• Illustration: ClearType Close-Up

In what appears to be a first step toward monetizing its intellectual property portfolio, Microsoft has revealed licensing terms for patents related to ClearType text-display technology and to the File Allocation Table (FAT), which maps files to clusters on disks formatted by Microsoft OSs and is commonly used by makers of portable storage media. The move suggests that Microsoft will increasingly turn to its portfolio of more than 4,000 patents as a revenue source. However, if the company is too aggressive about pursuing intellectual property licensing, it might drive potential licensees to consider alternate technologies more seriously.

Role of Patents Changing

Patents have always been an important aspect of Microsoft's business. The company encourages employees to apply for patents by making them a factor in employee evaluations, particularly in the Microsoft Research division and in product development teams, and as a result, the company has more than 4,000 active U.S. patents and another 5,400 pending.

In the past, Microsoft has used these patents as a defensive measure—that is, to prevent competitors from duplicating features and functionality in Microsoft products and to fend off patent-infringement lawsuits (a competitor suing Microsoft for patent infringement is likely to settle if Microsoft can show that it also holds patents that the competitor is violating). Patents are also useful as bargaining chips in business negotiations—IBM is widely believed to have obtained very favorable Windows 95 licensing terms in part because of the significant patent portfolio it held.

Microsoft has licensed some of its patents and other intellectual property, such as source code, to partners on an ad hoc basis, where it served a particular business interest. For instance, Microsoft has licensed information related to Windows Media to embedded device makers in an effort to increase use of that format. But until recently, Microsoft did not have a consistent policy or formal program dictating how its patents and intellectual property could be used by other companies.

This began to change in 2002 with the implementation of the Shared Source Initiative, under which Microsoft licenses pieces of source code to selected partners under restrictive but consistent conditions; the company also formalized the licensing for certain Windows Media technologies in spring 2003. The shift accelerated when Microsoft hired Marshall Phelps, a 28-year IBM veteran who was largely responsible for implementing IBM's successful patent licensing program in the mid-1980s. In Dec. 2003, under Phelps's leadership, Microsoft began to roll out a formal, companywide program for licensing its intellectual property.

Why the Change?

There are several possible reasons behind the move for greater consistency in intellectual property licensing.

Revenue generator. Phelps has said, "We want to convey that Microsoft is open for business when it comes to intellectual property licensing," suggesting that the lack of such licensing was hampering the adoption of Microsoft technologies. But the company is, in fact, insisting on licenses for technologies that have been broadly used for many years without any payment to Microsoft. Thus, the licensing announced so far does not seem intended to promote wider use of Microsoft-patented technologies, but rather to increase the revenue the company receives from them.

This could prove important as corporate IT spending continues to remain below the historic highs of the late 1990s, and as the company's emerging businesses struggle toward profitability. For instance, the FAT patent licensing program could generate up to US$250,000 apiece from dozens of digital camera and portable media player manufacturers, netting several million quick dollars. The program could help Microsoft capitalize more quickly on its research and development expenditure, which often results in patents that cannot quickly or easily be turned into products.

Antitrust. According to Microsoft's settlement with the U.S. Department of Justice (DoJ) and 17 states, if a hardware or software vendor needs "any intellectual property rights owned or licensable by Microsoft" to exercise its rights under the settlement, then Microsoft must make this information available under "reasonable and non-discriminatory" terms. In Aug. 2003, Microsoft implemented a program, the Microsoft Communication Protocol Program (MCPP), for licensing specific technology required by the settlement. Having a formal licensing program in place for all intellectual property could help it deflect antitrust regulators from pursuing similar lines of inquiry in the future.

Patent-infringement lawsuits. Since Aug. 2003, Microsoft has lost a US$521 million patent-infringement case to Eolas over browser plug-in technology used by Internet Explorer and a US$62 million case to SFX over the whiteboard technology used by NetMeeting. By formalizing its policies on intellectual property and patents, Microsoft may be trying to strengthen its patent position so it can avoid similar outcomes in the 20 or more patent-infringement cases it still faces.

Influence markets. The new policy could also help Microsoft influence the direction of crucial markets by casting doubts about competing products and promoting standards supported by Microsoft. For instance, although Microsoft has announced no intention of using its FAT patent to strike against Linux (which supports FAT), the licensing announcement has reawakened rumors that Microsoft holds a number of other patents that are incorporated by Linux, and could attempt to collect on those patents at some future time. Meanwhile, making royalty-free licenses available for two standards related to Web services (WS-Security and BPEL4WS, described below) could remove doubts about the legal provenance of such standards and spur Web services adoption, which in turn would help Microsoft sell a wide variety of products meant to support Web services.

