Microsoft walks the patent tightrope

To patent or not to patent, that is the question for Microsoft.

The software giant has been a prolific intellectual property mill over the past two decades, securing more than 3,000 US patents. But as Microsoft and other large companies actively embrace open standards as a way to expand the market for Web services and other technology, they walk a fine line between promoting the adoption of standards and protecting valuable proprietary software.

Standards such as Extensible Markup Language (XML), a format for creating structured documents and facilitating Web services, have been embraced by Microsoft and others as a way to ensure the interchange of data between disparate computing systems. The basic XML description is freely published and open to anyone, but the software Microsoft and others are building to exploit XML isn't, leading to a growing list of granted and pending patents covering methods for manipulating XML data.

In just the past month, Microsoft has applied for patents in Europe and elsewhere to cover how XML-based documents are created in the company's dominant Word software. Analysts and rivals claim the company is attempting to use patented technology to lock out competitors. Microsoft contends it is simply protecting its intellectual property.

At the same time, Microsoft has agreed to give away the proprietary XML dialects, or schemas, its new Office 2003 package uses to describe documents.

The situation is indicative of a struggle faced by Microsoft and other companies, said Stephen O'Grady, an analyst for research firm Red Monk. They want to profit from their research and innovations, yet standards-based technology has to be freely available on some level to encourage broad adoption and ensure interoperability.

"There's always a struggle between openness and keeping your technology to yourself," for companies like Microsoft that are "proprietary in nature," O'Grady said. "There is a fine line there. You need a sizable community to commit to a particular product and format to give that product relevance. But you also want to protect your interests."

O'Grady said Microsoft has to be particularly careful not to make any licensing decisions that could be seen as locking out competitors. While the company was subject to relatively modest penalties in the settlement of its main US antitrust case, it faces a number of other legal challenges that allege illegal anticompetitive behaviour. The European Commission is expected to issue a ruling soon penalising Microsoft for favoring its Windows Media Player, similar to complaints cited by RealNetworks in its $1bn private antitrust claim against Microsoft.

"I can't really fault them for patenting work they've done -- you want to prevent your technology from being stolen or misappropriated down the road," he said. "What it comes down to in many of these patents is how are they going to be implemented? If they use those patents to lock out competing products, they're going to have a lot of questions to answer down the road."

Mining intellectual property
The balancing act is particularly tricky as Microsoft embarks on a new mission to generate more revenue from its intellectual property. The company last year hired Marshall Phelps, the lawyer who made intellectual property licensing a major revenue source for IBM, and recently began licensing several commonly used technologies as part of a broad campaign to boost its intellectual-property-licensing business.

"Microsoft has not tried to build a patent portfolio they could monetise until now; they've essentially given stuff away," said Ted Schadler, an analyst for Forrester Research. "Now there's really a push to look for valid ways to make money from their IP."

David Kaefer, director of business development for Microsoft, said the new licensing directive was prompted by several reasons, including a desire to cut down on litigation costs and a recognition that the technology industry -- and Microsoft in particular -- have matured.

"It's a deliberate decision to pursue a collaborative strategy, not a blocking strategy, with our IP," Kaefer said. "Microsoft is maturing as a company; we're not the same company as we were a year ago, and our patent portfolio isn't the same...We have to be predictable and a little more mature about how we handle our IP."

The growing expectations for business computing products to work together also plays into the licensing plan, Kaefer said. "In the past, you could design things in a way that was unique and didn't necessarily need to interact with other products, but interoperability is a key thing customers are looking for now," he said. "You have to figure out how you're going to enable that interoperability, and providing predictable access to your IP is part of that."

Microsoft's licensing and IP push becomes more complicated, however, as the company's research increasingly is based on extending and exploiting open standards, Schadler said.

"Microsoft is trying to walk this line between creating standards, which are necessary for the adoption of software," and making money from its inventions, he said. "It's not just Microsoft -- the major vendors are all trying to figure out what they can give away and what they can commercialise. I think the opinion on that changes situationally, day by day or week by week."