Thursday, November 10, 2005

HOLDING COMPANIES: THEY'RE NOT JUST FOR "CLOSED-SOURCE" ANY MORE - This morning, three of the world's biggest electronics companies - IBM, Sony and Philips - have joined forces with the two largest Linux software distributors to create a holding company for sharing Linux patents, royalty-free.

Called "The Open Invention Network" (OIN), the holding company is amassing patents pertaining to open source to create a centralized repository of "safe" patents in an effort to protect vendors and customers from patent royalty disputes resulting from freely shared Linux code. The company will be headed by Jerry Rosenthal, who is the former vice president of IBM's Intellectual Property and Licensing business.

The acquired patents will be available to any company, institution or individual that agrees not to assert its patents against the Linux OS or certain Linux-related applications. One of the more notable patent portfolios that were acquired by OIN are the B-to-B e-commerce patents that were purchased in a bankruptcy auction from Commerce One for $15.5 million by a Novell subsidiary ("JGR Acquisitions").

Allegedly, the holdings also include 500 of IBM's software patents pledged in January to open-source developers, as well as Sun's 1,670 Solaris patents pledged shortly thereafter. Last month, IBM announced additional pledges to the healthcare industry. In August, Open Source Development Labs (OSDL) launched its Patent Commons initiative that seeks to collect software licenses and patents pledged to the open-source community in a central repository. Today, OIN has become the centerpiece of that effort.

For me, these open-source pledges were always an "I-get-it-but-I-don't-get-it" situation. These pledges have been pretty heavy on the PR, and rather light on the actual details of the overall structure of this deal. It is apparent that some strings will remain attached to these patent pledges - there's no way these companies would invest tens of millions of dollars only to give these patents away with a hearty handshake.

The only explanation that makes sense at this point is that companies like IBM are relying on these pledges to entice open-source developers to hire them for R&D service contracts (although they don't actually say this in their press releases). After crunching some numbers, it would appear that the benefit of giving these patents away in return for contracts outweighs tbenefitfit obtained from monitoring and enforcing the patents. In fact, in the case of IBM, they are betting that this approach will be a significant source of revenue in the future. As this article from Brian Bergstein explains:

IBM sees that Engineering and Technical Services unit as an unheralded growth engine. Those R&D-consulting engineers are expected to haul about $1 billion in services contracts in 2005, just three years after the group's formation.

But executives say the group's real value is that it stimulates lucrative hardware sales -- especially in the chip division, which has bet heavily on providing high-end microprocessors for IBM machines and outside clients.

The highest-profile work by the E&TS unit, as it is called, is customizing the chips that will run next-generation video game consoles made by Microsoft Corp., Nintendo Co. and Sony Corp. E&TS also has a $100 million deal to develop military technology with Raytheon Co. and an alliance to do telecom research with Nortel Networks Corp., which has cut its own staff mightily in recent years.

The United Arab Emirates government is paying E&TS $125 million to develop automobile "black boxes" that monitor traffic and automate toll collection. The Pentagon relies on E&TS to ensure a domestic supply of top-tier chips for sensitive military electronics.

E&TS people say this is just the beginning of a push to extend the fruits of IBM's unparalleled research and development efforts -- which get nearly $6 billion a year in funding and make IBM the top U.S. patent holder -- into such fields as gaming, aerospace, defense and medical devices.

A very clever move, and possibly the first one I've seen that would seriously capitalize off of open-source formats (the Patent Prospector blog has some additional insight here). And if the joint-development agreements are written correctly, IBM could put its muscle behind further patenting by development partners (not to mention knock-out a chunk of IBM prior art under 35 U.S.C. 103(c)), who may not otherwise be keen on patenting their R&D.

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