Friday, July 30, 2004

Microsoft patent filings to increase by 50%

As noted in the New York Times [below], Microsoft announced on July 29 that its patent filings will increase by 50% in the next fiscal year. Note also, however, the allusion of Gates to patent impact statistics (as those of CHI research), which are generally statistically meaningless but good to throw out to analysts and shareholders when they look good.

As discussed in a previous post, some have taken this increased patent activity as part of a strategy to attack open source. While it may have an impact in the open source area, it may simply be that Microsoft needs some new products to sell, ones with better growth opportunities than the old ones.

from the New York Times:

Microsoft said on July 29, 2004 that it planned to increase its storehouse of intellectual property by filing 50 percent more patent applications over the next year than in the previous 12 months.

Microsoft, the world's largest software company, increasingly regards the legal protection of its programming ideas as essential to safeguarding its growth opportunities.

Speaking at the company's yearly meeting with financial analysts, Bill Gates, the company's chairman, called patents a "very important part" of what he termed the "cycle of innovation" that has been responsible for Microsoft's past prosperity and continued corporate health.

The planned surge in Microsoft patent activity would come at a time when it faces increasing competition from open source software like the Linux operating system, which is distributed free.

Open source software is a reaction against proprietary software. Advocates of open source computing regard the excessive use of software copyrights and patents by corporations like Microsoft as a restriction on the efficient exchange of ideas among programmers.

Microsoft's stepped-up patent program, analysts say, will be watched closely in the industry to see if the company uses it mainly as a defensive tactic or as an offensive weapon to try to slow the spread of open source products.

The company did not spell out its intentions. But Kevin R. Johnson, group vice president for worldwide sales, said that its software licenses indemnify customers against legal patent and copyright challenges to Microsoft products, whereas the legal protections offered by companies that support Linux are far less substantial. And he said that "intellectual property risk" is now one of the issues that corporate customers routinely raise when assessing software.

The software business, Mr. Gates said, runs on innovation instead of capital. He portrayed the announcement last week that the company would hand $32 billion to its shareholders in a special dividend this year as proof of the success of Microsoft's proprietary formula - instead of a sign that the company had matured and run out of growth opportunities, as some analysts suggested.

"We think there's more profit where that came from," Mr. Gates said. "That's why the investment level is up and that's why the focus on intellectual property is very strong."

Microsoft, Mr. Gates said, intends to file more than 3,000 patents in its 2005 fiscal year, which began this month, up from about 2,000 patent filings in fiscal 2004. It typically takes three years or more before a filed patent is approved. Today, Microsoft trails well behind I.B.M. and several other hardware makers in the size of its patent portfolio.

But patent counts alone, Mr. Gates noted, are an imperfect measure of a company's innovative activity. Equally important, he said, is the impact of the patents filed. Mr. Gates cited research showing Microsoft patents are cited as "prior art," or examples of existing knowledge, in other patent filings somewhat more often than the patents of other technology companies, including Oracle, Sun Microsystems, Apple and I.B.M.

The theme of the daylong conference was that Microsoft views a host of growth opportunities ahead, and that innovation will fuel that growth.

"People don't want to come here to work for some stodgy, old, middle-aged company," Microsoft's chief executive, Steven A. Ballmer, said.

The company is coming off a strong year, as its revenues rose 14 percent, to $36.8 billion, in the year that ended last month. Microsoft benefited more than others from the modest recovery in the technology sector and a rebound in personal computer sales, particularly as corporations finally replaced their aging machines.

Despite its long-term optimism, Microsoft expects the current year to be one of lower growth of 5 percent or so. The company traditionally makes conservative projections, then routinely surpasses those modest figures. Financial analysts expect that Microsoft's revenues may well grow by 10 percent.

The challenge for Microsoft is to find ways to stimulate growth before the arrival of an ambitious new generation of its Windows operating system, code-named Longhorn, which is not expected to ship before 2006.


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