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Microsoft’s Collaboration Imperative
For many people, Microsoft and open innovation may not seem the most obvious of bedfellows. However, says the company’s deputy general counsel for IP, that is exactly what they are.

By Horacio Gutierrez, Microsoft Vice President and Deputy General Counsel for Intellectual Property and Licensing

IAM Magazine, April/May 2008

Editor’s Note -- This article originally appeared in issue 29 of Intellectual Asset Management ( magazine, published by Globe White Page Ltd, London, UK.

Quite a stir was created on 21st February 2008, when Microsoft announced that from now on it will offer free and open access to detailed technical specifications for all the application programming interfaces and protocols used in its high-volume software products. As part of what the company called “a strategic shift in our technology and business practices”, Microsoft also took a number of steps that will make it possible to work more cooperatively with the rest of the industry – especially the open source community.

“Many people reacted with disbelief,” reported Infoworld, a leading industry trade daily. And that’s because, in the words of analyst Peter O’Kelly of the Burton Group, the move represents “a real shift at Microsoft”. That view was seconded by Carmi Levy, a strategy consultant with AR Communications. “These announcements are like McDonald’s releasing the recipe for its secret sauce,” Levi noted.

To those who have been following Microsoft’s evolution, the announcement was the latest – and one of the most significant – milestones in a seven-year-long effort by the company to adjust its business to changing market realities and transform itself into a more open and collaborative industry player.

The inside story of our transformation is an interesting one. At bottom, it is a tale of how intellectual property came to be seen in a new light at our company and of how we have come to understand it today as a bridge to collaboration with other firms.

Hopefully, this story will have some resonance for senior executives and IP managers at other companies. Microsoft, after all, is hardly the only company that has had to acclimatise itself to what we like to call the new “collaboration imperative” of today’s market environment. In any event, the IP road we have travelled over the last seven years has been marked by three major milestones.

It’s Time to Make Peace

In late 2001, as Microsoft’s top leadership was working on a tentative settlement of its difficult four-year antitrust battle with the US Justice Department, then-deputy general counsel Brad Smith put together a PowerPoint presentation for senior executives. It contained only one slide – but it was one with a very powerful message. It read: “It’s Time to Make Peace.”

That message resonated with Chairman Bill Gates and CEO Steve Ballmer. When Smith was later appointed the company’s new general counsel and top legal officer, this vision became a mandate that was immediately put into action.

That mandate, simply put, was to bring an end to the flood of litigation and disputes that had been burdening the company and to build bridges between Microsoft and other industry leaders. And over the next few years, this is precisely what Smith did. Dozens of cases were resolved, including Microsoft’s 2002 antitrust settlement with state attorneys general in the US, its data privacy agreements with the Federal Trade Commission and the European authorities, and antitrust and intellectual property disputes with the likes of AOL Time Warner, Sun Microsystems, RealNetworks, IBM and Novell.

As Steve Ballmer later told Business Week: “The company has made it a priority to do all we can to end these legal issues and [we want] to do so in a way that increases collaboration with other companies.”

Ballmer’s point about increasing collaboration was significant, for Microsoft’s efforts to settle these disputes were not driven exclusively by legal concerns. There were also fundamental business reasons for a transition to a more collaborative industry relations model.

Technology development, for one thing, has become too widely dispersed and heterogeneous, the pace of innovation too rapid, and the competition for markets and customers too multifaceted and demanding for any one firm to go it alone in all areas of the technology field. Indeed, it had become increasingly difficult for even the largest companies to hold all the pieces of even their own product technology in their own hands. This is so even for a company such as Microsoft, which invests over US$7 billion a year in research and development in the software field. We realized that we had to collaborate more if we wanted to succeed in this increasingly decentralised and multipolar technology environment.

And we weren’t the only ones who came to that conclusion. At a time when inventions were building upon each other with such rapidity as to render obsolete a company’s most far-sighted product development strategy, it was becoming obvious that the only way to stay above the rushing waters of creative destruction was through alliances with other firms. By 2006, an Economist survey would find that nearly seven out of 10 senior executives said their top strategy for accelerating innovation was to increase their collaboration with other companies.

