Showing posts with label IBM. Show all posts
Showing posts with label IBM. Show all posts

Friday, April 3, 2020

Today is the 10th anniversary of the launch of FOSS Patents--and here's a Microsoft patent threat from 2004 no one reported before

Ten years ago to the day, the first FOSS Patents blog post went live. (In the table of contents on the right side you can also find an entry for January 2010, but that one was added subsequently--and backdated so the contact form would be listed behind all of the actual content.)

When I talk to readers at courthouses or on other occasions, I realize most people don't even know what the "FOSS" stands for. That means Free and Open Source Software, a "politically and philosophically correct" term that describes both persuasions of the same movement. At the outset, the idea was indeed to focus on patent threats and assertions against open-source programs such as Linux. I always viewed the Open Invention Network (OIN) very skeptically as it appeared to part of the problem to a several times greater extent than it was part of the solution. And I was aware of some threats no one had reported on at the time. In fact, there is one that I hadn't written about in the more than 16 years since it was made, but with so much water under the bridge by now--and with Microsoft being a member in good standing of the open-source community these days--I'm going to reveal it on this occasion:

In early 2004, Microsoft's patent licensing department contacted MySQL AB, the originally Finnish-Swedish and, at that time, heavily Americanized open-sourced database company (whose CEO I was advising at the time). What Linux was in comparison to Windows, MySQL was to Oracle, Microsoft SQL Server, and IBM Db2. The term isn't used much anymore, but back then the "LAMP Stack" meant Linux, the Apache webserver, the MySQL database, and one of the P languages (mostly PHP, with a few people using Perl, or even Python): an open-source technology stack powering more websites than any other comparable configuration. MySQL had risen to popularity alongside Linux. It was a symbiotic relationship. Microsoft, of course, favored Windows + Internet Information Server + SQL Server + Visual Studio (C# or Visual Basic).

What Microsoft--and again, the Microsoft of then is not the Microsoft of now when it comes to these types of issues--told MySQL (a company that had received tens of millions of dollars of venture funding while Microsoft already had roughly 10,000 times greater resources) was that they claimed to hold a patent that covered functionality at the very core of the MySQL database engine. From a software development perspective, a database engine is a relatively monolithic (as opposed to modular) thing. If someone asserted a patent against the basic architecture of your engine, it could mean that you have to almost start all over. You'd lose years.

Microsoft was clear about its demand: a 2% royalty on MySQL's (tiny) sales. Two things were not clear, however: whether Microsoft had an agenda to actually start a patent war against open source and, particularly, the LAMP Stack, so that an initial royalty agreement would not have been an amicable resolution of an IP issue but could have been the beginning of the end for MySQL and LAMP; and Microsoft declined to disclose that mysterious killer patent.

The concern I just outlined--that Microsoft would wage an all-out patent war against open source--was not merely paranoia. A Microsoft exec in charge of corporate strategy at the time had told some Silicon Valley venture investors a year or two before that "if it comes to worst with open source, [they'd] just use some of [their] patents." So what was presented as a shakedown might have been a concealed attempt at a shutdown.

Microsoft was the only company at the time to have an issue with Linux; the rest of the industry viewed Linux as a chance of liberation from Microsoft dominance. When it came to MySQL, however, two other major patent holders--IBM and Oracle--potentially had just the same strategic motivation to attack the successful startup, as those companies were pro-Linux, but faced a disruptive-innovation threat from MySQL. While that would have been a gigantic violation of antitrust law, one of MySQL's founders even feared that Microsoft, IBM and Oracle might have agreed to launch near-simultaneous patent attacks on them. And they had only a very few patents (from a smaller startup they had acquired)--likely of zero retaliatory value.

MySQL didn't accede to Microsoft's demand, and Microsoft never stepped up the pressure or sued. Part of the reason may very well have been (and in my view, most likely has been) that there were two things going on in the EU that Microsoft had to be cautious about. The European Commission going after Microsoft for its conduct in some other conduct; and the EU's legislative bodies (Council and Parliament) were working on a Directive for the Patentability of Computer-Implemented Inventions, i.e., software patents directive. Concerns by the open-source community played an important role in the political debate.

At some point MySQL was seriously considering making Microsoft's patent royalty demand public. We had already prepared a press release, and it was going to be centered around an open letter to EU policy-makers urging them to abolish software patents in Europe (though that wouldn't have solved the problem for MySQL anywhere else, and it actually generated most of its revenues in the U.S. anyway). We didn't escalate the conflict, and ultimately that was better for everyone involved.

Oddly, about five years later Microsoft actually tried to defend MySQL's independence. Oracle was in the process of acquiring Sun Microsystems, which had acquired MySQL the previous year for $1 billion. While Sun wanted MySQL's business to grow, there were reasons to assume Oracle simply wanted to control it so as to eliminate a competitive threat. Microsoft and SAP (even though mostly concerned about Java in the beginning) were the two large complainants, and MySQL's founder, Michael "Monty" Widenius, was the third complainant, with help from me. So MySQL's founder and I ended up in an alliance with Redmond about five years after we had thought Microsoft would potentially use patents to destroy it.

If not for that old Microsoft patent threat against MySQL--16 years under wraps--, I might never have gotten involved with patent policy in the first place. And I had it very much in mind when I launched FOSS Patents. At that time, I already knew that Microsoft wasn't necessarily a foe (as the Oracle-Sun merger review showed). In fact, I felt that some FOSS people, maybe because they received funding from the likes of IBM and Oracle, weren't being fair: they turned a blind eye to some other large tech companies' (especially their financial backers') questionable patent dealings and pro-software-patent lobbying, but even when Microsoft had good intentions in specific areas, they looked at whatever Microsoft did or announced like Sherlock Holmes with a magnifier glass and, if all else failed, simply made up concerns that weren't warranted. Part of the FOSS Patents agenda was to focus more on companies whose patent abuse got less attention, but "deserved" more. The first big story here was the second post ever: on an IBM threat against an open-source mainframe emulator.

This blog's focus evolved dynamically. In fact, just about four weeks before I launched FOSS Patents, Apple had filed its first patent infringement complaint against an Android device maker (HTC). Android became the most heavily-attacked piece of open-source software that year as Oracle sued Google (a case that later became only a copyright dispute as Oracle's patents failed in court), Microsoft sued Motorola, Motorola sued Apple (which countersued using largely the same patents as against HTC), and the following year Apple sued Samsung.

Of the roughly 2,300 FOSS Patents posts I've written to date (also, there were a few guests posts), roughly 63% (1,456 posts) went live in the years 2011-2013, the three years in which the "smartphone patent wars" were raging on a very large scale. By 2014 they had already subsided, and in 2014 various disputes came to a partial or complete end.

With those Android companies countersuing, my litigation reporting simply had a mobile focus (and occasionally even gaming consoles). If I had anticipated that, I'd have named the blog "Mobile Patents" or "Phone Patents."

Actually, "FRAND Patents" would have made even more sense. I already took a clear position against injunctions over standard-essential patents in 2010. And a few years later, a Research In Motion/BlackBerry lawyer accused me, after a Mannheim trial, of having "devalued" SEPs and that companies were cutting back on their standardization activities (obviously not true, as we all know now with the benefit of 2020 hindsight).

More recently, this blog has almost been an "automotive" blog, only because car makers are currently the ones that SEP holders like Nokia primarily seek to prey on.

So there's probably no point in ever renaming a blog, much less when it is as well-known as this one. I'm very grateful for having so many loyal readers, and a number of highly important people in the industry as well as in the judiciary, executive and (to a lesser degree) legislative branches of government. I really am.

