Microsoft tries new tack in license deals

Although the company is less willing to change the way it develops and markets its software, Directions on Microsoft analyst Rob Helm said the computer maker is eager to address regulators' concerns and is likely to settle a dispute that centers on contractual issues.

"Microsoft will show more flexibility on contract provisions than on things that require technical or design changes," Helm said.

Microsoft disclosed last week that it had recently removed a clause from its standard Windows contract with computer makers. Manufacturers that wanted to sell Windows on their machines were asked to agree, in the clause, not to assert claims that the operating system infringed on their intellectual property.

The move, which was made last month, came just days before Japanese regulators raided Microsoft's offices as part of an investigation into that particular contract language. Microsoft representatives say they were aware of the Japanese inquiry but maintain that the timing was more coincidental.

The company said it had been working to remove the language for several months, after hearing from computer makers--particularly those overseas--that the terms were problematic. "We have definitely heard from a number of partners," said David Kaefer, Microsoft's director of technology policy.

The same or similar language has been part of Windows contracts since the early 1990s, Microsoft executives said.

Regulators have looked at the issue on and off over the years. A U.S. Department of Justice investigation in the early to mid-1990s ended without action, but the issue was briefly raised in the most recent antitrust battle between the agency and Microsoft. The European Union also looked into the issue in 2000 and 2001 but closed that probe without taking action.

Although the goals of the language were to reduce the likelihood of litigation and to remove uncertainty for customers, Microsoft can pursue those aims in other ways, Kaefer said. Most likely, the company will do this through deals through which it enters into a patent cross-license agreement with some computer makers. The company already has such a deal with Hewlett-Packard and with other large companies, such as Cisco.

The move to drop the provision is "a logical business decision" and shows an increased awareness on Microsoft's part of the broader implication of its actions, RedMonk analyst Steve O'Grady said. He noted that other regulators have already examined the provision and left it intact.

"If it is legal, presumably, they could leave it in there," he said. "Obviously, they've chosen not to take that route."

That indicates that "Microsoft is a little more sensitive to the perceptions of its business practices," O'Grady said.

The move is part of an overall rethinking of the way Microsoft handles intellectual-property issues, Kaefer said. In general, Kaefer said the company is learning that there are creative ways to handle many of these issues that both resolve legal concerns and improve its relations with partners.

"When you have a willingness to think through those things and change the model where it's appropriate, that hopefully helps the company...in terms of customer satisfaction, which is a huge goal of ours," Kaefer said. Microsoft has made the improvement of its rating among customers a priority, and it is a key component of bonuses for top executives.

As for the Japanese investigation, Microsoft certainly hopes that its actions have made the inquiry moot.

Both O'Grady and Helm agreed that this issue probably just wasn't worth fighting for Microsoft.

Because Microsoft is more willing to change its contract terms than it's willing to change the way it develops software, Helm said it is the computer makers--and not Microsoft's competitors--that have gained the most from the company's announced shift.

"The winners are likely to be the PC manufacturers," Helm said. "They were the winners in the DOJ case."