If
you were to accept patent production as a good proxy for innovative
ability, you would quickly conclude that one of the software giants is
a whole lot more creative than the others. The scores go like this: SAP
AG, the $10 billion-in-revenue, Walldorf, Germany-based king of
enterprise resource management, has a grand total of about 40 patents.
Oracle Corp., the $14 billion-a-year database powerhouse, holds about
625 patents. Then there's Microsoft Corp. 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 Corp., 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.
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 anti-patent 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 Inc., 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 Corp. 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 Inc. or Hewlett-Packard Co., 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 post-bubble shakeout left a number of firms with few assets
aside from their IP. Forgent Corp. in Austin, Texas, for example, has
made more than $100 million in licensing fees - or 90% 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.
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.
So what sort of IP strategy is Oracle pursuing? Judging from an
article in The American Lawyer's August IP Law & 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 Inc.
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. - Stacey Higginbotham
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Juergen Lasowski
And the winners are...