There's one thing I had envisioned for the 10th anniversary that I haven't found the time for: a redesign. This blog still uses the "Blogspot" platform's original blog layout. Blogspot became Google's "Blogger" service, and undoubtedly supports more fashionable layouts. However, since I have manually entered and edited all the HTML tags here from the outset, it's a bit risky to switch to a newer layout (I ran a test and the result looked awkward)--I or someone I'd pay for it might have to go over 2,000+ posts and make countless manual adjustments. Nevertheless, it may happen later this year--certainly sometime before the potential 20th anniversary :-)

There were times when I was seriously considering discontinuing this blog, or handing it to some other organization, such as an IP-focused publishing company. But in recent years there have been some really exciting developments--and I've found a way to keep blogging while continuing to run an app development company (I'll have a new game to announce this summer).

Some of you encouraged me to keep going--even some who have rather different positions on SEPs or on patent policy in general. Thanks for that, too. I'll keep sharing my honest observations and opinions with all of you for quite some more time!

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Wednesday, January 30, 2019

Half fun, half serious: How tech CEOs react to an antitrust investigation

General counsel to CEO: "Sir, we have a problem. I just got a call from the Federal Trade Commission. In one hour, the FTC will announce a formal investigation of our allegedly anticompetitive conduct."

11 tech leaders and how they respond to this development:

Jeff Bezos (Amazon): "I thought the Washington Post would shield us from this forever! Now I gotta buy the New York Times, too. And if all else fails, CNN. Take that, Trump!"

Tim Cook (Apple): "Political crap! But finally Android is useful for something. We'll point to all those dumbphones to prove we don't have monopoly power. I'll just have to keep my mouth shut about people not using them to access the Internet. And maybe that Qualcomm guy had a point about duct tape?"

Mark Zuckerberg (Facebook): "Was there no prior indication on those FTC lawyers' Facebook profiles? I thought we'd figure this out early. But here's the biggest question: Can I run for President if we're still being investigated then or will we have to temporarily restructure the company?"

Larry Page (Google parent Alphabet): "We're innocent because 'Don't Be Evil.' Why are they doing this to the most politically correct company in the world? Are they confusing data privacy for competition enforcement by any chance?"

Ren Zhengfei (Huawei): "Those American trade warriors will stop at nothing to shut us out of their market. Unfortunately, we have to cancel all executive travel to countries that might extradite any of us. I trust those white-collar prisons in America are good, but I'll pass."

Ginni Rometty (IBM): "They could at least have waited until the last mainframe is switched off for good. Call Chuck Schumer and tell him how bad this is for the New York State job market. But don't tell him that New York banks will save money on their IT infrastructure if the government gets its way. That would be too much of a conflict for him to digest, and I don't want to have to outdonate Goldman Sachs."

Searching... (Intel): "I know it's counterintuitive, but it's actually good news. Being in the crosshairs of competition enforcers is the best benchmark. After all those boring years, we're now more relevant than ever."

Satya Nadella (Microsoft): "This is so 1990s! Don't they realize how much we've changed? We're now a genuine open-source cloud AI company while Steve Ballmer is watching basketball all day and Bill Gates is growing GMOs in Africa. They'll have to let the NEW Microsoft off the hook, I'm confident."

Larry Ellison (Executive Chairman & CTO, Oracle): "Who are the damn complainants? Can't we just buy'em all on our next acquisition spree? That would be my preferred strategy for dealing with this."

Steve Mollenkopf (Qualcomm): "We already have a dozen law firms on the case and now we'll double down on investor relations, public relations, sponsorship of researchers and analysts, think tanks, everything that money can buy! Blame Obama, Apple or Huawei-or all three, depending on whom you talk to--and tell Wall Street we'll settle this soon on very favorable terms. And now you have ten months to secure a patent injunction against the FTC's mobile phones and email servers."

Elon Musk (Tesla): "I have a plan for our planet: in the middle of the night I'll lay off another 5,000 people and let the underpaid remaining employees work even harder to offset the impact of this on our business. That's what I--I mean, THEY--just have to do to combat climate change."

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Saturday, November 3, 2018

Wall Street sees 20%-25% regulatory risk for IBM's envisioned acquisition of Red Hat

Last Sunday, IBM and Red Hat announced a merger agreement under which "Big Blue" (NYSE:IBM) would pay $34 billion, or $190 per NYSE:RHT share, to acquire the company that once started as a Linux distributor.

I may very well talk about the strategic ramifications of the proposed transaction some other time, but the focus of this post is exclusively on what the stock market appears to think of the deal.

On Monday (October 29), Bloomberg already reported on what was then a 12% spread, "among the highest for North American deals." The article quoted a portfolio manager who said he didn't want to bet on a deal that may be about a year away from closing, and IBM CEO Ginni Rometty as denying "any regulatory inhibitors," which she obviously had to say.

The time frame certainly affects demand, given that risk arbitrageurs could in the meantime use the money they would spend on RHT shares now to bet on a couple of other mergers, provided that those other deals would close more quickly and happen sequentially. But there's more to it. The spread does indicate that merger-focused investors are far from convinced that the deal will materialize.

On Friday (November 2), RHT closed at $172.24. If the deal went through, those investing now would then rake in a profit of more than 10%. Even if it took a year, a 10%+ gain would be a great deal. The only explanation for why there isn't stronger demand, at a higher price, is skepticism. Since I can't imagine anyone doubts that IBM is a serious buyer, the reason must be concern about the merger review process in the U.S. (DoJ), EU (European Commission, DG COMP), and China (MOFCOM). While China prevented Qualcomm from acquiring NXP, IBM reportedly claims it's not critical for the Red Hat deal. I haven't formed a definitive opinion on it yet, but for now I'll take IBM's word for it.

Without going into detail (yet) on the issues presented by the transaction, we can "reverse-engineer" the stock price in order to get an idea of how likely the deal is--in the eyes of sophisticated Wall Street investors--to go through or fall through. Let's start with the roughest and simplest approach, and then fine-tune it a little bit to take the time value of money into account.

The potential upside based on Friday's closing price is $17.76. Theoretically it's even greater since someone else might try to outbid IBM, but that doesn't appear to be considered too likely by anyone.

The potential downside here would not realistically be a complete loss of the investment. Red Hat is doing too well to go out of business anytime soon. The closing price over which IBM offered a premium of about 60% was $116.68, pretty much at a level with RHT's 52-week low of $115.31 (an intraday price as far as I can see).

If the deal falls through, it's a reasonable assumption that Red Hat's stock price will go back to that level, though it's obviously hard to predict what the market environment would be at that point in time somewhere in the second half of 2019. In order to keep things simple, let's not consider that investors might think they could mitigate their loss by getting out once there's a serious negative sign, such as a powerful Statement of Objections (SO) by the European Commission.

Assuming that the pre-merger-announcement closing price is where the price would fall, the potential per-share loss is $55.56 ($172.24 - $116.68).

If the likelihood of closing is estimated to be 76%, and the risk of things falling apart is (consequently) 24%, then there would be an equilibrium (76% x $17.76 is at a level with 24% x $55.56).

Let's fine-tune this by assuming a financing cost of $4.00 per share (roughly the Fed rate, assuming that you have this cost for 12 months). In that case, the potential gain (by placing the right bet on the deal going through vs. doing a far safer investment that would have a 2.5% yield) is $13.76, and the potential loss increases to $59.56. There would then be an equilibrium if the risk of the deal being blocked (or remedies being imposed with the effect of the deal falling through) was estimated at 19% (19% x $59.56 is at a level with 81% x $13.76).

Even in the aftermath of Qualcomm-NXP, that is a fairly skeptical perspective, given that mergers of this kind normally go through.

I've received a couple of independent invitations to meet portfolio managers in New York to discuss the deal, plus various calls and emails. Investors used to follow my coverage of the Google-Motorola process with great interest, and many still remember my vocal opposition to Oracle's acquisition of Sun Microsystems in late 2009 and early 2010. It was funny for me how the numerous Wall Street people I talked to always called the company "JAVA" (based on the stock ticker symbol). Java--the programming language--wasn't an issue at the time; MySQL, the open-source database, was the reason for which the European Commission conducted a Phase II review and issued an SO. It's about open source again, and this time around, Java will be part of the discussion.

