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Big Blue Discovers New Way To Leverage Patents

What do you call a company that spends vast sums on R&D to obtain new patents; then suddenly makes 500 of its patented inventions available to everyone else, including its competitors ... for free? Do you call it misguided? Altruistic? Insane? Stupid?

No, you call it IBM.

On Jan. 11, the world's biggest patent owner made 500 of its patents available to the public for free. Valued at more than $10 million, these patents cover a broad spectrum of software technology, including dynamic link libraries, interfaces, multiprocessing and databases.

But there is a catch. The patented technology is freely available only to those who want to use it in open-source software (which is software that lets users see, copy and modify the code). Developers can't use it in proprietary software, such as Microsoft Windows.

Many experts are impressed by IBM's latest step in exploiting its intellectual property.

"They are right for business reasons, but I don't think it was an easy decision to make," says Jeffrey Matsuura, an expert in high-tech law and business at the Alliance Law Group, a Virginia-based law firm. "I think other companies should--and will--consider doing the same thing."

Open-Source Movement

Most companies use patents in three ways: to exclusively exploit their inventions in the marketplace, license patents to other companies for big bucks, and protect themselves against infringement claims. IBM definitely isn't turning its back on those strategies. But the company also is exploring a fourth way to leverage patents.

"We are trying to use patents in a way that companies haven't done before," says Manny Schecter, IBM's associate general counsel for IP law. "We are trying to foster more collaborative innovation and create a patent commons in the open-source software space."

The company's action was spurred, in part, by a December 2004 report issued by The Council on Competitiveness, "The National Innovation Initiative." The report's authors argued that traditional methods for exploiting IP are no longer enough to promote innovation.

"No single organization has the scale to build today's complicated [IT] systems," the report stated. The authors of the study believe companies need to move away from proprietary software regimes and embrace open standards to ensure compatibility between IT products.

Some experts say that open-source development helps large and small developers avoid a growing threat to innovation: the proliferation of exclusive patent rights. Eben Moglen, an expert in intellectual property law who teaches at Columbia Law School, describes this as the anti-commons problem: "When there are too many exclusive rights in an area, you have to negotiate with an unmanageable number of people to do research, and the transaction costs become too high," he argues. "This happened in the biotech area during the 1990s. It was hard to do research because one had to buy rights from 20 to 30 different inventors."

This same problem now may be interfering with software development. "Patent lawyers are telling me software patents are more trouble than they are worth," he says. "They create a whole series of problems with companies taking in each others' laundry."

Big companies can leverage their patent portfolios to negotiate necessary cross-licenses. However, small- and medium-sized software businesses usually don't own enough patents to press for similar deals. They must either pay hard-earned cash for patent licenses, spend time and money trying to design around patents, or simply give up on innovating in patent-infested areas.

Because of this, many smaller tech companies look askance on software patents. It also is the reason many companies in Europe have actively opposed a proposal to legalize software patents in the European Union. Open source advocates also have joined the chorus against the proposed EU software patents, claiming that such patents would hinder innovation and thus harm society.

Big Blue Consultant

Protecting innovation is an admirable goal. But what does IBM get out of it? How does the company benefit by promoting new open-source technologies it can't own?

First, IBM obtains a defensive benefit. When developers create open-source technologies, IBM's rivals can't exclusively exploit these technologies.

Second, new open-source technologies can help IBM sell its other services. As customers flock to open-source IT products, they will hire companies such as IBM to install, maintain and customize these products. For instance, Deutsche Bahn, which runs Germany's railway system, hired IBM to advise it on how best to switch from the proprietary Unix operating system, to Linux, an open-source alternative. And Deutsche Bahn is running its new Linux system on new IBM servers--which means more profit for Big Blue.

"What IBM understands is that its success in the 21st Century isn't in making low-end hardware; it isn't in its interest to make propriety products that have interoperability problems; and it isn't in its interest to license Microsoft products," Moglen says. Instead, he says, "IBM is turning itself into the most important information consultancy in the world."

IBM isn't unique. Many other companies can benefit by making some of their patents available to the open-source community.

"One class of companies want open source to flourish because their business model includes use of open-source code, and they sell services and hardware around it. For these companies, [IBM's] type of donation makes a lot of sense," says Kevin Rivette, an IP management consultant with The Boston Consulting Group and author of the popular IP management book, Rembrandts in the Attic.

And there are plenty of such companies. For instance, just days after IBM announced it was donating 500 patents to open source, Sun Microsystems followed suit by making available 1,600 of its patents. This donation was aimed at strengthening Sun's OpenSolaris open-source operating system.

Buzz Kill

Many other companies are firmly opposed to open-source. Microsoft, for example, has been waging a PR campaign to convince businesses that open-source software is not as safe, less powerful and more expensive than products such as Windows.

Yet experts argue even companies that are committed to selling proprietary software eventually will embrace open source.

"Slowly and quietly people will change their business models to adopt open source," Rivette says. "Open source is creeping into so many things. How can you avoid putting open source into your business model?"

Rivette sees only one thing that can stop the eventual success of open-source software: companies that make their living not by selling products, but enforcing their software patents against others. These companies may have key patents essential to open-source software, and no financial incentive to make their patents available to the open-source community.

Acacia Research, for example, produces no IT goods or services, but makes lots of money from its patents on methods for sending compressed audio and video over the Internet. Acacia has sued many companies for allegedly violating these patents, and the patent owner has reached remunerative settlements with more than 227 firms.

Yet even companies such as Acacia may wind up accepting open source. "They will come around because they are business people," Rivette says. "If they figure out how to make money off it, they will use it."

Matsuura also predicts a rosy future for open-source software, expecting more companies to use it and in more contexts. This will benefit software users, who will get high quality, customizable software at lower prices. It also will help IT companies that want to use open source to enhance the sales of their own products and services.

As for companies that stubbornly fight against open source, they could wind up in trouble. "Customers want products that are secure, interoperable, innovative--all features that are associated with open source," Schecter says. "If other companies don't participate in the open-source movement, they might get left behind."

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Steven Seidenberg

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