Sam Ramji, Bryan Kirschner, Michael Francisco (and briefly Bill Hilf) from the Microsoft open source software lab were front and center last week at the Open Source Business Conference (OSBC), largely because of an article published the previous week in Fortune. There were several discussions that centered around patents and software business from an open source perspective, and I realized there are several disconnects between the Microsoft legal team and their PR machine, and most of the rest of the world.
The first disconnect appeared during Microsoft's day long event for open source ISVs the day before OSBC. Microsoft represents a US$44B revenue stream. Most of the executives from software businesses in the event represent companies that run US$2M to US$20M. There is a world of difference between the way these companies need to behave with respect to intellectual property tools and their software assets.
Most small companies don't care about patents in the same way as a large company must. A small company will likely file for a patent or three because it can make a real difference in their valuation in both funding and M&A activity. The management team, however, applies a different calculus to the problem. Filing for three patents with good patent attorneys could cost ~US$50K. That's half a head count for a year. And the patents won't be approved faster than 24-36 months.
Was the small company to discover a large company infringing their claims, they have very few real options. They have a ticket to a negotiation implied in their ownership of the patent. They can't afford to be greedy in the discussion because they can't afford the legal costs of a prolonged legal debate if business negotiations fail. Patent "cross licensing" deals with large companies with thousands of patents are not exactly balanced for small companies.
Most companies just don't live in the space of large cross licensing deals like a Sun, Microsoft, IBM, Intel, etc. That doesn't mean the smaller company management teams don't respect intellectual property or don't care about it, they just value patents differently in their business model. I imagine the average $20M company executive would happily entertain the painful and frustrating headache of $100M/year of inbound litigation with which Microsoft lives, if it came with a $44B revenue stream.
These executives don't want "special" rules for intellectual property. But neither do they need to think and apply the same rules the same way as companies that are Three Orders of Magnitude bigger. Indeed, for most of these executives, trademark (i.e. brand management) and copyright management is everything to them, and they're very savvy with respect to copyright licensing.
The second disconnect is the Microsoft talking point about return on investment for the R&D expense. Microsoft rightly claims on the order of $7B spent each year on research and development. The PR talking point is that "they want a return on that investment." The rest of us see a $44B revenue stream and think, "and what part of that revenue stream shouldn't be considered ROI?" This is what happens when you let lawyers (cost side of the balance sheet) think they can be a profit center.
This brings us to the third disconnect. The Microsoft executive and legal teams look to the IBM claims of $2B-$4B/year in IP licensing revenues and thinks, "why not us?" Why not indeed. Well let's look at some of the differences. You see it's really a business marketing problem.
Microsoft historically has a culture of putting programs in place so as to scale efficiently and keep margins high. This is good business practice. So the legal team did as well: here's the "IP Licensing" home. [I think it's significant that the URL contains a segment named "about". Remember -- legal is a cost center. Most of the legal concerns that reach the public eye would rightly show up under "about" on most company web sites.] As you explore this part of the site, you'll find all goodness about why you should license Microsoft IP through their licensing programs 'cause they're smart guys that invest a lot in R&D. (And they are and they do.)
But it's different than the business model practices developed over the long haul by IBM. Go look at the model Microsoft is chasing: here's the IBM IP licensing page. The page starts with the statement that they're the market leader in awarded patents (regardless of R&D investment), and they're "expanding their use of intellectual property to accelerate the adoption of open standards and open source software through creative licensing and stewardship programs." There's a prominent link on the simple page to all the program work in which IBM invests to modernize and reform the patent system and "reinvent the invention system." It is a remarkable piece of positioning.
Here is the company that clubbed Microsoft like a baby seal in the early cross licensing days, essentially playing the reformist hero. It is masterful marketing. IBM thinks through the business strategy from all angles (including support for open source software), then tells a GREAT story about it. [Indeed, an IBM executive would have wept for laughing so hard if they'd been present for the vaguely unprofessional bashing Sam Ramji took at the 451 Group reception at OSBC from a panel made up of Dan Kohn (Linux Foundation), Jeremy Allison (Google ex-Novell), and Eben Moglen. Andy Updegrove was the only balanced voice on the panel. Sam had to stand in the audience with the rest of us plebes and wait his turn for the mic.]
It's not that Microsoft doesn't want reform in the patent system, they simply don't talk about the work they do sponsor. And when they try to message reform it fails. They come across complaining about the inbound $100M/year litigation costs, with the additional hammering they've taken by Eolas (~$500M) and the Sun license (another $2B). They try to say they too want reform because they're victims too! But it's a poor story up against the $44B revenue stream. It has all the negative impact of Paris Hilton fretting about her approaching jail time while shopping for ten thousand dollar handbags. (I wonder how much inbound litigation IBM takes a year?)
What they need is a leadership message. One that resonates with a clean position with which the rest of us mere mortals can sympathize and possibly even support. Daniel Chalef (CEO, Knowledge Tree) offered the start of one for them during the ISV day but it was likely lost and not recognized for the brilliance it represents. Daniel suggested Microsoft take a leadership position in the EU AGAINST software patents.
This is fabulous. It could even be cleanly messaged as "encouraging the EU to not follow in the footsteps of the U.S. until such time as patent reforms have been implemented and proved." They would not be saying no software patents, but rather encouraging the EU to not make the same mistake the U.S. made until the U.S. figures out how to clean up the mess we all agree exists. It would show leadership, align with their current positioning, and not sound like victimized whining, nor would it clash with their licensing programs.
IBM is leading the reform movement and winning friends with its messaging while happily licensing and defending its intellectual property. It comes at a cost and maybe the margins aren't as good as Microsoft's historical packaged software margins, but business it is. Sun has reinvented its executive messaging cleanly to say they've got to play the game as a large business in the U.S., and they'll only use the portfolio defensively.
It's time for Microsoft to do the same before they're again [possibly mis]quoted as making veiled threats against customers. Microsoft is a software company. It's about time they again acted as one and stopped pushing their IP licensing business to the forefront of their messaging. It's not (nor will it ever be as big as) the business we (their customers) know they're in so it only serves as too frustrating a distraction.
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