As a matter of transparency, Red Hat contributed to my NoSoftwarePatents campaign in late 2004 and early 2005 (two other companies, including one far smaller than Red Hat, were much bigger supporters of the campaign), but there hasn't been any business relationship with Red Hat since. I've never had any relationship with IBM, other than having the greatest respect for the work of its patent department.

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Friday, April 4, 2014

Apple's patent dispute with Samsung and Google: implications for debate on patent reform, trolls

Yesterday Apple, IBM, Microsoft and other large corporations announced the Partnership for American Innovation in an effort to, as The Verge put it, "make patents cool again" or, as Reuters described it, to advocate "go slow" positions on U.S. patent reform. ZDNet's Steven Vaughan-Nichols, who likes open source far better than patents, thinks the PAI is, for the time being, "foggy on the details".

It's not purely a coincidence that Apple would take a more active role than ever before in patent policy during the opening week of the Apple v. Samsung II trial in California. The exact timing of the announcement was driven by increasing momentum behind the push for patent reform: on the same day, the Senate had already intended to vote on its version of the reform bill. But the fact that Android is eating Apple's lunch is undoubtedly the primary reason for Apple's decision to position itself so clearly on patents and patent enforcement. It's probably not just the #1 reason, but also the #2, #3, #4 and #5 reason.

It's no secret that I'd like to see more patent reform happen than those companies. This never prevented me from doing consulting work for Microsoft, which does support some reform proposals I like, such as fee-shifting and greater transparency. And while I'm not excited about a pro-status-quo patent advocacy initiative, I respect those companies' interests in and positions on intellectual property.

The world of politics is too complex (especially on one of the most complex policy areas of all) for binary classifications, but I see a certain antagonism here. In my opinion, the two most significant recently-formed patent-related advocacy groups are the pro-reform Main Street Patent Coalition and the "go slow" PAI with Apple, IBM, Microsoft and their (mostly) big pharma friends.

This is a regrettable rift between some (not all) large creators of information and communication technologies and key ICT users such as advertising agencies, banks, hotels, realtors, restaurants, retailers, grocers, printers, travel agencies etc. -- the members of the Main Street Patents Coalition.

Even more regrettable -- and this now takes us back to smartphone patent issues -- is the fact that the PAI is taking positions adverse to those of the Application Developers Alliance, whose members include Google and Samsung. Obviously, app developers are not key to IBM's business. But as I said on Twitter yesterday, I'd really like Apple and Microsoft to take into consideration the needs of small app developers in connection with patent reform because app developers are key to their platforms. It's great that Apple and Microsoft (like Google and Samsung) organize large developer conferences. It's great when they improve their developer tools. But I would also like to see them express their love for developers in connection with patent reform, and to promote not only what may give them an advantage against their key rival, Google, but also what helps small app developers against patent trolls.

I'm not criticizing them. I am, however, urging them never to position themselves against app developers in the patent policy context. I'm not saying they've done it so far in the current reform process; I just hope they won't. If Apple and Microsoft jointly opposed a reform proposal that would clearly benefit app developers who have to fend off patent trolls while Google- and Samsung-backed groups like the Application Developers Alliance and the Main Street Patent Coalition support the same proposal, they would unnecessarily alienate an audience that is key to their platforms. Ideally they should look for ways to support app developers.

While many app developers don't even want to file for patents on the differentiating features of their own products, I'm working on that myself and would encourage other app developers to do the same. So I don't believe that patents and app developers are antithetical. But patent trolls and app developers don't mix.

The highest-profile patent dispute in the world, Apple v. Samsung, is watched by most if not almost all of those who participate in the patent reform debate. The things that happen there teach lessons and send out messages that influence policy decisions.

The mere fact that this is a major dispute with numerous patents asserted in multiple countries is not sufficient to make a case for far-reaching reforms. These litigants can handle it. It is not, in and of itself, a terrible thing. But there are certain things that have happened in this dispute that are relevant to some of the key issues in the policy debate.

The first one is patent quality. That's a worldwide issue, but an even bigger problem in the U.S. than elsewhere. While 10 European judges have unanimously found that Apple had not invented slide-to-unlock, Apple is now using a U.S. patent from the same patent family at the ongoing trial as its star patent. It showed to the jury how Steve Jobs unlocked a device with a sliding gesture when he demoed the original iPhone. But no one told the jury that slide-to-unlock, even though in a graphically less elaborate form, already existed before. People who don't know about this will look at Apple's presentation and will be in awe of this incredible example of American inventiveness -- when in reality a small Swedish company had made slide-to-unlock available to customers before the iPhone and before Apple filed its patent. Having attended several hearings, trials and announcements of negative decisions on this patent over here, what is happening in California looks to me like reports from a parallel universe. By the way, Apple has so far not been able to defend a single patent claim of several patents that came to judgment in Germany (where Samsung also lost at least one patent) and at the European Patent Office.

Patent quality is not only a question of validity. Another important question to ask is whether the true and valid scope of asserted patents justifies the whole costly and protracted process of patent litigation or merely requires someone to make minor modifications to a product in order to be legally above board. For example, a U.S. import ban is in force and effect against any Samsung products that would infringe on the "Steve Jobs patent", but no one has even noticed this because the ITC had simultaneously with the import ban cleared Samsung's workaround. In some cases, workarounds are a good thing for innovation, such as slide-to-unlock. It's a complex issue. But the fact that Apple has, in more than four years of Android patent lawsuits, not proved yet that it owns any complete feature other than rubber-banding shows that a lot of patent litigation is much ado about nothing if a deep-pocketed, sophisticated defendant like Google or Samsung is being sued (in those cases, the patent system has shown a self-healing capability that I admittedly underestimated before). Still it can do serious harm to little guys, such as app developers, who can't afford to spend millions of dollars on protracted lawsuits and the legal advice they need to come up with viable workarounds.

It took Apple hundreds of millions of dollars in litigation costs (and Google and Samsung presumably spent hundreds of millions as well) to find out, after all these years, that apart from some design patent issues Samsung had years ago, the only feature that Apple can so far prevent Android device makers from offering is rubber-banding. That's ridiculous.

"Might makes right" is not fair. There must be cost-efficient ways to challenge bad patents. But based on what happened in Apple's first California lawsuit against Samsung, Apple may not be exceedingly interested in ways to get patents invalidated before an infringement case goes to trial. The most valuable one of Apple's three software patents-in-suit in the first case (most of the damages there relate to design patents, not software patents), the '915 pinch-to-zoom API patent, has meanwhile been rejected by the United States Patent and Trademark Office and Apple had to file an appeal to the Patent Trial and Appeal Board. The process isn't over yet, but if the Federal Circuit also found the patent invalid, then there would have to be a third trial because the previous two damages verdicts ($929 million in total) were based on the assumption that this patent was valid, but damages were not determined on a patent-by-patent basis.

I hope Apple won't promote policies that enable holders of patents of questionable validity to gain undue leverage. In Europe it's on the good side with the UPC Industry Coalition. The question is what it will do in the U.S. now.

Then there's also the subject of "patent trolls" -- the key term in the whole patent reform debate. Apple, Google, Microsoft and Samsung (and many others) are all members of the UPC Industry Coalition promoting balanced patent enforcement rules in Europe, and that industry coalition also stresses the growing problem of patent trolls. For the most part, though, the term "patent trolls" is used by the pro-reform movement, not the "go slow" guys. But whoever uses it, nobody can really define it. Non-practicing entity (NPE)? Not all of them are trolls. Patent assertion entity (PAE)? How is that different from an NPE?

Apple stipulated in the build-up to the ongoing trial that it does not practice three of the five asserted patent claims (click on the image to enlarge):

The parties disagree on whether Apple practices the other two claims-in-suit. But for a majority of the claims-in-suit, Apple conceded before the trial that it doesn't practice them. It just argues so far that it practices other claims of the same patents than the asserted ones. On a claim-by-claim basis, Apple has NPE status for at least three claims, as opposed to fighting against "copying". This shows how difficult is to define what a "patent troll" is. Apple isn't a troll, but it's trying to gain maximum leverage from its patents, and some people don't like that.

