Monday, May 09, 2005

Microsoft becoming Mr. Softy?

At a gathering of venture capitalists last Wednesday, Microsoft announced it would be licensing 20 technologies developed by its research organization. Microsoft Intellectual Property Ventures helps showcase Microsoft’s innovative nature, perhaps quelling questions about whether the software giant’s $3.08 cash dividend last November was a sign of stagnation. The new software technologies offered for licensure range in function from improving the sound quality of chintzy speakers to secure identification card software to a distance-learning program. Upon hearing the news many analysts voiced their opinion that this will have a major impact for startup technology companies and the industry in general.

The licensing announcement from Microsoft follows similar announcements from rivals IBM and Sun. Both companies recently declared that they were making numerous patents, 500 from IBM and 1,600 from Sun, available to the open source community (although it remains to be seen just how freely available these offerings will really be). Microsoft on the other hand is not making any attempt to say their patents will be given away gratis. Mr. Softy wants a piece of the action either in the form of royalty payments, equity ownership, or more likely both. Details of the arrangements reached are not expected to be publicly disclosed. Microsoft is aiming to fashion this new relationship after Xerox’s Palo Alto Research Center (PARC). It is yet to be determined, however, if Microsoft will take as active a role in further developing the new technologies in collaboration with its new licensing partners. In fact, Microsoft has already acknowledged that some IP Venture researchers will likely be assigned to other “internal” projects.

Many feel that the recent move by Microsoft is an attempt to repair an image that has been battered over the last few years. Widely thought of as a company intent on protecting its intellectual property and flexing its muscle at the slightest sign of encroachment, Microsoft is trying to spin this latest announcement as a signal of its efforts to foster innovation. It might also function as a shield against future anti-trust litigation.

From a corporate strategy perspective, we feel that this is an excellent opportunity for Microsoft to “unlock” some of the value created in tangential technologies. Many of the 20 patents Microsoft is initially making available, do not fit into the core product offerings of the company. The IP for the most part is also in the very early stages of development, requiring a significant amount of effort to take it to the point of commercialization. For Microsoft this development would not be a good use of its intellectual capital and could distract from further innovations in its core offerings and other more promising technologies. A possible consequence of major vendors flooding the market with licensing options is decreased interest and funding for alternatives.

Microsoft has positioned itself very opportunistically for its technological thrift sale. Right now venture capitalists are finding themselves flush with cash and the need to put their money to use. This is causing the most marginal of new business opportunities to find funding relatively easily. For Microsoft, this will mean cheap access to the capital and talent needed to incubate its fledgling technologies into market ready offerings. The company will also have some significant leverage when it comes to negotiating the royalty payments and the ownership positions it will receive, not bad considering the patents would otherwise be collecting dust.

In the end, it is highly questionable whether Microsoft’s new licensing scheme will significantly contribute to technological innovation. The most likely scenarios will involve Microsoft receiving some “free” software development that the company could incorporate into its future core offerings (you don’t think Microsoft would enter a deal without some cross-licensing, do you?). The new ventures may find some limited success in the near-term, but until Microsoft opens up its IP coffers a little further, major advances are unlikely. It is hard to say that Microsoft is loosening its grip on trade secrets. Essentially Microsoft is hedging its bets with this initiative. In the event that any of its licensed technologies creates a bigger market than anticipated, Microsoft will still have a foothold in the venture. After all, the company is making only 20 patents available in a year it is expected to receive over 3,000. Perhaps Microsoft is not becoming Mr. Softy after all.

Aaron Chawla – Chris Duncan - Puneet Tandon

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