Thursday, February 22, 2007

The enemy of my enemy is not my friend…

There has been tremendous enmity between Microsoft and the open source crowd over Microsoft’s aggressive attacks on Linux using a combination of ongoing FUD and threats of patent infringement suits. Sometimes Microsoft has agreed to a truce with open standards groups, or Red Hat’s main rival, but there isn’t a lot of love lost on both sides. Today, a Federal jury ruled Microsoft guilty of patent infringement, which certainly will please some Microsoft-haters. But (if upheld) the outcome has very scary implications for open standards and open source implications.

A federal jury said Thursday that Microsoft owes $1.5 billion in royalties to Alcatel-Lucent over Lucent’s MP3 patents. This would be the largest US patent settlement of all time: Kodak’s 1991 payment of $873 million to Polaroid over instant photography patents would only be about $1.3 billion in 2006 dollars.

Microsoft thought (or so it claims) that it had paid $16 million to license the MP3 patents from Fraunhofer, which created most of the 20 claimed MP3 patents. If that was a fair price, then the jury is saying infringement is worth 100x that. Even given Microsoft’s volumes, that’s a mind-boggling charge for having a small part of a complex software product (i.e. the media player within Windows) infringe these patents. (I won’t claim to be an expert on the essentiality of the Lucent IPR vs. other claimed patents that read on the MPEG Audio Layer 3).

The outcome is fraught with ironies. The verdict is part of a larger pissing match between Microsoft and Lucent over various counter-claims of infringement. Microsoft’s fight with Lucent dates to the latter’s attack on PC makers, which Microsoft indemnified customers as part of its anti-OSS FUD. Those that live by the sword, die by the sword.

However, the net impact of this will be to reward patent rent-seekers more than punish software monopolists. In this case, Lucent (a shadow of the company that once invented the transistor and cell phone) really hasn’t been able to make market leading products for nearly a decade. So their recent business model is to try to make money off their patent portfolio. RCA tried the same plan 40 years ago when they no longer made color TVs that people wanted, and as legendary scholar Al Chandler recounts (see Table 2.1), the result was RCA’s eventual collapse and sale to Thomson at fire-sale prices.

Given the multibillion-dollar incentives, this will escalate the battle over extracting rents from nominally “open” standards such as MP3 and MPEG2. On the one side will be the oligopolists — the pigs with their snouts in the trough — who get their IP added to a standard through various influence tactics. On the other side will be the patent trolls, using submarine patents and other techniques to support questionable claims.

Where’s the role of patents as an economic incentive for innovation? And would tightening patent criteria really make a difference?

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