Very closely related to the subject of "patent trolls" is that of patent transfers. Patents are an asset class and there's no point in considering all patent transfers inherently negative. But sometimes patent transfers do raise issues, such as in the context of privateering.

In Apple v. Samsung II, the pot is calling the kettle black in terms of assertions of patents acquired from third parties. Apple told the jury (and will continue to stress) that Samsung had acquired its two patents-in-suit (from U.S. inventors, by the way) and wants the jury to somehow consider the related infringement allegations less legitimate than Apple asserting patent claims most of which it conceded it doesn't even practice. But Apple itself sued all three leading Android device makers at the time -- HTC, Google's Motorola, and Samsung -- in Germany (where injunctive relief is a given except in connection with standard-essential patents) over a multilingual character set patent it had acquired from Mitsubishi. The Mannheim Regional Court strongly doubted the validity of that patent, and rightly so: the Federal Patent Court of Germany invalidated it. That patent could have caused serious harm to Android in Germany (where Android is now far more popular than iOS) if Apple had been able to enforce an injunction even for a limited period of time.

Patent hoarders like Intellectual Ventures and Acacia must love it when they see companies like Apple and Samsung suing each other over acquired patents.

If you'd like to be updated on the smartphone patent disputes and other intellectual property matters I cover, please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents and Google+.

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Tuesday, September 3, 2013

Microsoft-Nokia deal results in cost-effective combination of patent cross-license agreements

Here's a follow-up to my first reaction to the announcement of Microsoft's M&A and patent license deal. In that post I published two slides from a "strategic rationale" document provided by Microsoft to the press and thankfully published by AllThingsD's John Paczkowski. That slide is worth a closer look. Let me show it to you again (click on the image to enlarge) before commenting on what it says:

On the slide preceding this one, Microsoft recalls that "[i]ntellectual property is an important element of the smart devices business", stating two reasons:

  • Unless managed proactively, patent issues can create uncertainty for smartphone shipments

  • Unless managed creatively, patent royalties can add over 10 percent to the costs of a smartphone Bill of Materials

I don't doubt that Microsoft's intellectual property and licensing group is managing these deals proactively and creatively -- we'll get to that in a moment. But it's not just about proactive and creative management. It's also the strength of the IP that a company brings to the table. If you have strong patents and manage them well, you will do well. If you don't have a strong portfolio and then make management mistakes, which Google clearly made in connection with the Motorola deal that was a huge waste of money with respect to the patents involved and only got it into antitrust trouble, then your problem gets worse.

In an interview with National Public Radio's Marketplace Morning Report, I just said that Google owned hardly any patents when it acquired Motorola and had to shore up its portfolio, while Microsoft already has a strong portfolio and is primarily interested in long-term access. (Of course, as I always do, I disclosed proactively to the Marketplace interviewer the fact that Microsoft is one of my clients -- but I'm not involved with this transaction and I speak only for myself, not for any client.)

The philosophies of Microsoft and Google with respect to intellectual property -- and, as part of that, litigation avoidance -- couldn't be further apart. The whole idea of the Google-Motorola deal was to buy patents in order to sue others over them, hoping that this would bring about a stalemate -- a strategy that has been an utter failure. Compare this to Microsoft's focus on licensing patents in order to avoid litigation from being brought in the first place.

It's easy to see that Google's Motorola strategy has failed. There are only two ways in which you can get leverage out of a patent portfolio. The most important one by far and away is to obtain injunctions. Motorola has won zero enforceable injunctions against Microsoft and it just lost the only injunction it has been enforcing recently against Apple, which a German appeals court confirmed to me (will discuss this one in my next post). The alternative approach to get leverage out of patents is to seek monetary compensation, and a U.S. district court awarded Motorola less than one-twentieth of a percent of the royalty rate it initially demanded from Microsoft (a German court has also indicated it won't bless Motorola's royalty demand from Apple).

The slide from Microsoft's rationale document that I published further above gives an example of one of the mistakes that led Google to totally overpay for Motorola's patents: it didn't take into consideration that a broadly-licensed patent portfolio is less valuable than one you can still assert against pretty much everyone in a given industry. Microsoft says that "Nokia is also conveying rights under its agreements with IBM, Motorola Mobility, and Motorola Solutions". This means that a Motorola-Nokia license deal struck a few years ago apparently goes with Nokia's wireless devices business. As a result, Google's Motorola can't sue Microsoft's future smartphone business for the remaining term of that agreement, and Motorola's patent portfolio gets less valuable by the day.

License agreements are typically not published, and litigation is often the only way to find out about any of their terms. I don't know the specific terms that will enable Microsoft to benefit from those Nokia deals with IBM, Motorola Mobility, and Motorola Solutions. But my best guess is that those license agreements were phrased in a way that would make the license travel with the licensed business unit and products. That's not unusual. But there are deals that don't come with the related provisions.

The mentioning of IBM is interesting not because IBM would be likely to sue Microsoft directly (I don't think that would ever happen) but because IBM has repeatedly sold patents to Google.

IBM, Motorola Mobility and Motorola Solutions are only three examples of the "more than 60 patent licenses with third parties", claimed to come with "attractive royalty arrangements", from which Microsoft will benefit. Microsoft will also be assigned Nokia's "existing license with Qualcomm".

Without these additional benefits to Microsoft, it would have had to work out a number of wireless patent license deals as a result of the Nokia deal. Now it appears that the relevant mobile devices will have a comfortable licensing position to start from because Nokia assigns benefits under five dozen deals to Microsoft.

It gets even better. Apparently Microsoft has -- as I infer from the slide published further above -- previously signed patent cross-license agreements with other companies that also apply to new acquisitions by Microsoft. In this regard, Microsoft mentions some very interesting companies including the two global leaders in the smartphone market:

Low-cost or (ideally) free-of-charge access to other players' IP is a key success factor. The final bullet point on that slide of Microsoft's strategy presentation says:

"Put all together, Microsoft will have the most cost-effective patent arrangements for smart devices"

This may prove a far more important competitive advantage than many people think today. It will enable Microsoft, after this deal closes, to deliver smartphone functionality at attractive prices while maintaining a reasonable level of profitability. Companies that own weaker portfolios (because they contributed less to innovation and didn't do the smartest acquisitions and license deals) will find themselves at a disadvantage, unless they have something to offer that enough customers are willing to pay a premium for.

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Thursday, August 8, 2013

Google drip-feeds the open source community with periodic patent pledges that don't really matter

Today Google announced that it pledged 79 more patents to open source under the terms known from its March 2013 pledge relating to ten patents, which I described as a PR stunt. Based on the announcement it appears that these are typical enterprise software patents, which makes sense given that Google acquired them from IBM and CA -- companies that have, as Google notes, themselves made certain open source patent pledges.

Google itself points to a study according to which a modern-day smartphone potentially infringes on 250,000 patents. (I'm not saying that this is the right number, but the number is high for sure.) Smartphones are multifunctional. Still there's a lot of software patents out there that cover technology that is usually not implemented in a mobile device. In light of this, I can't see why it makes a significant difference (let alone a material difference) whether Google "donates" 10 patents (as it did in March) or 89 (the ones from March plus the ones pledged today). Relative to the number of patents that a piece of software potentially infringes, and also relative to tens of thousands of patents held by Google (including the ones for which it acquired Motorola Mobility), contributing to open source software projects is not significantly safer than it was before. (I'm not taking a position here on whether contributing to open source is safe or unsafe; this is just about whether today's pledge is a game-changer, and it definitely isn't.)