Royalties for FAT, Subpixel Rendering

The first two technologies to be made available on a royalty basis under the new licensing program are FAT and ClearType.

FAT. First developed by Microsoft in 1976, then modified over the years, FAT is a file indexing system used to describe where the parts of a file are stored on a physical storage medium, such as a hard drive or removable storage device. FAT (or an equivalent technology, such as NTFS) is necessary because a computer does not necessarily write clusters of data from a given file to physically adjacent spaces on a storage device. Microsoft owns four patents that are used by FAT.

Because FAT is supported by all Microsoft OSs, and because information about how it works is widely and freely available, it is broadly used by manufacturers of removable storage media (such as flash memory cards) and PC peripherals (particularly digital cameras, most of which come with removable flash memory) to enable their devices to easily exchange data with Windows-based PCs.

Now, Microsoft wants to collect US$0.25 per device, up to a maximum of US$250,000 per manufacturer, from these companies. Specifically, Microsoft wants the following companies to license FAT:

• Companies that preformat removable storage media, such as compact flash memory, in the FAT format and that preload FAT-formatted data onto such media
• Companies that manufacture consumer electronics devices that incorporate FAT-formatted removable solid-state media, including digital still and video cameras, portable media players, multifunction printers, digital picture frames, electronic musical instruments, and televisions.

Many non-Microsoft OSs, including Linux and the Mac, can also read and write to FAT, but Microsoft is focusing on peripheral manufacturers for the time being and has not announced plans to pursue FAT licensing on a wider basis.

Some potential licensees might seek ways to evade the licenses—for example, by turning to alternate indexing and storage technologies, or by parsing the specific terms of Microsoft's FAT patents for exceptions. (One possible interpretation is that the patents only cover devices that use long file names, rather than the eight-dot-three format originally required by DOS.) But because FAT is so widely used today, and because moving away from it would probably cost more than the US$250,000 maximum, most potential licensees will probably pony up when asked. Lexar Media, a manufacturer of flash memory, was the first company to license FAT under the new program.

Subpixel rendering (ClearType). This technology enables individual pixels to be shaded in a way that makes computerized text easier to read, particularly on LCD screens. Microsoft's implementation of subpixel rendering, called ClearType, is already built into Windows, but the company now hopes that manufacturers of non-Windows devices (or companies that create display technology for non-Windows devices) will license the right to implement subpixel rendering. (For an illustration showing how subpixel rendering works, see "ClearType Close-Up".)

The ClearType licenses will cost US$1 per unit for personal digital assistants and mobile phones, US$2 per unit for personal computers, and US$3 per unit for tablet computing devices. Agfa, a firm that specializes in display technologies for embedded systems, was the first company to sign up for this program.

When licensing both technologies, Microsoft says it will consider factors such as cross-licensing and the number of units shipped with the technology, and it may alter the licensing terms accordingly.

Royalty-Free Licenses

The new intellectual property licensing policy also encompasses several royalty-free licenses, most of which had been previously announced. These licenses cover the following technologies:

• The default schemas used by Office 2003 applications to present XML-formatted data
• Sockets Direct Protocol (SDP) on Infiniband, a protocol that makes it possible for certain networking applications to use storage area networks (SANs) without modification
• Web Services Security (WS-Security), a set of enhancements to the Simple Object Access Protocol (SOAP) that helps developers insure message integrity, message confidentiality, and single-message authentication; it was developed by Microsoft, IBM, and VeriSign
• The Business Process Execution Language for Web Services (BPEL4WS), which describes a way to notate business process behavior for Web services; it was developed by Microsoft, BEA, IBM, SAP, and Siebel.

Microsoft also reiterated its commitment to providing royalty-free covenants for its patents to academic institutions, and said that it would not change its policy that allows other software vendors to incorporate Microsoft intellectual property found in its SDKs.

Resources

More details about Microsoft's new intellectual property licensing policy, including the specific patents covered by each program, is available at www.microsoft.com/mscorp/ip/.

To read the full patents, run a patent number search at www.uspto.gov/patft.

Microsoft's Shared Source Initiative Web site can be found at www.microsoft.com/sharedsource.

For more information and links to the Windows Media licensing programs, see "New Clients for Windows Media" on page 19 of the Feb. 2003 Update.

Details about the MCPP are at members.microsoft.com/consent/info/. The final order approving and describing Microsoft's settlement with the DoJ and 17 states can be found at www.microsoft.com/presspass/trial/nov02/11-12FinalJudgment.asp.