Patent Protections At Heart Of Microsoft-Novell Deal - InformationWeek

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11/8/2006
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Patent Protections At Heart Of Microsoft-Novell Deal

Microsoft Corp. will pay out ten times more than Novell Inc. over the life of the agreement the two companies signed last week because it's worried about possible patent lawsuits, an analyst said Wednesday.

Microsoft Corp. will pay out ten times more than Novell Inc. over the life of the agreement the two companies signed last week because it's worried about possible patent lawsuits, an analyst said Wednesday.

The deal, announced Nov. 2, includes patent protections, support cooperation, and co-development agreements. Novell revealed the financial details of its deal with Microsoft in an 8-K filing with the Securities and Exchange Commission (SEC).

Under the agreement, Microsoft will make an upfront payment of $108 million to Novell for patent protections, while Novell will pay out at least $40 million over five years to Microsoft for similar patent considerations and cooperation. The total expense to Microsoft, however, comes to $442 million, since the Redmond, Wash. developer will also pay $240 million to Novell for Linux service subscriptions it intends to dole out to customers, $60 million to market combined Windows-Linux solutions, and $34 million to set up a sales force to pitch a joint offering that includes Novell's SuSE Linux Enterprise Server.

"We think that Microsoft was concerned about patents that Novell held that Microsoft might have infringed," said Matt Rosoff, analyst with Kirkland, Wash.-based Directions on Microsoft. "There's been a lot of talk about why Microsoft got involved. Why would they pick up the phone when Novell called?

"It's very similar to the Sun and AOL [antitrust] cases," said Rosoff. "They sat down at the table [over patents] and said 'what other things can we do?'" Two years ago, Sun settled its antitrust lawsuit with Microsoft for a payment of nearly $2 billion over 10 years. The pact included several provisions that promised technical cooperation between the two software makers. At the time Sun's chief executive, Scott McNealy said: "This is a big day for customers. Everywhere we go, customers say, 'We have Sun and Microsoft technology, and we need interoperability.' We need peace."

Rosoff figures that Microsoft did its own arm-twisting in the deal, even though it ended up fronting 10 times more money than Novell. Among the most interesting clauses of the agreement is the one that says Novell's payment to Microsoft will be based on a percentage of revenue from the former's Open Platform Solutions and Open Enterprise Server.

"That's the other half of the deal," said Rosoff. "Microsoft probably went to Novell and said, 'we haven't even starting looking at Linux [for patent infringements] yet' or 'hey, SuSE might infringe on our patents. So Novell gave a percentage of its revenues."

It was all part of a complicated legal arrangement, Rosoff repeated, and not one prompted by a desire to push interoperability. If it had, said Rosoff, the Microsoft point person last week would have been someone from the Windows Server group, not Brad Smith, the company's general counsel.

In a statement issued Tuesday, Novell's own head lawyer characterized the agreement differently. "Novell entered this broad set of agreements with Microsoft to further promote the adoption of Linux," said Joseph LaSala, Jr., general counsel for Novell.

The Novell's chief executive said something similar. "This will help drive Linux more rapidly into the enterprise and government arenas, broadly expanding opportunities for Linux and open source," said Ron Hovsepian.

Is the deal a win for Linux or is it just an agreement of legal convenience? According to Rosoff's: "Look at all the promises in the Sun agreement. And look at what's come out if it. It was a legal settlement and I suspect that this is the same."

Microsoft had not replied at posting time to a request for comment.

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