It also doesn't make Google a major benefactor of the open source community. About eight years ago, IBM had pledged 500 patents, and Sun approximately 1,600. I criticized those pledges as well, at the time. But 500 is more than 89, and 1,600 is a lot more than 89.

The problem with those patent pledges is usually not what's in them; it's what's not in them. For whatever reason, Google still reserves the right to assert tens of thousands of patents against open source projects.

If Google wants to help others (open source or not) navigate the patent thicket, why doesn't it lead by example and list all of the patents it holds? Why doesn't it officially and actively support of Rep. Peter Deutch's End Anonymous Patents Act? (By "support" I mean deeds, which speak louder than words.)

Why doesn't Google just "donate" one patent (Motorola's pager synchronization patent), which has been repeatedly found invalid (and is without the slightest doubt going to be invalidated by the Federal Patent Court of Germany in November) but which Google is still enforcing trollishly against Apple, to the community of German iCloud users? That would make a difference because these people would get push notifications of new emails back, and since this is just a dead patent walking, there would be no cost involved from a reasonable and cooperative patent holder's perspective.

It's still not clear what Google's motive is. Apparently it plans to make more announcements like the one today. What does it hope to achieve? Devalue intellectual property in general (though Google advocates excessive royalty levels for standard-essential patents)? Divert attention away from yesterday's defeat? I don't know. Not yet, at least. But I do know that today's announcement has no significant value to open source, and no impact whatsoever on Android-related patent litigation.

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Thursday, February 14, 2013

Google files first patent infringement suit in company history to hit back at BT

The next time Google founder and CEO Larry Page is asked about his company's stance on patent litigation he won't be able to repeat what he said at the Google Zeitgeist conference in September 2011: "We've never sued anyone over patents."

When Mr. Page made this claim, the statement had to be interpreted rather narrowly to be considered accurate. A few weeks earlier HTC had sued Apple over nine patents it received from Google for this purpose. The deal structure was so unlike a genuine patent purchase that the ITC later threw out all Google patents HTC was trying to use against Apple in that forum.

A few months after that Zeitgeist talk, in January 2012, Google authorized a Motorola Mobility lawsuit against Apple over six patents in the Southern District of Florida. The merger agreement was publicly available and absolutely unequivocal about the fact that Motorola needed Google's consent prior to bringing new IP assertions while the merger was under antitrust review. Since May 2012 Motorola Mobility is a wholly-owned Google subsidiary, so any patent infringement suits Motorola Mobility may have brought somewhere in the world since the closing of the deal would also have to be viewed as a Google patent lawsuit. Other jurisdictions are not as transparent as the United States, so I wouldn't rule out that some Motorola lawsuits filed against Apple and/or Microsoft since the closing of the deal will surface somewhere.

But as of yesterday, one doesn't even have to evoke HTC or Motorola to find an example of Google suing someone over patents. Yesterday Google filed a patent infringement complaint against BT (British Telecom) in the Central District of California (that's basically L.A.) over four patents. CNET published the complaint. Reuters was first to report, and its story indicates that there's actually been more than just this one Google lawsuit, mentioning a filing by Google's Motorola Mobility as well.

Two of the patents-in-suit, U.S. Patent No. 5,581,703 and U.S. Patent No. 5,701,465, relate to "reserving system resources to assure quality of service". These two patents were acquired from IBM, as was U.S. Patent No. 7,460,558 relating to "connection capacity reassignment in a multi-tier data processing system network". The fourth patent-in-suit, U.S. Patent No. 6,807,166 on a "gateway for internet telephone", originally belonged to Fujitsu.

In a press statement quoted by multiple reports Google justified its departure from its (save Motorola and HTC) defensive policies of the past with the fact that "BT has brought several meritless patent claims against Google and our customers -- and they've also been arming patent trolls". I reported on BT's six-patent lawsuit in December 2011, allegations by Google (filed in October 2012) that a non-practicing entity named Suffolk Technologies was suing it as a front for BT, and last month another NPE, named Steelhead Licensing, asserted a (former) BT patent against many industry players, including several Android device makers, one of which is Google's Motorola Mobility.

Considering that Google complained about BT "arming patent trolls" it would have been more appropriate for Google to sue BT, or have third parties sue BT, over homegrown Google patents. But Google is asserting three former IBM patents and one former Fujitsu patent. Google's statement does not explain why it's fine for IBM and Fujitsu to arm Google but unacceptable that BT sells some of its intellectual property to third parties (no matter what the intentions behind such transactions may be).

Credibility is a lesser concern here. The biggest problem Google's first offensive patent lawsuit in its own name faces is a tactical one called asymmetric exposure. Google is suing BT in the US and the UK. In the US there are some parts of BT's global multiprotocol network and it's selling certain services there, but it's not its largest market, while the US is the largest market for Google. Google is also suing BT in the UK, which is obviously BT's number one market, but the UK is a jurisdiction in which patent holders rarely win, and if they win at all, it's not a country where you have juries that render billion-dollar damages verdicts.

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Monday, June 11, 2012

IBM, Activision Blizzard latest heavyweights to oppose Xbox import ban requested by Google

Interesting statements on public interest considerations keep showing up on the ITC document system. The two latest submissions were made by IBM and Activision Blizzard, both of which oppose the Xbox 360 import ban Google (Motorola) is pursuing.

IBM, which holds more U.S. patents than any other company and sold more than 2,000 of them to Google last year, explains that the Xbox gaming consoles and accessories "contain components developed by, and a limited porttion of which are manufactured by, IBM in the United States", so IBM would "suffer commercial harm" in the event of an import ban.

IBM accurately notes that "Motorola's domestic industry relating to gaming devices is based largely on licensing, and Motorola does not manufacture a product that competes with the Xbox 360". IBM does not go into detail on the fundamental question of injunctive relief over standard-essential patents (an issue on which it's closer to Cisco than to Google, though IBM's past position statements didn't rule out injunctions under all circumstances), but it recalls that "[i]n this investigation, the presiding [judge] found that Motorola's conduct with respect to its offers to license its patents to Microsoft were misleading and demonstrate 'that Motorola was not interested in good faith negotiations. . . .'" IBM says an import ban "would frustrate the public interest by allowing Motorola to benefit from its refusal to negotiate with Microsoft in good faith".

What's particularly noteworthy about IBM's intervention is that it's a strong supporter of open-source technologies such as Linux, the operating system Android is derived from. But IBM doesn't appear to believe that the end of protecting Android justifies abusive means.

Activision's submission states that the company, "one of the United States' largest video game publishers", "has expended and continues to expend significant resources to develop video games and accessories specially adapted to operate on Microsoft's Xbox gaming console". Activision's letter is relatively short (just one page) since it simply endorses the Entertainment Software Association's submission and incorporates the ESA's statements by reference.

And I'm now going to incorporate by reference my previous posts on statements on the public interest filed in the investigations of Motorola's ITC complaints against Apple and Microsoft:

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Friday, July 29, 2011

IBM's patent deal with Google

Bloomberg reported that Google "acquired a batch of patents" from IBM without specifying how many and in which field. According to SEO by the Sea, the USPTO was informed on July 12 and 13 of the fact that Google was assigned 1,030 granted patents from IBM in a variety of areas ranging from chips and object oriented programming to relational databases and business processes.

I have looked up the USPTO's patent assignment database, and based on random picks, the information reported by SEO by the Sea is plausible. I am going to take a look at more of the reassigned patents in the days ahead.

Execution date of most or all of the assignments:
May 3, 2011

There are different execution dates of the assignment documents. Based on my random picks, most (if not all) of those assignments were signed on May 3, 2011.

The Nortel patent auction took place two months later. Google still made a $4 billion bid to buy Nortel's patents and is currently rumored to be trying to acquire InterDigital LLC. The efforts Google continues to make after the IBM deal means that Google doesn't believe this one deal is enough to address its patent issues. That said, let there be no doubt that this is very significant progress for Google, which held only about 700 granted patents by a recent count before these assignments (and less than 600 in January).

