How open? That's the big patent question

If you were to accept patent production as a good proxy for innovative ability, you would quickly conclude that one of the software giants is a whole lot more creative than the others.

The scores go like this: SAP, the $10 billion-in-revenue, Walldorf, Germany-based king of enterprise resource management, has a grand total of about 40 patents. Oracle, the $14 billion-a-year database powerhouse, holds about 625 patents. Then there's Microsoft. The current total for the $40 billion ruler of the world's desktops is about 4,000 patents, and it's filing for more at a rate of 3,000 a year.

Piling up patents, though, can have as much to do with business strategy as with inventing things. Nowhere is that more true than at software companies, which make products that weren't even patentable in the U.S. until 1981, and which still have widely varying approaches to the task of managing their intellectual property. Those approaches are being shaped by multiple factors, from the part of the market the companies serve to the threat or opportunity they perceive in the burgeoning open-source software movement, which is dramatically affecting the IP rules in this maturing (but far from mature) industry.

Consider: IBM, the fourth great power in software, has more patents than anyone, a reflection of its heritage as a broader-based information technology company as well as its success over the years at building up a famously lucrative licensing operation serving all its businesses. All told, the Armonk, N.Y.-based behemoth has about 40,000 patents. Yet IBM is also the biggest backer of open-source software, which is why it made some 500 relevant patents freely available to all comers in January. What that will mean for Microsoft, the company with the most to lose from open source, isn't yet clear. But figuring it out is partly the job of Marshall Phelps, the IP luminary who built up IBM's licensing operation--and since 2003 has worked for Microsoft.

To say there's a lot going on in software IP is a little like saying that Larry Ellison and Bill Gates are competitive guys. In Brussels this summer, the European Parliament voted down a law--endorsed by the big software companies and protested in the streets by open-source advocates--that would have unified and strengthened the software patent process in the European Union. In Washington, software companies are among those pushing hardest for patent reforms that would, among other things, cut down on the litigation that plagues the industry. And in corporate headquarters around the world, software-firm strategists are figuring out how to plot a course in an IP landscape being shaped by antitrust rulings, customer demands for interoperability and changing ideas about how their companies--which more than any others embody the importance of intangible assets in the modern economy--should manage those assets.

"We wanted to signal the fact that we're moving from a more trade secret-reliant company to a more patent-reliant company."

--David Kaefer, director of business development for IP licensing, Microsoft

"They're all talking about getting down the learning curve," says Stuart J.H. Graham, an assistant professor at Georgia Tech who has written extensively on IP in the software industry.

Moving down that curve in the biggest hurry is Microsoft, which took a major step in adapting its proprietary strategy to a changing world in late 2003, by posting a new licensing policy. "It was our way of saying we're open for business," says David Kaefer, director of business development for Microsoft's intellectual-property licensing group. "We wanted to signal the fact that we're moving from a more trade secret-reliant company to a more patent-reliant company."

Over at IBM, meanwhile, they are busy defining the curve. IBM has had a patent program for five decades, or about 40 years longer than it has had a standalone software unit. Late last year, the formation of a new group within its IP division marked what Jim Stallings, the leader of the group, calls the beginning of a "fourth stage" of using intellectual property strategically. "We build technology that is built on standards," explains Stallings, IBM's vice president for IP and standards. "So we have leveraged out standards to grow our business into new areas. We expand on (standards) and allow them to be the glue that holds our products together." By enhancing and promoting that glue through measures such as the grant of those 500 open-source related patents, the company hopes to shape an IT world where its products and services will thrive.

SAP, meanwhile, is focusing on keeping its basic architecture proprietary but opening some of its source code as a way to get other software companies to integrate with SAP. It's also accepting that customers might want to use open-source software and develop around an open platform. "We are trying to provide a service to our customers, and they want applications to run on open source," says Tim Crean, chief intellectual property officer at SAP. "There's a lot of market incentive to be open and be interoperable, and companies are responding in the openness of their licensing programs."

As for Oracle, which declined to comment on its IP strategy for this article, it is following a more proprietary model after years of viewing software patents as a terrible idea. As late as 1994, Oracle testified before the U.S. Patent Office that it was filing patents only as a

Well-researched and pratical article

Thank you for writing such a well-researched and practical article.

[TanNg]

Not well researched

Not well researched, because there is no mention of Google patent

[John Kuzak]

Thank you

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Source Code Not Needed

Overall, this was an informative and well-done article. However, I would like to point out that the goal behind open-source is not the ability to steal other people's copyrighted code to create competing products. As demonstrated by Firefox, OpenOffice, and countless other high quality projects, Microsoft's source code isn't necessary for creating similarly functioning software. Patents prevent the possiblity of having options in the marketplace because of the government-granted monopoly on a concept. I realize my feelings on the matter are the antithesis of corporate thinking, but I actually like being able to choose which browser, word processor, and operating system I use. Software patents are nothing more than an anti-competitive weapon that stifle innovation and eliminate choice from consumers.

[JuggerNaut]

I Totally Agree!

Couldn't have said it better myself. Great post :-)

You have hit the nail on the head...

Besides, if I bought a Ford, could Toyota then sue ME, because Ford Violated Toyotas patents..?

This very concept needs to be challenged and refuted.