31 Mar
2017

Embracing the power of patents

Based on different continents and very different in size, Microsoft and Fractus are united by a sophisticated understanding of IP value which is delivering tangible results. Others would be well advised to heed their example

IP value creation comes in all shapes and forms, and can be practised by all kinds of companies. Microsoft and Fractus may be different in terms of size, location and product offering; but both know that embracing the power of patents delivers long-term strategic advantages, which in turn create operational flexibility and generate significant financial returns. Their stories are worth listening to.

Ahead of the pack

No other company pushes the envelope on IP value creation quite like Microsoft. On February 8 the software giant was at it again with the announcement of a new level of patent protection for its cloud business: the Azure IP Advantage programme.

The three-pronged offering:

  • expands the company’s existing indemnification policy to include the open source providers which power its Azure services;
  • makes 10,000 of the Windows-maker’s patents available to Azure customers to help them to defend themselves against possible infringement suits; and
  • pledges to Azure customers that if Microsoft sells patents to a non-practising entity, they can never be asserted against them.

All in all, it is quite the package and should add to Azure’s appeal in a rapidly growing market in which Microsoft is trying both to make up ground on Amazon and to distance itself from Google. Certainly, neither competitor offers anything which comes close to this kind of IP protection. While Amazon Web Services is the clear market leader, Microsoft knows that it has an edge with its 60,000-plus patent portfolio and is bringing that IP muscle to bear. What is more, Amazon’s cloud business carries with it a particularly broad and potentially onerous IP non-assert provision.

This creative use of patents to further broader business aims is becoming typical of Microsoft. As the company has shifted its priorities in recent years under CEO Satya Nadella – who has consistently preached a mantra of cloud first, mobile first – so the IP group has shifted gears to leverage its extensive patent portfolio to help develop new and existing client relationships. This has led to the tech giant focusing less on simple licensing royalties and more on getting Microsoft products onto more devices. That was clear in the high-profile deal it announced last year with Chinese smartphone market Xiaomi. While many of the traits of this latest Azure announcement are unique, the common principles reflect a team which is working ever more closely with the rest of the business and which has clearly responded to Nadella’s direction.

Concerns over IP risks in the cloud are never far away. While litigation remains relatively infrequent, it does not take a great leap of imagination to predict that businesses will likely see far more disputes in the future in a market which Gartner predicts will generate more than $1 trillion in IT spending by 2020.

Giving customers coverage under 10,000 of Microsoft’s patents – many of which relate to the cloud, but which also include areas such as multimedia and content creation – should provide significant freedom to operate. It should also create the peace of mind which may persuade many actual and potential customers that using Microsoft cloud products is the safest bet.

Microsoft’s recent value creation drive comes as one of its traditionally strong IP areas – licensing fees – is on the decline, thanks in large part to a slumping smartphone market. However, this fall has clearly focused minds on other ways of deriving value from the thousands of patents that the company owns. This new value creation approach is about longer-term client relationships than those delivered by time-limited, market-sensitive royalty payments. After all, when people buy and use your products, you have the opportunity to build an ongoing, positive, expansive interaction with them which can last way beyond the patent’s life.

Turning small into big

Meanwhile, on the other side of the Atlantic, Fractus is one of those rare stories: a European medium-sized enterprise which gets the importance of intellectual property and has prospered as a result.

A designer, manufacturer and licensor of optimised antennas, Fractus was spun out of the Polytechnic University of Catalonia in 1999 and now has a portfolio of over 200 rights. “From the very start, we were clear that we wanted to put up entry barriers to competitors,” CEO Rubén Bonet explained to IAM. “We understood that speed to market and quality would be a part of this, but we discussed it with our investors and concluded that patents would be essential if we were to capture all the value of a technology that had the potential to transform the antenna industry. We did not want to be a small company servicing a few clients; we wanted to be a big one that could change the world.”

Fractus raised a total of €20 million in venture capital investment, allowing it to expand overseas and develop revenue streams based principally on product sales. By 2007, it was enjoying a good level of success, but had reached a point where a crucial decision had to be made about its future. This was a choice between seeking more investment in order to build more factories and acquire other antenna businesses so as to take over their production facilities, or to focus on licensing so that more money could be poured back into the company and its R&D efforts. Bonet points out that the choice was available only because of Fractus’s early-stage patent focus.

After exploring both options in detail, Fractus went down the licensing and royalties path and began to develop a list of high-profile licensees, including Motorola in 2010. The previous year, it embarked upon a litigation campaign against a group of mobile phone manufacturers, eventually settling with all of them except Samsung, which had to pay a total of $41 million after being found to have wilfully infringed Fractus’s rights. In total, the assertion campaign netted the Catalonian company payments of well over $100 million.