Google's tactical options depend on encumbrances

If those patents were unencumbered by existing license agreements, Google could use them in a variety of ways.

In the near term, one of the most obvious ways to put them to use would be to pick some that may read on important Oracle products and propose to Oracle a cross-license that would resolve the Android IP dispute on more favorable terms than Google could negotiate without such leverage. Many of the transferred patents cover fields of technology that are key to Oracle, though this doesn't automatically mean that Oracle infringes any valid ones of them.

A countersuit by Google against Oracle would likely result in further escalation, given that Oracle owns more than 20,000 patents and could probably attack Google in Java-unrelated ways. Also, Oracle has a head start (unless the ongoing Java/Dalvik-related lawsuit gets stayed). But if Google wants a cross-license on sweet terms, it might have to countersue.

Google could also sell some of those patents to embattled Android device makers such as HTC. HTC could then, for example, use them in countersuits or counterclaims against Apple, possibly with an obligation to sell the patents back to Google after the dispute.

But all of this is a matter of encumbrances, and it's highly unlikely that those patents are entirely unencumbered. IBM has over the years entered into many license agreements with other companies in the industry. It's hard to find announcements of such deals, but IBM has always been very active in that regard. At least in negotiations in which IBM wasn't able to unilaterally dictate the terms, licensees will usually have ensured that their license agreement can't be rendered useless or circumvented by selling the patents to another entity. Lodsys is an example of a patent holder who bought patents that a previous owner (Intellectual Ventures) licensed to many others, and Lodsys and Apple now disagree over whether Apple's related license extends to its app developers.

I don't know if IBM ever licensed any of these patents to Oracle. If it did, Google would not be able to use the related patents as leverage against Oracle. The same applies to any other company in the industry, be it Apple, Microsoft, Nokia or you name them.

How strong is Google now?

If there are encumbrances that limit Google's ways to use those patents, the strength of this package deal could be much less than it appears at first sight. Assuming for the sake of the argument that Google has many tactical options regarding different companies asserting patents against Android, the question is how much Google can do now to protect Android.

This is difficult to assess from the outside, but my feeling is that this deal can help Google to defend itself against other patent holders if it's sued directly. It can serve to deter some companies from suing Google directly. But it's hard to imagine that this deal puts Google into such an incredibly powerful position that it can give an intellectual property guarantee (including indemnification) to its device makers.

IBM's motivation

With tens of thousands of U.S. patents, IBM can easily sell 1,000 of them without being in an appreciably weaker position. The question is whether this was a lucrative deal for IBM -- an opportunity to cash in on patents that IBM might have earmarked for divestment -- or driven by a a more strategic rationale.

Most patent auctions take place in private. Maybe IBM auctioned these patents off and nobody talked about it because of non-disclosure agreements. But if IBM had shopped those patents around, it's likely that something would have leaked, at least after the transaction.

If IBM didn't sell those patents in an auction, some other questions come up:

  • Why didn't IBM seek to maximize the selling price? A month before the execution date of the deal -- May 3 --, it was already known that Google's stalking horse bid for Nortel's patents amounted to $900 million, and everyone knew those patents were going to be sold for more since an auction isn't truly an auction until it's for real. So the obvious way for IBM to drive up the price would have been to have some of the same players bid. After all, IBM's executives have a fiduciary duty to sell the company's assets at the best possible price. They can't just sell patents below market value unless there's a strategic reasoning. That leads to the next question.

  • If the motivation was more on the strategic than the financial side, why would IBM support Google (potentially against different other companies)? IBM doesn't have any direct economic benefits from Android. While Android is basically a Linux fork, IBM's own business is about Linux, not Android, so any effects would be highly indirect and actually doubtful. Instead, IBM might be interested in Android as a platform for its own mobile client applications. Mobile access to enterprise solutions is increasingly important. IBM appears less concerned about a possible need to compete with Google's cloud services in some fields in the future -- maybe not right now, but this could happen, and Google could use Android as leverage against everyone else's -- including IBM's -- offerings. The deal between IBM and Google may address this potential future conflict in some way.

  • It also seems that this direct deal between IBM and Google bypassed the Open Invention Network, a patent holding firm that claims it wants to protect Linux against patent assertions. Google recently became an associate member of the OIN, and IBM is one of its founders (and probably the most active player involved with it besides Red Hat). While the OIN doesn't cover Android so far (otherwise Oracle couldn't have sued Google), IBM could have tried to bring those 1,000 patents into OIN -- possibly with a significant financial commitment on Google's part to support the transaction and a broader scope of the OIN. The fact that IBM and Google sidelined the OIN in this case is interesting. The OIN may play only a secondary role in IBM's and Google's future plans.

  • IBM actually sided with Oracle late last year with respect to the Java Community Process against Google and the Apache Software Foundation. But if IBM and Oracle don't have a cross-license in place (maybe they never formalized a patent deal because they thought that destruction is mutually assured if they sue each other), then IBM's patent deal with Google could now give Google leverage to weaken Oracle's control over Java.

Again, the above bullet points are all based on the assumption that it wasn't just a cash-in-on-excess-baggage type of deal. I believe it was about more than that, but I don't know for sure.

[Update] I also gave comments on this to the Los Angeles Times and VentureBeat. [/Update]

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Friday, July 15, 2011

Kootol (India-based company with US and European patent applications) sends notices to many companies regarding Twitter/Facebook-style feeds

Patent monetization is turning into a think-global-sue-local business. Today, an Indian company named Kootol distributed a press release announcing that it sent "a notice" to a long list of companies large and small, claiming that they sell products and operate services on which a patent application pending in different jurisdictions around the globe reads. Kootol describes the scope of that patent application as basically covering the kinds of feeds provided by the likes of Twitter, Facebook and LinkedIn:

"The invention allows the user to publish and send messages using one way or two way messaging and by subscribing to posts of other users of a network. By indexing each message of each user the system provides real time search capabilities to users of the network in turn creating a unique form of communication."

Note that no one can be sued for infringing a patent application before it is granted. An application may never be granted, or it may be granted only after some modification of its scope. However, Kootol's patent application will result in a U.S. patent. On March 30, 2011 the U.S. Patent & Trademark Office issued a Notice of Allowance, which I have published on Scribd. It states that "prosecution on the merits is closed", so Kootol will very soon hold a U.S. patent in its hands, with a strong presumption of validity under the law.

With today's notices, Kootol hopes to strike license deals early on, and attempts to pave the way for suing companies for willful infringement after the patent has been issued.

Kootol primarily points to its patent application pending in the United States: U.S. Patent Application No. 20100030734 on a "universal knowledge management and desktop search system". Kootol refers to that patent by its original application number 11/995343 and its original title, "method and system for communication, advertising, searching, sharing and dynamically providing a journal Feed", and claims that it has been assigned an exclusive license to that patent application by its "inventor", Yogesh Rathod. Since the inventor and original applicant is also a "director" of Kootol, this is most likely a patent licensing front set up by him. But this is not just about the U.S. market:

According to the description of that patent on Kootol's corporate website, applications "have also been filed in India, Canada and Europe". Indeed, the World Intellectual Property Organization (WIPO) lists that patent application, and there's a long list of designed member states for which the applicant claimed priority. You can find the pending European patent application here.

By the way, the same "inventor" appears to have filed other patent applications as well, also in connection with social networks. But Kootol currently talks only about that particular application.

Recipients of Kootol's notice: many companies of all sizes, including Lodsys defendant Iconfactory (Twitterriffic) and StatusNet (the operator of Identica)

This is the list of recipients of the notice as published today by Kootol:

"Microsoft, Yahoo, Google, Apple, Bharti Airtel Ltd., Webaroo Technology (India) Pvt. Ltd., Amazon, AOL, Nokia, Bebo Inc., ExactTarget Inc., Ford Motor, Foursquare Inc., IBM, Linkedin, MySpace, NING Inc., Research In Motion Inc., Quora Inc., Salesforce.com Inc., Seesmic Inc., Siemens Enterprise Communications Inc., Sina.com Technology Co. Ltd., StatusNet Inc., PopBox Inc., Twitpic Inc., Peek Inc., The Iconfactory Inc., Ubermedia Inc., Yammer Inc., Facebook and Twitter."