As my colleague Masanobu Katoh, corporate vice president for intellectual property at the Japanese giant Fujitsu, recently noted: “We are a US$45 billion company. We are into consumer products, computers, consulting and services, even manufacturing. We do it all. But alas, doing it all is no longer enough. We can no longer succeed unless we collaborate with other companies.”

This was one of the perspectives that guided Brad Smith’s bridge-building efforts. By 2003, the stage had been set sufficiently for the next phase of Microsoft’s transformation to begin.

Building a New IP Framework

In June of that year, Microsoft hired Marshall Phelps to serve as its corporate vice president of intellectual property and licensing. During his 28-year career at IBM, Phelps had gained notoriety in business and IP circles for building IBM’s patent licensing programme into a US$2 billion a year profit machine. So it was perhaps no surprise that some pundits viewed his hiring as a signal that Microsoft intended to erect patent toll booths all across the landscape of the information technology industry and generate a massive IBM-style IP royalty stream.

But the truth was actually quite different from what the pundits predicted. In fact, Microsoft wanted Phelps to oversee the expansion of the firm’s patent portfolio so that it could be used as currency for building relationships with other firms. Big firms, small firms, open source firms – we intended to work with anyone and everyone to produce the technology innovations that will help us remain at the forefront of new markets and business opportunities.

As Marshall would often say: “We don’t need to be driven by a blind strategy to maximise royalties. What we need is greater collaboration with other forces in the industry.”

This decision to focus on relationship building required that we treat intellectual property in a fundamentally new way. We could no longer view IP as primarily the right to prevent others from using our technology or competing in our market. In the age of open innovation, intellectual property’s greatest value would lie in serving as the currency for collaborative relationships with other firms that could help us acquire the technologies and competencies we needed to remain successful.

In fact, open innovation itself – ie, collaborative product and technology development between firms – would literally be impossible without intellectual property protection and rights, which provided the legal infrastructure upon which firms can share their most innovative research and partner together to create new products and services. Without strong and clear IP rights, firms would naturally resist sharing their ideas for fear that competitors would steal their innovations. But with protection of such rights, firms could share their innovations with each other secure in the knowledge that each was fully protected in deploying them to mutual advantage. Just as good fences made good neighbours, strong IP rights made for strong and successful collaborations. And IP’s so-called fence was actually more of a bridge to collaboration than a barrier between firms.

A Patent Portfolio to Share

So our IP team began beefing up Microsoft’s patenting efforts – our portfolio would eventually grow from around 3,500 patents in 2003 to more than 13,000 today. We also formed an IP licensing unit, to trade technology rights with other firms and gain new opportunities for Microsoft. But most of all, we began collaborating with other companies in the industry in a manner and on a scale never before seen at Microsoft.

Take our April 2004 deal with Sun Microsystems. Through the creative use of intellectual property, we transformed Sun’s antitrust and patent infringement suits against us into a broad multi-layered agreement that not only settled those issues, but also launched a technology collaboration between our firms aimed at enhancing the interoperability of our products. This early cooperation, in fact, laid the basis for the launch, on 10th March this year, of a new Interoperability Center, where technical experts from our two firms will test new ways to make the Windows Server and Sun Solaris operating systems work together more effectively.

That initial Sun deal marked one of the early examples of Microsoft mining intellectual property not for its traditional exclusivity value but rather for its inclusivity value. And it proved to be powerful stuff, enabling us to resolve complex and difficult disputes and, in essence, turn enemies into friends. Or at least into much more cooperative rivals.

Other deals would soon follow, including agreements with SAP and with Siemens – and later with Toshiba and Nortel – that employed the structure of a patent cross-licensing arrangement to establish a broad technical and business collaboration between our firms. Some of the hoped-for collaboration envisaged in a few of our early deals failed to materialise. But much collaboration did happen, and we learned some valuable lessons from these experiences about how best to exploit the opportunities created by such inter-company collaboration while avoiding their pitfalls. We were able to apply these lessons to later deals and eventually even to broaden the fields of collaboration to include marketing and other areas of mutual business benefit.

One of the IP team’s most significant breakthroughs during this phase was the launch of a special unit called IP Ventures, which partners with start-ups, venture capitalists and even government agencies to take inventions created by Microsoft Research and put them in the hands of entrepreneurs and small businesses throughout Europe, the United States and Asia.

