How open? That's the big patent question
To say there's a lot going on in software IP is a little like saying that Larry Ellison and Bill Gates are competitive guys.
The scores go like this: SAP, the $10 billion-in-revenue, Walldorf, Germany-based king of enterprise resource management, has a grand total of about 40 patents. Oracle, the $14 billion-a-year database powerhouse, holds about 625 patents. Then there's Microsoft. The current total for the $40 billion ruler of the world's desktops is about 4,000 patents, and it's filing for more at a rate of 3,000 a year.
Piling up patents, though, can have as much to do with business strategy as with inventing things. Nowhere is that more true than at software companies, which make products that weren't even patentable in the U.S. until 1981, and which still have widely varying approaches to the task of managing their intellectual property. Those approaches are being shaped by multiple factors, from the part of the market the companies serve to the threat or opportunity they perceive in the burgeoning open-source software movement, which is dramatically affecting the IP rules in this maturing (but far from mature) industry.
Consider: IBM, the fourth great power in software, has more patents than anyone, a reflection of its heritage as a broader-based information technology company as well as its success over the years at building up a famously lucrative licensing operation serving all its businesses. All told, the Armonk, N.Y.-based behemoth has about 40,000 patents. Yet IBM is also the biggest backer of open-source software, which is why it made some 500 relevant patents freely available to all comers in January. What that will mean for Microsoft, the company with the most to lose from open source, isn't yet clear. But figuring it out is partly the job of Marshall Phelps, the IP luminary who built up IBM's licensing operation--and since 2003 has worked for Microsoft.
To say there's a lot going on in software IP is a little like saying that Larry Ellison and Bill Gates are competitive guys. In Brussels this summer, the European Parliament voted down a law--endorsed by the big software companies and protested in the streets by open-source advocates--that would have unified and strengthened the software patent process in the European Union. In Washington, software companies are among those pushing hardest for patent reforms that would, among other things, cut down on the litigation that plagues the industry. And in corporate headquarters around the world, software-firm strategists are figuring out how to plot a course in an IP landscape being shaped by antitrust rulings, customer demands for interoperability and changing ideas about how their companies--which more than any others embody the importance of intangible assets in the modern economy--should manage those assets.
"They're all talking about getting down the learning curve," says Stuart J.H. Graham, an assistant professor at Georgia Tech who has written extensively on IP in the software industry.
Moving down that curve in the biggest hurry is Microsoft, which took a major step in adapting its proprietary strategy to a changing world in late 2003, by posting a new licensing policy. "It was our way of saying we're open for business," says David Kaefer, director of business development for Microsoft's intellectual-property licensing group. "We wanted to signal the fact that we're moving from a more trade secret-reliant company to a more patent-reliant company."
Over at IBM, meanwhile, they are busy defining the curve. IBM has had a patent program for five decades, or about 40 years longer than it has had a standalone software unit. Late last year, the formation of a new group within its IP division marked what Jim Stallings, the leader of the group, calls the beginning of a "fourth stage" of using intellectual property strategically. "We build technology that is built on standards," explains Stallings, IBM's vice president for IP and standards. "So we have leveraged out standards to grow our business into new areas. We expand on (standards) and allow them to be the glue that holds our products together." By enhancing and promoting that glue through measures such as the grant of those 500 open-source related patents, the company hopes to shape an IT world where its products and services will thrive.
SAP, meanwhile, is focusing on keeping its basic architecture proprietary but opening some of its source code as a way to get other software companies to integrate with SAP. It's also accepting that customers might want to use open-source software and develop around an open platform. "We are trying to provide a service to our customers, and they want applications to run on open source," says Tim Crean, chief intellectual property officer at SAP. "There's a lot of market incentive to be open and be interoperable, and companies are responding in the openness of their licensing programs."