That list is not even complete. Kootol's press release indicates that more companies are going to receive letters from them.

Tactical situation and defense strategies

At first sight, Kootol is not a particularly deep-pocketed entity. By contacting potential future infringers while the patent application is still being examined, Kootol gives all of those organizations an opportunity to contact patent offices that (unlike the US Patent and Trademark Office) could still be persuaded to reject the application, such as the European Patent Office (which contrary to popular misbelief does grant European software patents on a daily basis).

Kootol probably hopes for some quick settlements and will then use any initial income to fund its further enforcement activity, and at some stage possibly some lawsuits.

Maybe Kootol also hopes to get the attention of potential acquirers of its rights. Patent pool companies such as Intellectual Ventures and RPX routinely buy patent applications either to be able to later enforce the patents they might result in or to clear the market. However, Kootol cold have contacted those directly as opposed to issuing a press release.

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Wednesday, November 17, 2010

Torn between a lobby and a FRAND

Ahead of a European Commission and European Patent Office conference on intellectual property rights and standardization taking place in Brussels on Monday (22 November 2010), some of the most vocal advocates of openness have determined that FRAND is not a foe of "free" and that both concepts are legitimate in their own right.

I don't just mean the actual business practices of the companies behind the royalty-free/restriction-free lobby. Meanwhile we can even hear it straight from the horse's mouth:

Oracle provides TCK [the official testing kit for compliance with the Java standard] licenses under fair, reasonable, and non-discriminatory terms consistent with its obligations under the JSPA [the Java standard-setting agreement].

Don Deutsch, [Oracle Corp.] Vice President of Standards and Architecture

The above quote is from a statement with which Oracle -- a driving force behind ECIS and OpenForum Europe and an "open standards" lobbying partner of the FSFE -- just responded to the Apache Software Foundation (ASF), one of the two or three most important open source organizations in the world.

The context: compatibility of FRAND with FOSS; field-of-use restrictions

The statement quoted above speaks for itself, but the context makes it even more relevant: the board of the ASF had complained that Oracle "imposes additional terms and conditions [on Java licensees] that are not compatible with open source or Free software licenses." The ASF contends that "Oracle is violating their contractual obligation as set forth under the rules of the JCP [the Java standard-setting process]". It reiterated this view in a succinct reply to Oracle's FRAND statement: "The ball is in your court. Honor the agreement."

The open letter to which the word "agreement" points is more than three years old. At the time, Java belonged to Sun; Oracle acquired Sun last January. Therefore, the letter was directed to Sun, and it stated the following:

[...] The JCK license Sun is offering imposes IP rights restrictions through limits on the "field of use" available to users of our software.

These restrictions are totally unacceptable to us. As I explain below, these restrictions are contrary to the terms of the Java Specification Participation Agreement (JSPA) - the governing rules of the JCP [Java standard-setting process] - to which Sun is contractually bound to comply as a signatory. The ASF has a proud history of support for open software ecosystems in which commercial software can flourish.

However, Sun's JCK license protects portions of Sun's commercial Java business at the expense of ASF's open software. It prevents our users from using Apache software in certain fields of use.

[...] limitations on field of use for our users is contrary to the basic principles of open source licensing, and therefore these limitations would prevent distribution under any open source license, including our own. [...]

There you have the argument I addressed in this recent post ("FOSS can implemented patented standards"). The FSFE also listed the Apache license among FOSS licenses that it falsely claims to be incompatible with FRAND-based licensing. (You can read the truth about patent licensing under the Apache license here).

Oracle contradicts itself and its lobbying fronts ECIS, OpenForum Europe and FSFE

It appears to be a common pattern that open source foundations don't want to become "frandations", so they claim legal incompatibility even though their problem is a philosophical one. But what's really interesting is that Oracle uses two contradictory definitions of "open standards":

In front of policy-makers, Oracle (interestingly, Don Deutsch himself) gives talks such as this recent one in Brussels about all the good that open standards do. Oracle co-authors, finances and lends its name to statements such as this one that argue against FRAND-based licensing because it would allegedly "exclude a broad segment of the industry -- mostly open source software developers -- from implementing that specification in their products." ECIS, which issued that one, is run by Thomas Vinje, Oracle's outside counsel on EU antitrust matters. Oracle is one of its most influential members. Similarly, Oracle is a member of the OpenForum Europe (where Don Deutsch gave that talk), and it uses the FSFE for its purposes.

But when one of the most important open source organizations tells Oracle that FRAND terms "are not compatible with open source or Free software licenses", the answer is just that all Apache will get is FRAND -- take it or leave it. The Register also interprets it as saying "this is Oracle's stance on the matter and it's not changing."

As Apache's aforementioned succinct reply shows, the organization insists that this attitude constitutes a breach of the Java standard-setting agreement and, most of all, its section 5.C.III. You can find that agreement here, and this is a wording the ASF interprets in its favor:/p>

"[...] the [licensor] agrees not to impose any contractual condition or covenant that would limit or restrict the right of any licensee to create or distribute such Independent Implementations."

Apparently the ASF believes that this means its open source implementation of Java (the Apache Harmony project) must not be restricted. However, as I've already shown, Oracle says that FRAND licensing is "consistent with its obligations under the [standard-setting agreement]."

IBM -- the largest member of ECIS and OFE and financier of the FSF/FSFE -- supports Oracle

So Oracle believes FOSS can be reconciled with FRAND. And guess where IBM -- the other large company supporting the same European lobbying entities (ECIS, OFE and FSFE) -- stands: firmly on Oracle's side.

For a long time Big Blue supported not only the ASF in general but also its Java implementation, Harmony, in particular. Last month, however, it defected and now supports Oracle's OpenJDK, a GPL-based Java implementation.

IBM's open source VP Bob Sutor wrote on his blog that this switch of allegiance "will help unify open source Java efforts" and that "customers will benefit by having first class Java open standards developed collaboratively and constructively".

The Guardian's technology blog, however, calls this move "as much divisive as unifying."

The decisions and positions taken by those companies completely undermine the efforts of their "open standards" lobbyists in Europe such as IBM's Jochen Friedrich, who advocates extreme positions, and Oracle's Trond Undheim, who (as I mentioned in a recent post) referred to a group of EU officials as "rats" transmitting the "RAND disease" (RAND is synonymous with FRAND).

Upcoming Brussels conference on intellectual property rights and standardization

This endorsement of FRAND's compatibility with open source by Oracle and IBM has interesting implications to the debate taking place in Europe over open standards. Like I said at the beginning, the European Commission and the European Patent Office are going to host next week a conference on "Tensions between intellectual property rights and standardisation: reasons and remedies".

Some of the players I mentioned will speak there. Oracle's friend of FRAND, Don Deutsch, is on a panel on "ex-ante commitments to licensing terms". Thomas Vinje, counsel to Oracle as well as ECIS, will talk about the "certainty of availability and continuity of essential IP rights for licensing". An IBM patent attorney, Nicolas Schifano, is also on that panel. Finally, the FSFE's Karsten Gerloff will give a speech on "open source, freely available software and standardization".

I believe Don Deutsch won't be able to avoid discussing the Java situation. That one is important in and of itself, but it also plays a role in the patent infringement suit Oracle filed against Google and which draws more attention right now than any other patent suit in the industry (although there are so many going on, especially concerning mobile devices).

In its answer to Oracle's complaint, Google references the ASF's criticism and Oracle's obligations under the Java standard-setting agreement to allow independent implementations. Oracle claims seven of its Java patents are infringed by Dalvik, the virtual machine for Google's Android mobile operating system. Dalvik is derived from a part of the Apache Harmony code. So Oracle's denial of a different license has ramifications way beyond the ASF's desire.