Especially noteworthy here was the experience Microsoft gained working with government economic development agencies such as Enterprise Ireland and the Finnish National Fund for Research and Development (Sitra) to foster the growth of small businesses. We provided entrepreneurs and small start-ups with valuable intellectual property that otherwise would have sat on the shelf because it didn’t fit into any of our product lines. The government agencies offered managerial, marketing and financial support of various kinds. For Microsoft, the benefits of such work included ground-floor access to potential new business opportunities. The government agencies, meanwhile, gained new resources to help grow their local high-tech industries and strengthen their national economies. As Frank Ryan, CEO of Enterprise Ireland, put it: “IP Ventures furthers our ability to assist local businesses in an international market.”

By early 2006, Microsoft was ready to take its IP-enabled transformation process to a higher level – and tackle the biggest challenge of all.

Building a Bridge to Open Source

I was brought on board that year to succeed Marshall Phelps as vice president of intellectual property and licensing, and to take on the direct management of the IP team’s efforts. I had previously served as Microsoft’s associate general counsel for Europe, the Middle East and Africa, where I had gained experience working on antitrust and intellectual property issues with both private firms and government entities in the European Union.

My focus as leader of the IP organization was really threefold: to guide the continued expansion of the IP unit’s activities and integrate them even more tightly into the company’s overall business strategy; to continue to expand the scale and scope of our collaborations with other firms; and to make a decisive breakthrough in building a bridge of collaboration to the open source world to improve the interoperability of our respective products.

Since then, we not only continued to expand the number of software inventions we patented, but also focused on maintaining the high quality of those patents. This quality focus would ultimately result in our being given top ranking by two different organisations that track patent quality. In November of 2007, the Institute of Electrical and Electronic Engineers (IEEE) ranked Microsoft the leader among all technology companies, up from seventh place the year before. And the Patent Board ranked our patent portfolio number one in both Technology Strength and Science Strength in their January 2008 Scorecard, up from second place the previous year.

The single most-important advance during this time in Microsoft’s transition to a more open and collaborative relationship with the industry, however, was the signing of a landmark agreement with open source leader Novell in November 2006. For the first time anywhere, a working model of cooperation with a major Linux provider had been created that not only enhanced the interoperability of Windows and Linux software through joint technology development, but also indemnified customers using such software from legal concerns over intellectual property licensing requirements.

“They said it couldn’t be done,” our CEO noted on the day of the announcement. “But this is a new model and a true evolution of our relationship [with the industry].”

And, indeed, many people really did think it impossible to bridge the gap between proprietary software companies such as ours and open source firms. But a funny thing happened on the way to the software Tower of Babel: the customer made his voice heard.

He wanted Windows and Linux systems in his back office to work together seamlessly and efficiently, but did not want to be the one doing all the technical work to make this happen. And he wanted his vendors to assure him that by using their software products he was not going to be violating other people’s intellectual property rights.

He wanted solutions, not excuses. So he finally demanded that both sides of the open source vs. proprietary software debate get together and actually serve his needs instead of treating the problem like some sort of ideological or religious conflict.

So we got to work. Microsoft and Novell approached the problem by trying to think creatively about how to create an intellectual property bridge between the two worlds of open source and proprietary software. We knew that this bridge had to be built on respect for the innovations of each company and the open source community.

And that’s what we did. Not that it was easy – I remember a couple of all-night, coffee-fuelled, shower-less negotiating sessions there at the end. But we got it done together. And in the end, the Microsoft-Novell agreement succeeded at long last in breaking through the logjam of mutual suspicion and animosity that had for so long existed on both sides of the software divide.

Since then, we have signed a number of patent collaborations with companies that sell open source solutions A consumer electronics-oriented deal with Korean giant Samsung Electronics was a milestone; and agreements with Linux distributors Xandros,

Linspire and TurboLinux were also significant. The Samsung deal was unique, being the first patent agreement with a consumer electronics leader in which we agreed on a model to provide coverage for certain types of Linux devices all within the context of a broader cross-licensing arrangement. It also led to further cooperation deals, including the joint development of a new line of networked digital photo frames sold under the Samsung brand. The Linux distributor deals, meanwhile, represented new milestones in enhancing the whole ecosystem of Windows and Linux cross-platform products.

