Richard Lloyd

No other company pushes the envelope on IP value creation quite like Microsoft. Yesterday the software giant was at it again with the announcement of a new level of patent protection for its cloud business through the launch of the Microsoft Azure IP Advantage programme.

The three-pronged offering expands the company’s existing indemnification policy to include open source technology providers that power Microsoft Azure services; makes 10,000 of the Windows-maker’s patents available to Azure customers to help defend themselves from possible infringement suits; and pledges to Azure customers that if Microsoft sells patents to an NPE they can never be asserted against them. As the company made clear, it’s not in the business of transferring patents to NPEs, but it claims it has responded to customer demand in including this final provision.   

All in all it’s quite a package and should add to Azure’s appeal in a market which is growing rapidly, and in which Microsoft is both trying to make up ground on Amazon and distance itself from Google. On a call yesterday with IAM, the company’s IP head Erich Andersen observed that neither of those competitors offers a package that comes close to this kind of IP protection. Amazon Web Services is by far the market leader, but Microsoft knows that it has an edge with its 60,000-plus patent portfolio and is bringing that IP muscle to bear. Plus as this blog has pointed out, Amazon’s cloud business carries with it a particularly broad IP non-assert provision. “We think this is a competitive approach and very differentiated from our competitors,” Andersen said on the call.

It’s also an approach that is becoming typical of Microsoft. As the company has shifted its priorities in recent years under CEO Satya Nadella — someone who has consistently preached a mantra of cloud first, mobile first — so the IP group has shifted gears to leverage the company’s extensive patent portfolio to help develop new and existing client relationships. That, for instance, has meant that the tech giant’s approach to licensing has focused less on simple royalties and more on things like getting Microsoft products onto more devices. That was clear in the high-profile deal it announced last year with Chinese smartphone market Xiaomi. Many of the traits of this latest Azure announcement are unique, but the common principles reflect a team that is clearly working ever more closely with the rest of the business and that has clearly responded to Nadella’s direction.

“What we see with out customers is a huge focus on moving to the cloud,” Andersen reflected on yesterday’s launch. “Microsoft is one of the largest companies in the industry and as we’ve been working with our customers we’ve talked to them about the issues they face and tried to come up with solutions.”

As with any rapidly developing area of tech, concerns over IP risks in the cloud are never far away. While litigation remains relatively infrequent, it doesn’t take a great leap of imagination to predict that businesses are likely to see far more disputes in the future in a market that Gartner predicts is going to generate more than $1 trillion in IT spending by 2020. Andersen wouldn’t be drawn on whether the litigation threat was going to be greatest from NPEs or operating companies, but he did stress that the threat of lawsuits was “something that people can manage smartly” and that they can “thoughtfully approach IP risks in the same way as they approach, say, security risks”.

Of course, a well-funded NPE armed with quality patents can still pose a very real threat, particularly as an operating business on the end of a lawsuit can’t counter-sue with its own IP. That might be true, Andersen admitted, but he stressed that the company’s indemnification policy means that it already steps in to handle assertions against a broad range of customers - a situaiton that will only be extended by what was announced yesterday. What's more, giving those customers coverage under 10,000 of Microsoft’s patents - many of which relate to the cloud, but also include areas like multimedia and content creation - should provide significant freedom to operate (you can see an analysis by TechInsights of the patents here). Patents creating the kind of peace of mind, in other words, which may persuade many actual and potential customers that using Microsoft cloud products is the safest bet.

Microsoft’s recent value creation drive comes at a time when one of its traditionally strong IP areas — licensing fees — are on the decline; thanks, in large part, to a slumping smartphone market. Looked at another way, though, that fall has clearly focused minds in Redmond on other ways of deriving value from the thousands of patents that the company owns. Direct licensing income may be falling for now, but this new value creation approach is about much longer term client relationships than the kinds that time-limited, market-sensitive royalty payments deliver. After all, when people buy and use your products, you have the opportunity to build an ongoing, positive, expansive interaction with them that can last way beyond the life of a patent.

With licensing revenues hovering somewhere between $2 billion and $3 billion at their peak, Microsoft is not about to walk away from what is still a hugely successful part of its business. But with initiatives like the Azure programme, the company is proving once again that when it comes to IP value creation it is far more than a one-trick pony.