch of people adopting Internet standards, test-driving online applications, and implementing a free operating system, well, maybe Microsoft needs to collect something on all that activity, as the self-appointed holder of the franchise.

But how to collect? By claiming ownership through patents, of course. Isn't this a credible claim? I mean Novell, LG Electronics, Linspire, and Xandros have signed up in agreement, although Novell disavows the patent part.

Yes, this activity can be interpreted as support for Microsoft's patents, but please note as well that money is changing hands, $440 million in the case of the Novell pact. Microsoft will spend that amount in give-aways of support for Novell's SUSE and spend that on other aspects of the deal. It's a boon for Novell at a time when its business plan is limping.

For Microsoft, doing so strengthens a weak competitor, which helps it fend off future antitrust accusations, while theoretically weakening a strong one, Red Hat.

None of the other players are Linux powerhouses. It's not confidence in the patents that's powering these deals; it's Microsoft's seemingly bottomless war chest of cash. (Xandros, Linspire, and LG won't say how much they're collecting. But if Microsoft buys a little credibility for its patents with these deals, then its probably worth something out of the petty cash box.)

Microsoft has no intention of suing its customers because they use open source code. It has no intention of seeking a date in court where it will be required to name patents and defend their legitimacy. When was the last time Microsoft looked forward to a day in court? When was the last time it fared well there?

There are several trends counter to software patents retaining force -- the recent Supreme Court decision indicating weak standards have been used in granting patents and the Bush administration's belated agreement on the point, to name just two. For Microsoft's patents to have any value in an aggressive sense, Microsoft must use all its wiles to generate belief in their potential, not their actual, force.

The deals with weak Linux vendors are about monetizing a weak patent portfolio. Microsoft's deputy general counsel of intellectual property, Marshall Phelps, spent 28 years at IBM figuring out how to get a return on its huge patent portfolio; IBM now collects a billion a year in royalties. Microsoft hired Phelps in June 2003 and put him to work to do the same thing for Microsoft.

So, the middle ranks of Microsoft try to figure out how to be more like open source code in their practices, while the upper-most ranks rattle the patent saber against open source. It's got what you'd call a conflicted personality.

One way to become a legacy company is to take the saber rattling seriously and sign your company up to pay the patent tax. It's money that could be spent adopting more open source code and moving the company forward, but like I said, Microsoft is perfectly willing to make other firms the has -beens. Just contact any Microsoft deputy general counsel's office. They will show you where to sign.

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