The field-of-use restriction Apache complains about relates to mobile devices. Oracle allows independent Java implementations, but it draws a line in the sand where smartphones and tablets are concerned, for commercial reasons. This is a perfect example of a restriction that has nothing to do with royalties. Those who oppose FRAND often try to narrow the issue down to license fees while I advocate a more comprehensive approach.

Political debate and mixed-source reality

The conference "is part of an open dialogue process that the Commission is undertaking with key stakeholders [...] The EPO and the Commission hope to organise further events and meetings on issues relevant to IPR and ICT standards, with the objective of improving transparency and predictability in this crucial field."

While several of the speakers have a propensity for politicizing this topic, the conference program also lists panelists who operate on a day-to-day basis in the mixed-source reality of the IT industry. For instance, SAP is a markedly Linux-friendly vendor of proprietary software and should be able to tell us about how to cross the span. I also see major telecommunications equipment companies on the list. Nokia co-founded the MeeGo project, an open source mobile operating system based on Linux. But Nokia instigated patent litigation against Apple and is having an argument over FRAND licensing. This seems to me a perfect example of a company that cares about open source as well as its intellectual property.

In terms of an additional type of stakeholder that would have been great to have on one of the panels, I wish there were some SMEs (rather than just an association claiming to speak on their behalf) with mixed-source expertise and a complete focus on meeting customer needs by combining the best of both worlds. There are many of them out there.

That said, I really look forward to attending the conference next week and will report on it here (in compliance with applicable house rules, of course).

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Friday, September 3, 2010

A gold rush for big iron?

The European Commission's recent decision to launch two parallel antitrust probes of IBM's suspected abuse of the mainframe monopoly raises hopes that this huge market may open up in the not too distant future.

The mainframe business is a gigantic opportunity. For now, no one in that area can compete effectively with IBM, which leverages its mainframe monopoly to sell not only hardware but especially software and services.

The numbers and the strategic implications

IBM owns about 40% of the $24.5 billion market for mainframe software, which is roughly twice the size of the market for Linux-based software. In the total of hardware, software and services, IBM generates approximately 25% of its revenues and more than 40% of its corporate-wide profits in the "big iron" business. That's a profit figure somewhere north of $5 billion (easily), and it's anything but a business in decline.

Companies formerly foreclosed by IBM’s conduct will now want a piece of the action.

Those numbers reflect merely a part of the overall opportunity. Just the largest 10% of mainframe customers have collective annual revenues of $21 trillion, exceeding the GDP of the European Union and the United States.

Mainframes are only a part of their IT budgets. Those top 10% of mainframe customers have an estimated total annual IT budget between $800 billion and $1 trillion based on typical percentages in the relevant industries. If only half of that goes to external vendors and service providers (now or in the "cloudy" future), that's a $400-500 billion opportunity for the industry, or roughly 30% of global IT spending.

IBM does a lot of cross-selling (of Power CPU and Intel-based systems) to many of those customers, benefiting from the privilege position it owes to the mainframe monopoly. If and when the market opens up, IBM will lose its exclusive mainframe gatekeeper status and other vendors will compete more effectively for those accounts.

I've seen the slides of an IBM-internal presentation. "Account control" (in terms of controlling customers) is central to IBM's strategy, and the mainframe monopoly is the key to it. The 40%+ figure of IBM's corporate-wide profits doesn't even include the effects of that. That percentage relates just to sales of mainframe hardware, software and services, irrespective of upselling.

This is all the more important as the IT sector is undergoing a major transformation toward the cloud computing model. There hasn't been a similar need and (especially) opportunity to stake the claims in IT for quite some time.
In this recent posting I described how IBM's new mainframe generation -- the zEnterprise -- is designed from the ground up to "assimilate" (as a journalist put it) Intel-based platforms in the corporate data center. So what I previously called "upselling" (of non-mainframe offerings) is now about to become part of the "data center in a box", or "system of systems", that IBM calls its new mainframe.

Potential strategic investors

It's a given that various IT industry giants will rush to secure a piece of the action, if they think that IBM’s abusive conduct to protect its monopoly will come to an end. They need the regulators to open up the market, but they won't wait until the end of the process. In anticipation of positive things to happen, everyone will try to secure the pole position through strategic investments.

The fact that the regulatory process has only just begun will, of course, be factored in when determining company valuations.

These types of situations and processes aren't unfamiliar to me. I co-founded one of the first online gaming startups in Europe, and we had strategic partnering inquiries from different telecommunications and media companies. One of those talks resulted in the acquisition of our company by Telefónica in early 2000. Subsequently I became involved with MySQL AB as an adviser to the CEO and early-stage shareholder in the company, and later saw the likes of Intel and SAP come in -- and finally, MySQL's acquisition by Sun.

I'd just like to describe from my vantage point after 25 years in the IT industry which players I would imagine to consider investment opportunities in connection with a future competitive mainframe market. The list below is ordered alphabetically. I'd like to clarify that at the time of publication of this posting, I do not own stock (or related derivatives) of any of the companies mentioned.

BMC: This $2 billion company does a large part of its business on the mainframe. When the cards get reshuffled, it won't want to be left behind.

Dell: This computer maker is more diversified than most people know and recently experienced an increase in profitability due to strong sales of enterprise hardware (server, storage and networking products).

Intel: Previously invested in mainframe emulation company Platform Solutions, Inc. (PSI). Can supply high-performance CPUs to power software emulators and could also play a role in hardware emulation.

HP: A natural IBM competitor with a strong foothold in the enterprise market.

Micro Focus: This company is also publicly traded and offers Visual COBOL, a .NET-based implementation of the programming language in which most mainframe legacy software is written. Emulators could run legacy programs on the same servers as Visual COBOL programs, making a gradual migration of workloads a more viable option for customers than it is today.

Microsoft: Invested in PSI (like Intel) and in T3 Technologies. For Microsoft's enterprise software division, improved interoperability with mainframe legacy workloads is essential. I'm not worried for free and open source software: if Linux couldn't compete in such a server-based context, it would never be able to compete with Windows. Customers should have all options. Compared to IBM's monopoly, competitive pressure from Microsoft and its partners would definitely be an improvement. By definition, there can never be two monopolies in the same markets.

Oracle: In its core business (relational database management systems), Oracle misses most of the mainframe opportunity due to IBM's stranglehold on the market. The standard mainframe database is IBM DB2. In a more competitive market, Oracle would be able to sell 11g and its enterprise software to a larger number of IBM's customers. Furthermore, Oracle's hardware division (formerly named Sun Microsystems) could play a key role in connection with emulation (similar to what I wrote above about Intel).

SAP: While not nearly as disadvantaged by IBM's practices as Oracle and others, SAP would also benefit from an open market. Its recent acquisition of Sybase is a cornerstone of its enterprise cloud computing strategy. The integration of mainframe legacy workloads with mobile and other cloud-related technologies will create new opportunities for SAP.

Obvious economic motivations

All of the companies I mentioned, and presumably a number I didn't even think of in this context, know that there is a lot of pent-up demand in the market for more competitively priced solutions for the execution of mainframe legacy workloads.

I wouldn't be surprised to see significant activity in the wake of the launch of antitrust probes. In my experience, such deals are often negotiated in a matter of weeks. Some take longer. But I can't see how the industry would forgo such an opportunity.

It's unhelpful that IBM always tries to use actual or suspected activities of other companies to deflect attention from the serious issues that need to be addressed in the course of the regulatory process. There's no denying the jugular importance of the mainframe to the world economy. IBM maintains its absolute control over this strategic platform with threats, intimidation, FUD and generally anticompetitive behavior, all of which stifles innovation.

Those are the problems. More competition is the solution.

So when the deals happen, let's let IBM cry. Its customers -- who are locked in and get overcharged -- have suffered long enough.

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