Fractus demonstrated its deep commitment to patents most recently when it became the recipient of the first-ever ex parte injunctions granted by the Barcelona Commercial Court, applying protocols specially established for the Mobile World Congress – the annual gathering of the global mobile communications industry held in the Catalonian capital each year.

The company had been making forays into new territories, which in turn revealed that two businesses – one French, one Chinese – appeared to be infringing its patents. These companies were contacted and provided with reports highlighting the relevant infractions, as well as requests to discuss deals, but nothing happened. When Fractus learned that the pair were to be exhibitors at Mobile World, it made use of the newly developed protocols to request seizures and preliminary injunctions, both of which were granted and enforced on the event’s opening day. During the event itself, Fractus became aware of another Chinese company whose products were potentially infringing and duly obtained another injunction.

What Fractus so clearly understands is that while enforcement is always the last resort for any company when developing a licensing programme, it must still be a viable option. Taking a licence should never reduce anyone’s chances of success. On the other hand, licensors must be prepared to be assertive – not only for their own sakes, but also for those of their licensees, which need reassurance that their interests are being protected. If the licensor does not enforce against infringers, it is handing them an unfair market advantage.

All too often, rights holders are viewed as aggressors and those that they pursue for licensing payments as victims. However, the Fractus story tells a different tale. It is one in which patents have helped a small business in Barcelona to take on the world and deliver a leap forward in a pivotal area of mobile communications, with patents ensuring that it receives its just reward for a strong commitment to invention and R&D. Fractus should offer inspiration to other technology start-ups, as well as assurance to licensees that it really is in their interest to pay up to get access to top-class technology. Efficient infringers do not always have to win – sometimes the good guys come out on top.

Why Microsoft’s Azure IP Advantage programme puts the heat on Amazon

Bart Eppenauer, former chief patent counsel at Microsoft and now managing partner of Shook Hardy & Bacon’s Seattle office, explains why the company’s new Azure IP Advantage programme could be a game changer in the cloud:

Microsoft recently made news in announcing the Azure IP Advantage programme. I consider this a major step forward by the company in creating even more business value from its IP portfolio.

Azure customers should really appreciate these benefits, as it’s the most comprehensive set of offerings I’ve ever seen to address IP risks in the cloud. Under Microsoft’s new programme, Azure customers will receive uncapped indemnification (including coverage for open source technology), access to 10,000 Microsoft patents via a “Patent Pick” in order to deter and defend lawsuits, and a springing licence in the unlikely event that Microsoft transfers one of its patents to an NPE. As competition heats up in the cloud computing realm, the company has clearly differentiated itself in terms of customer protection against an ever-growing IP threat on cloud-related technologies.

One aspect of the programme launch that caught my eye was Microsoft’s statements that it does not require customers to “give up” their IP rights as part of this offering. Even though Microsoft took the high road in focusing on customer value, I view its words as a pretty clear reference to Amazon, which has an incredibly broad IP non-assert provision in its AWS customer agreement, which requires customers to give up their IP for the rights to use AWS. Microsoft obviously saw this as well and is highlighting the difference between the approaches that the two leading cloud platform competitors take. In essence, Microsoft is saying: “We share our IP with our customers to help them, while Amazon takes its customers’ IP away.”

Looking at this more precisely, if you compare Microsoft to Amazon now, what you find is that Amazon is way behind in terms of customer IP protection. Microsoft offers customers uncapped indemnity, with coverage for included open source elements, the “Patent Pick” right, and the springing licence, all as a feature of Azure and part of the Azure IP Advantage programme. Amazon offers none of these benefits, while continuing to insist that customers license their IP back to Amazon and all other AWS customers simply for the privilege of using AWS.

So where is this likely to go? It will be interesting to see if Amazon responds anytime soon. As the market leader, it may take a “wait and see” approach. But, if this turns out to be a significant competitive differentiator for a company that is its nearest competitor and rapidly gaining ground, then the company will need to respond.

My guess is Amazon’s first move will be to perhaps add some level of customer indemnification. It is also part of the LOT Network, so is likely to stick with that and not offer a unilateral springing licence in the near term. Amazon’s biggest challenge will be trying to match Microsoft’s “Patent Pick”. Microsoft is putting up a portfolio of 10,000 patents, which is larger than Amazon’s entire worldwide portfolio (at least according to public records that I could access). And the “Patent Pick” portfolio is a strong one. We’ll also have to see whether Amazon is willing to move away from its unpopular IP non-assert clause. It’s likely that Amazon will have to chase Microsoft’s tail lights for quite some time in this particular race if they try to compete on the customer IP protection front.

This is an edited version of a piece that first ran on the IAM blog on February 27