Analysis: Microsoft patent claims hint at internal issues

Microsoft’s aim to seek patent royalties from open-source distributors and users may be an attempt to use legal threats to deflect attention from larger questions surrounding its business, including lack of interest in new versions of core products and lackluster profit from new wares.

Microsoft’s claims that it will ask distributors and users to pay royalties for up to 235 of its patents included in open-source software, including Linux, is clearly an attempt to spread fear, uncertainty and doubt and make people hesitant to use open source as an alternative to commercial products, intellectual-property (IP) attorneys said. But the claims also raise questions about the business strategy behind Microsoft’s aggressive moves to seek licensing money from patents amid rumbles that customers have been slow to adopt Windows Vista and Office 2007, while new products such as the Xbox 360 remain unprofitable.

The matter came to light Monday with the publication of a Fortune article that included Microsoft CEO Steve Ballmer saying, “We live in a world where we honor, and support the honoring of, intellectual property,” adding that users of free and open-source software have to “play by the same rules as the rest of the business. What’s fair is fair.” The article included comments from additional Microsoft executives detailing plans to seek the infringement claims, and just as it was posted online, Microsoft sent e-mail to other journalists about the issue.

There may be a link between the timing of Microsoft’s claims against open source and the release of its Windows Vista product, said Stuart Meyer, partner at Fenwick & West in Mountain View, California. Rather than add features to Vista that would make business users want to adopt it, the OS’ distinguishing characteristic is the addition of an engine that will shut down users access to Vista if they are using a counterfeit or pirated version of the software, he said.

“Why do people want to want to switch to an OS that just includes new hurdles that have to be cleared?” he said. Microsoft may have decided that enforcing its IP through litigation is more important than offering innovative software that can compete on its own merits, a strategy that may leave many users unimpressed, Meyer suggested.

“It’s just friction that doesn’t advance the ball,” he said. “It’s tough for people to get behind this even if it’s part of our constitution [to prevent patent infringement].”

Microsoft’s unwillingness to specifically identify which patents are being violated also shows it is less than serious about initiating litigation, which may suggest the company knows it will be a tough battle to fight, he said. “If Microsoft wanted a lawsuit, they would have brought the lawsuit first,” Meyer said.

The only way to force Microsoft legally to show which patents are being infringed is for a Linux distribution company such as Red Hat Inc. or other open-source vendors who think they may be violating patents to bring a summary judgment in court against the company. This would require that Microsoft sue them if they want to collect royalties, he said.

Mark Wine, an IP lawyer and partner at McDermott Will & Emery LLP in Los Angeles, agreed that Microsoft is hoping companies will pay without a fight rather than engage them in a legal battle. He also said Microsoft may be trying to drive open-source software users to migrate to its products.

“I think it’s as much a marketing move as anything else,” Wine said. “If you’re really serious, you sit down and have a discussion, and you tell [open-source users] which patents, or you sue them.”

There’s no love lost between Microsoft and the open-source industry, and it’s been clear for years the software giant sees open source as a threat. Before Linux became the widely used OS for commodity servers from Hewlett-Packard Co. and Dell Inc., the Windows Server was the top choice for low-end servers. Microsoft has also seen open-source products threatening to commoditize key areas of its business, including worker productivity software, CRM (customer relationship management) software and developer tools.

Many also argue that Microsoft is at a turning point as it tries to build a successful business around online services and advertising after it waited too long to adopt the new business model that rocketed Google Inc. to its current success. While Microsoft launched products such as the Xbox 360 game console and Zune digital media player in an area it said will be key going forward — entertainment and devices — neither device has proved successful. The former product, while popular, has so far made no money for the company, and the latter is flailing against its exceedingly popular and incumbent competitor, Apple’s iPod.

It remains to be seen whether Microsoft will be able to collect on its claims or if the open-source community will use them to strive for patent reform, currently a popular issue before the U.S. Congress. However, the claims certainly will raise important issues around how patent-infringement cases will be litigated in the future, said Paul Lesko, head of the IP litigation group at SimmonsCooper LLC in St. Louis.

“If there’s going to be a skirmish in the future, they helped draw the lines,” he said. “It applies certain pressure [to open-source companies] … to find out how many of those patents are worth the paper they are printed on and how many are not.”

Linux evangelist Eric Raymond seems to think the patents at issue fall under the latter category. “It is nearly as certain that those patents are all junk,” he said in an e-mail interview. “If Microsoft had sound and critically relevant patents to assert, they wouldn’t need to screw around with vague threats. They’d simply publish the patent numbers and it would be game over for Linux.”

Horacio Gutierrez, Microsoft vice president of intellectual property and licensing, said that while Microsoft won’t discuss specific patents publicly, it has discussed them in private with companies such as Novell Inc. that struck deals with the company to exchange patent royalties for indemnification against litigation. Microsoft’s recent claims are an attempt to avoid going to court rather than to pick a legal battle with open-source companies, he said.

“What we’ve done is we’ve come up first with a licensing mechanism that is a reasonable [way] for companies in the business of distributing open-source software to reach an understanding [with us],” he said.

However, Gutierrez also acknowledged that Microsoft’s decision to seek royalties for patents is a business one. “Microsoft invests over 6 billion in research and development a year, and that’s an investment that results in innovation,” he said. “Our shareholders have a right to expect that we are going to protect that innovation.”

(Grant Gross in Washington, D.C., contributed to this report.)

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