Committing to Collaborate

As I look back over the last seven years, I see a single unifying theme running through all of our work on the intellectual property front – namely, learning (sometimes painfully) how to collaborate across company boundaries for the benefit of customers as well as our own firms. Sometimes this has meant putting aside perceived self-interest in order to settle disputes. Sometimes it has meant learning how to work with new types of entities, such as government agencies or even small entrepreneurs in China. And sometimes it has meant figuring out ways to bridge the gap between the business models, technology development approaches and even basic philosophies that have long divided us. But in every case, we developed these new ways to use IP to promote intercompany collaboration because it was manifestly and inescapably necessary for us to do so if our company and our industry were to move forwards in any sensible way.

Internally, the transition to a more collaborative approach has not always been easy for us. As everyone knows, Microsoft has always been an intensely competitive company. But over time, our leadership has come to understand that collaboration with other companies, even with competitors, was good for Microsoft and good for the industry, and indeed a prerequisite for our future success.

According to Fortune magazine, in fact, Microsoft’s collaborative new intellectual property strategy has resulted in nothing less than a sea change in our relations with other companies. There have been more than 475 IP licensing and collaboration deals signed to date, many with competitors such as Apple (including a recent collaboration on the iPhone), IBM, Novell and Nokia. On top of that, there has been the expenditure of over US$1.5 billion, or more than $400 million annually, to acquire technologies from other firms. That’s before mentioning the signing of more than a dozen R&D partnerships with open source firms to boost the interoperability of Windows and open source software, and better serve customers with mixed information technology systems. As mentioned, the launch of a new IP Ventures unit has put cutting-edge Microsoft technologies in the hands of small start-ups in America, Europe and Asia; while the Interop Vendors Alliance was also formed – made up of over 100 companies, it helps to improve the way our technologies work with those of other firms. And, of course, the latest manifestation of the new collaboration imperative is the recent announcement of our new interoperability principles and the publication, as a first installment, of 30,000 pages of technical specifications for our software.

This last action by Microsoft was taken for a number of important reasons, including regulatory developments, but particularly the following two. First, the interoperability principles reflect a strategic change in our approach to this issue that has evolved over time based on market dynamics and customer needs. Second, customer demand for greater interoperability has increased over time as certain of our products have become ever more critical to their operational continuity and data portability, and this has been reflected in feedback we have received from the Interoperability Executive Customer Council (IEC) and the Interoperability Vendor Alliance (IVA).

People are Noticing the Change

In any event, the changes wrought under our new approach to IP have not gone unnoticed by the media and analysts. They have charted our transformation well – although I must say that sometimes the coverage has taken a tone of mild surprise, as if to say, “We like the collaborative and cooperative approach, but what is the motivation behind this?”

In an article entitled, “Redmond’s Open-Door Policy”, for example, Fortune magazine noted Microsoft’s reputation for vigilantly guarding technical secrets but then went on to say: “[I]n a series of surprising and littlenoticed moves, the company has made an about face. Call it glasnost in Redmond.”

The New York Times, for its part, agreed that Microsoft has begun to “foster more amicable relations between the big software company and start-up companies, which have often regarded Microsoft as a threat”.

And Red Herring magazine noted that: “Microsoft has abandoned the fortress mentality around its intellectual property and is opening up channels of collaboration.”

Meanwhile, Chris Swenson, an analyst at NPD Group, declared that: “This is the new Microsoft. It really is changing.” And as for analyst Rob Enderle of the Enderle Group, he simply said that: “Microsoft is in the midst of the biggest change it has undergone since it became a multinational company.”

I could go on, but the point is that to meet the needs of a changing market, Microsoft has used intellectual property as an instrument to reshape its relations with the rest of the industry. In both scale and scope, this transformation of our basic outlook and business practices is without question significant.

All of these steps do benefit many in the industry, but clearly our motivation in the end is to maximise value for our shareholders. We are still in business to make a profit; and we will remain a tough and able competitor. As Laura DiDio, a researcher at the Yankee Group put it: “They’re not Doctors Without Borders.”

True. But Microsoft has forged important new partnerships with companies all over the world and has gained access to valuable new technologies and market opportunities. As a result, we are much better positioned today to profit from what we call the new collaboration imperative of today’s open innovation world.

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