Microsoft balances patents, standards

The software giant has been a prolific intellectual property mill over the past two decades, securing more than 3,000 U.S. patents. But as Microsoft and other large companies actively embrace open standards as a way to expand the market for Web services and other technology, they walk a fine line between promoting the adoption of standards and protecting valuable proprietary software.

Standards such as Extensible Markup Language (XML), a format for creating structured documents and facilitating Web services, have been embraced by Microsoft and others as a way to ensure the interchange of data between disparate computing systems. The basic XML description is freely published and open to anyone, but the software Microsoft and others are building to exploit XML isn't, leading to a growing list of granted and pending patents covering methods for manipulating XML data.

In just the past month, Microsoft has applied for patents in Europe and elsewhere to cover how XML-based documents are created in the company's dominant Word software. Analysts and rivals claim the company is attempting to use patented technology to lock out competitors. Microsoft contends it is simply protecting its intellectual property.

At the same time, Microsoft has agreed to give away the proprietary XML dialects, or schemas, its new Office 2003 package uses to describe documents.

The situation is indicative of a struggle faced by Microsoft and other companies, said Stephen O'Grady, an analyst for research firm Red Monk. They want to profit from their research and innovations, yet standards-based technology has to be freely available on some level to encourage broad adoption and ensure interoperability.

"There's always a struggle between openness and keeping your technology to yourself," for companies like Microsoft that are "proprietary in nature," O'Grady said. "There is a fine line there. You need a sizable community to commit to a particular product and format to give that product relevance. But you also want to protect your interests."

O'Grady said Microsoft has to be particularly careful not to make any licensing decisions that could be seen as locking out competitors. While the company was subject to relatively modest penalties in the settlement of its main U.S. antitrust case, it faces a number of other legal challenges that allege illegal anticompetitive behavior. The European Commission is expected to issue a ruling soon penalizing Microsoft for favoring its Windows Media Player, similar to complaints cited by RealNetworks in its $1 billion private antitrust claim against Microsoft.

"I can't really fault them for patenting work they've done--you want to prevent your technology from being stolen or misappropriated down the road," he said. "What it comes down to in many of these patents is how are they going to be implemented? If they use those patents to lock out competing products, they're going to have a lot of questions to answer down the road."

Mining intellectual property
The balancing act is particularly tricky as Microsoft embarks on a new mission to generate more revenue from its intellectual property. The company last year hired Marshall Phelps, the lawyer who made intellectual property licensing a major revenue source for IBM, and recently began licensing several commonly used technologies as part of a broad campaign to boost its intellectual-property-licensing business.

"Microsoft has not tried to build a patent portfolio they could monetize until now; they've essentially given stuff away," said Ted Schadler, an analyst for Forrester Research. "Now there's really a push to look for valid ways to make money from their IP."

David Kaefer, director of business development for Microsoft, said the new licensing directive was prompted by several reasons, including a desire to cut down on litigation costs and a recognition that the technology industry--and Microsoft in particular--have matured.

"It's a deliberate decision to pursue a collaborative strategy, not a blocking strategy, with our IP," Kaefer said. "Microsoft is maturing as a company; we're not the same company as we were a year ago, and our patent portfolio isn't the same...We have to be predictable and a little more mature about how we handle our IP."

The growing expectations for business computing products to work together also plays into the licensing plan, Kaefer said. "In the past, you could design things in a way that was unique and didn't necessarily need to interact with other products, but interoperability is a key thing customers are looking for now," he said. "You have to figure out how you're going to enable that interoperability, and providing predictable access to your IP is part of that."

Microsoft's licensing and IP push becomes more complicated, however, as the company's research increasingly is based on extending and exploiting open standards, Schadler said.

"Microsoft is trying to walk this line between creating standards, which are necessary for the adoption of software," and making money from its inventions, he said. "It's not just Microsoft--the major vendors are all trying to figure out what they can give away and what they can commercialize. I think the opinion on that changes situationally, day by day or week by week."

Double-sighted aim
The goal for Microsoft and other technology companies, such as IBM and Oracle, in promoting XML is twofold: Make sure the standard works well enough that businesses want to adopt it, and make sure your XML implementation is better than the other guy's.

"With any sort of widely accepted standard, once it's out there, it's a matter of who can build the best applications and tools to run on that standard," said Matt Rosoff, an analyst for research firm Directions on Microsoft. "Microsoft thinks Office is the best tool to work with XML...and they're very bullish on their platform being the best way to use Web services."

Dwight Davis, a vice president at research firm Summit Strategies, said XML and other standards are merely a starting point for Microsoft and its competitors.

"By definition, an open standard shouldn't give any one company an advantage over another," he said. "But even within the narrow confines of a standard, you can still make claims your standards-based product is better than other standards-based products. The competition really ends up happening on top of the standards, where you have these higher-level functions. Everyone is competing to come up with more compelling solutions to build on top of those standards."

One of the toughest issues is deciding what level of innovation is worthy of protection. The XML standard itself obviously isn't patentable, but what about a minor and somewhat obvious way of manipulating data based on the standard? What about a fairly radical idea, such as embedding a different customized user interface within every XML document?

"There's a base layer where standardization is obviously important and everyone plays from the same book," Schadler said. "But there's a layer, whether it's one click up the software stack or several, where interoperability matters less and your solution matters more. Just where that layer is, I don't think anyone's figured it out yet."

"It's really a minefield in some ways for vendors to tiptoe through," Davis added. "I think you're going to see a lot of low-level agreement on standards, and as you move up the stack, things will get into more specialized functions."

Long-term investment
For now, the strategy for Microsoft and others seems to be patent now, profit later. The U.S. Patent and Trademark Office has hundreds of pending applications now for patents on XML-related processes, many of which are unlikely to be granted, and fewer still of which will be commercialized.

"My sense is the big companies are largely working in a pre-emptive way with these patents," Davis said. "There's a self-protection element to filing as many applications as you can. But there's a distinction between patenting something and requiring me to pay royalties for it."

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The majority of XML-related patents, Davis said, likely will be licensed royalty-free, similar to the way Microsoft offers its Office 2003 XML schemas.

"Microsoft and IBM and others are going to identify some ideas as revenue-generating patents," he said. "But they've realized, and it's been a hard pill to swallow, that if they're going to be working on standards...they're not going to be able to charge royalties for that part of that patent portfolio. It's just too difficult politically."

Kaefer said royalty-free licensing made sense for Office XML schemas, but that approach may not apply to other XML-based innovations. "With the XML schemas, we saw a lot of partner and customer requests to make those schemas available," he said. "By making those available, there's a real benefit to encouraging the market to standardize and adopt XML. It's hard to say what beyond that we will do...It comes down to what offers the best benefits for customers and partners."

Kaefer added that free and for-profit intellectual property licensing can serve the goals of interoperability and open standards.

"Often times I think there isn't an appreciation of the fact that interoperability can be promoted through these royalty-bearing approaches as well as royalty-free approaches," he said. "In fact, it is precisely because both these options exist that companies are able to interoperate at the levels they are today. If some companies didn't have the option to monetize their IP, they would never contribute it to a standards process or make it available for licensing."