As for Oracle, which declined to comment on its IP strategy for this article, it is following a more proprietary model after years of viewing software patents as a terrible idea. As late as 1994, Oracle testified before the U.S. Patent Office that it was filing patents only as a
defensive maneuver, arguing that their use would stifle innovation in the software industry. But since 1998, the company has gone from 30 patents to 625 (thanks in part to buying other software companies) and has done some licensing of its patents to outside firms.Fifteen years ago the standard tools for IP protection in software were still trade secret and copyright. Since then, patents, expensive to file and maintain and controversial even within many companies (what engineer welcomes the necessary bureaucracy?) have been steadily, but unevenly, gaining favor. "With a patent, the government has given the company power to exclude other people from doing things that can create value in your marketplace," says Ralph Eckardt, a senior manager in the IP practice at Boston Consulting Group. "If a company is making a big investment in a product's development, they are looking for ways to eliminate uncertainty around that investment. Patents give you the power to create products and features that others cannot copy, with the hope that you can use those to get higher margins on your product than others in the industry can."
At the same time, the open-source movement has been gaining strength, with the creation of software that can be used or modified under the terms of the General Public License, or GPL. The GPL allows others to use the software and modify it under an open copyright. However, even companies in the open-source space are turning to patents to protect their ideas around software they aren't sharing under the GPL. It is the emergence of those companies, offering shared software but charging for services and maintenance, that is making open source easier to deploy. In turn, the relative ease of deployment and lower cost has made open source a powerful competitor to proprietary software companies like Microsoft and a potential ally to hardware and services companies like IBM.
What patents mean to Microsoft
It's against this backdrop that the evolving IP strategies of the major players must be understood. Start with Microsoft. In the early 1990s, Bill Gates was still in the antipatent camp, warning that patents could bring the software market to a complete standstill and drive out small players. But a 1994 patent fight showed the company the value of patents and triggered a major turnabout.
Now, two years after luring IBM's former intellectual property guru, Marshall Phelps, to Redmond, Microsoft has the goal of filing 3,000 patents this year (that's 11.5 patents a day if you take out weekends) while mining its 4,000 existing patents for profit and protection against upstarts. Ideas such as creating a computerized emergency contact system and the ability to use the "tab" key to navigate through Web sites have been patented by Microsoft.
Why all the patents? At the most basic level, patents give Microsoft the ability to exclude others from offering the same features a Microsoft product does. The more patents it has, the harder competitors will find it to offer similar products.
But patents are also a response to the fact that customers and regulators have been forcing the desktop giant to open up its source code and facilitate connections between Microsoft products and the broader IT world. With the source code exposed, competitors could re-engineer software similar to Microsoft's without violating its copyright--if that were the only protection it had.
"We have to look at the rights and how they relate to the code. What do you choose to protect? Do you do it with trade secrets or with patents?" Kaefer says. "We needed to find some other form of IP to allow collaboration to work. Copyright has just been a protection against end user piracy and always has been."
For Microsoft, however, collaboration is a relative thing. The strategy, it's fair to say, is to allow some connectivity without giving away too much--while at the same time turning its arsenal of patents and recent licensing agreements to competitive advantage in the fight against open source. Kaefer, who reports to Phelps and works in an IP division that has about 50 people focused on licensing, says that Microsoft has so far signed five cross-licensing agreements with potential competitors in support of objectives such as helping Windows integrate well onto cell phones. The group has also done about 40 out-licensing deals in the past two years. But there are limits. If OpenOffice, sold by Sun Microsystems, worked as easily as Microsoft Office does on Windows, why would anyone pay $300 more for Microsoft Office?
In-licensing is also an important part of the strategy. Often sued in the past for infringement, Microsoft has in recent years reached some high-profile settlements with such companies as Sun, InterTrust Technologies and SAP. So far it has spent $1 billion to license technologies like the ones covered by InterTrust's digital-rights-management patents. Among other benefits, those agreements are helping Microsoft play up a major difference between its proprietary world and that of the open-source backers, and sow some doubts about the safety of the latter.
In June, Microsoft launched an indemnification program that guarantees it will pay the legal fees and otherwise help defend customers who buy its products and later find themselves on the wrong end of an infringement suit. That's an assurance that's not available for open-source users, who, of course, are using code that comes from multiple and far-flung collaborators. Kaefer says indemnification has long been part of what Microsoft offers to its largest customers like Dell or Hewlett-Packard, and this program just extends it down to smaller firms.
But others are quick to point out the program's broader significance for Microsoft. Rob Helm, director of research at Directions on Microsoft, an independent research firm based in Kirkland, Wash., says, "If Microsoft knocks on open source because it has no IP protection...just by making noise about the issue and even if they didn't make a dime with
new customers, it would still have some value." Some observers think Microsoft, with its huge trove of IP, may possess--and at some point be willing to assert--patents that would upset the plans of software users with a big commitment to open source. Says BCG's Eckardt: "Ask yourself: Who are you at risk from if you are using Linux? Who's likely to lose something and want to sue? Effectively, it looks like (Microsoft is) giving you a benefit, but in reality they are threatening you."Kaefer's response is that Microsoft isn't interested in suing its customers, but that there are plenty of other people out there who might be. He has a point; so-called patent trolls, companies that exist mainly to assert patents, have proliferated in the sector, partly because the postbubble shakeout left a number of firms with few assets aside from their IP. Forgent in Austin, Texas, for example, has made more than $100 million in licensing fees--or 90 percent of its revenue--from its JPEG compression patent.
And then there is SCO Group, the Lindon, Utah-based software company that is suing IBM, alleging that IBM's work backing Linux has infringed its intellectual property rights. IBM has contested the claims vigorously and so far successfully. Meanwhile, the fact that a Microsoft licensing deal with SCO has provided the small firm with some revenue has helped to fuel speculation about Microsoft's plans for competing with open source.
Learning from history?
There is, of course, some historical irony in the emergence of IBM as a champion of open-source software. Back in 1980, when it made that first, fateful operating system licensing deal with the 25-year-old Bill Gates, Big Blue was still highly proprietary about its business, then dominated by mainframe hardware. It was also the defendant in a government antitrust case, as Microsoft would be a decade and a half later. But the company's strategy has changed hugely since then, and so has its approach to intellectual property management.
If the fourth stage that Stallings describes is about selectively using IBM's IP to support the development of standardized architectures, the previous three stages had a different flavor. Five decades ago, the emphasis was simply on assuring exclusivity for IBM's products.
Next came a growth stage, as the company's richly funded research made it the country's most prolific patenter. That was followed in the 1990s by the big push toward outlicensing, led by Phelps and still very much in evidence; IBM made $1.7 billion last year licensing out its technology. At the same time, IBM was moving toward broader patents, in software and business methods.
The strategic shift toward services has been a major factor in this evolution and was the biggest driver in the creation of Stallings' unit. His team's job is to sift through patents and find areas where IBM can contribute to standards or to the creation of a so-called patent commons. The idea is to release patents into the community for use in setting standards and to prompt innovation while monitoring the use of those patents to make sure no one comes along trying to enforce rights associated with the patents for profit.
"We have always had a choice," Stallings says. "We choose to donate some of them and build on them so others can invest in them. The fact that we own (the patents) gives us leadership and the ability to advance certain areas." Some skeptics have called the donations a publicity stunt, but analysts in the space see a move that's designed to get a network of users working around IBM's products and the Linux operating system.
Stallings sums up IBM's evolving approach to IP management this way: "We see all of this as being no longer as much of a legal discussion as it was in the past," he says. "It's becoming a business discussion. The C-level executives need to recognize intellectual property is about their business--the future of what they are going to be as a company--whereas in the past, this has been a legal issue with lawyers and policy wonks determining IP."
Given those views, it's not altogether surprising that IBM's IP organization moved in June to hire one of the best-known advocates of handling IP as a strategic asset: Kevin Rivette, co-author of "Rembrandts in the Attic," the groundbreaking 1999 book on managing intellectual property assets. Rivette is now IBM's vice president of IP strategy, and reports to Stallings.
Over at SAP, the IP-management organization dates back only to 2001. Crean took charge last year, joining from Sun Microsystems, where his work included litigating against Microsoft on IP and other matters. Based in Palo Alto, Calif., Crean leads a group of about
50 employees in the U.S. and Germany who actively work on standards boards and write some defensive patents.SAP's enterprise resource planning applications can cost millions of dollars and take years to implement, making them hard to reverse-engineer. That's one big reason why the company still relies mainly on copyright and some trade secrets. With only 40 patents in its vault, SAP does not look at its patents as a source of revenue, but as more of a bargaining chip in negotiations with other companies and a way to protect itself against infringement suits. "There is a philosophical question of whether a business wants to make money from an IP program or if it wants to make money directly in the marketplace," says Crean. "We've chosen to use our IP to give us the freedom to sell the products we develop. We are a product company. The IP just supports the sales of our products."
It is pressure from the big corporate customers who buy its expensive applications that is motivating SAP to open up and offer products that work in open-source environments. With its NetWeaver platform for business intelligence software, SAP has created an open platform for developers to build on. Its partnership with open-source database MySQL signals to its customers that open source isn't evil in SAP's eyes. It also allows SAP to compete against Oracle's offerings without investing as much in development.
What Oracle reveals
So what sort of IP strategy is Oracle pursuing? Judging from an article in The American Lawyer's August IP Law and Business and conversations with various observers, Oracle's approach seems most similar to that of Microsoft. Chief patent counsel Sanjay Prasad leads a nine-member team and has recently been spending time merging Oracle's IP portfolio with that of the recently acquired PeopleSoft, whose patents are mostly pending. The database company has managed to grow its patent filings along with the rest of the industry but has not been keen to open up its platform for better integration or for others to build on. Oracle owns about 625 patents and is encouraging engineers to file more.
Oracle has donated some code to open-source groups that run its software, such as Linux and Apache. Like SAP, it can't completely ignore the desire of big corporate clients to use open-source platforms to improve connectivity. But it is mainly at that operating system level where the company is accommodating them, according to Navi Radjou, a vice president with analyst firm Forrester Research. Radjou wonders whether the similarity to Microsoft's model might be partly attributable to the fact that the founders of both companies are still in charge.
"Larry and Bill don't want to look outside of what they have developed," Radjou argues. "And there is a conceptual gap forming between firms like Oracle and Microsoft, who will open up their proprietary code for licensing, and companies like SAP and IBM, which are embracing open code and licensing out their ideas."
In this analysis, the closed model works best for companies that are focused on delivering a quality-controlled product to customers, whereas the open model encourages the creation of a network of products built around protected IP and standards. SAP and IBM are trying to create a network of users who may also one day become contributors to their products, while Microsoft and Oracle are trying to control the development and use of their products and R&D efforts.
Radjou also offers a quick way of gauging which model a software company most closely resembles. "The proxy you can use in determining if someone is going to be focusing on protecting their innovation or sharing it is how they structure their IP group," he says. "Does it report to the general counsel or the CEO? Is it strategic or is it an ownership and protection model?" IBM and SAP's IP groups report up to the CEOs; Microsoft's group reports to the general counsel.
Both models will likely be around for a long time to come. Information technology departments and corporate users will want software they can adapt and interconnect, while home users and small businesses will likely want to avoid hiring a new person or learning a new skill just to install a printer. After all, most consumers don't want to become part of a collaborative software development project.
Not coincidentally, it is IBM and Microsoft that most clearly exemplify the two approaches. Microsoft's IP model seems best suited to its desire to move into the digital home and serve small business. IBM's, of course, is well crafted to build on the company's historic strength in selling to big companies--mainframes in the past, services in the future. Yet the two companies also have many customers in common and are sure to compete (as well as collaborate sometimes) in many arenas.
And, of course, the rivalry will continue to shape the IP strategies of both firms, not to mention those of nearly everyone else in the industry. That's only fitting, though. After all, this is a contest that began, 25 years ago, with what was surely the most fateful licensing deal in history.
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