A patent trove for the masses

IBM’s savvy move to share 500 patents may spark innovation in computer software and in how companies handle IP.

In his book Who Says Elephants Can't Dance? former IBM chief executive Louis V. Gerstner Jr. silenced many critics by chronicling IBM’s successful turnaround from a lumbering beast into an agile pachyderm that could quickly give customers what they wanted and pull ahead of the competition.

This January, the information technology giant once again led off with a new dance step that others were quick to follow. In a post-holiday feast of riches, IBM opened 500 of its patents to individuals or groups who collaborate on open-source software like the Linux operating system.

IBM said the move marked a major shift in the way it manages its intellectual property (IP) portfolio. And it hinted there could be more “patent commons” forthcoming, that is, patents used to establish a base for innovations in IT areas of broad market interest.

“This patent pledge was really a radical change for both IBM and the industry,” said Robert Sutor, vice president of standards and open source at IBM in North Castle, New York. “It’s a very aggressive statement. We developed all this IP ourselves. But it’s a gamble because we don't know if people are going to develop things around this.”

The number and breadth of the 500 IBM patents staggers the mind: 19 pages on its Web site list interfacing, storage management, multi-processing, human interfacing and other innovations previously held private. But IBM's overall IP portfolio is even more impressive: the company takes in about $1.2 billion annually from licensing its inventions, including 40,000 patents earned worldwide. It has led the world in patents filed for the last 12 years, including the 3,248 patents granted in 2004.

So how much of a risk was the give-away to IBM? Monetarily, not much. The 500 patents bring in about $10 million in licensing revenue per year, said Sutor. And it costs IBM about $1 million a year to maintain the patents, which it still owns.

But Sutor is optimistic about a handsome return on the $11 million per year it is costing IBM to open the patents. “The bet we’re making is that we think people will be able to innovate on top of the work we previously did,” said Sutor. “When they do everyone will benefit from that innovation, including us. The ultimate benefit will far exceed what we are paying.”

Sharing the spoils

IBM's move to “do well by doing good” isn't new. Linux got a major boost in 2000 when IBM said it would invest about $1 billion in 2001 to move Linux onto its computer servers, which are used widely in corporations. IBM also made its own software usable on Linux and beefed up its service staff. The investment reportedly was recouped within a year.

The patent release is seen as a similarly smart move for IBM to break open a market, and take a big piece of the spoils. “Patents are strategic assets IBM cultivates assiduously,” said Bruce Sunstein, chairman of the patent practice group and co-founder of Bromberg & Sunstein LLP, an IP law firm in Boston. “It isn’t in the habit of giving away technology if it doesn’t get something back.”

The company stands to profit when other software developers take its IP and create commercial solutions that can run on IBM hardware and with its home-grown proprietary software, said Charles King, principal analyst at Pund-IT Inc., an industry analysis firm based in Hayward, California. The quality and the breadth of patents appear strong, he said, and cover many niche markets with growth opportunities, such as storage management and voice recognition.

“This isn’t a flash in the pan thing. It’s another example of a greater collaborative strategy the company has been following for almost half a decade,” said King. “IBM dropped a pebble in the water and the ripples are hitting many shores.” Programmers in industrialised countries stand to gain, but the gains might be even greater emerging economies such as Thailand, where there is a big push to tap open software, King said.

IBM is keenly aware of that secondary benefit. “We think with this that we have established IBM as being a leader around the use of IP for open source,” Sutor said. It likely will be years before any measurable benefits to IBM can be made in terms of new products for itself or broader markets for its own hardware and software. In the shorter term, however, Sutor said he is looking for innovation in the open-source community on top of what is covered in the patents. And he is looking to see if other companies offer up their IP in a similar way to stimulate collaborative programming in the industry.

Collaboration is already showing promise. Weeks after IBM made its patent release, Sun Microsystems made 1,600 patents on its OpenSolaris operating system available to open-source developers. Nokia followed in May with access to its Linux Kernel software, and Computer Associates in September pledged open access to 14 of its patents for people working on open-source software.

A subtle balancing act

The challenge for IBM and other software companies is to figure out what IP to keep private and what to share. The Internet and World Wide Web have changed the traditional notion of developing IP and milking it for all it is worth. With more programmers collaborating around the world, the software market is becoming more and more open. And for some, that begs the question about whether patents stymie innovation, something that has been the source of heated debate in the European Union and elsewhere. Sutor said there’s no hard and fast answer. “Patents have legal standing, and they have a lot of economic importance,” he said. “IBM does not think that software patents and open source are incompatible. There are lots of ways to mix and match them.” The January patent give-away is one example.

But that leaves start-up software firms in a quandary: do they need IP or should they emphasize open source to potential investors? Sutor recommends they decide if they are going to make money by licensing their products, or whether the products will be used to generate service or partnering businesses with other companies. “You can’t take a 1995 view of how you’re going to start a software company today, because I think it misses the mark tremendously,” he said. “There are many venture capitalists today who six years ago may have thought that patents were the only way to do things. They may still encourage this, but there are many venture capitalists that say, ‘Tell me how you're going to be involved with open source.’”

IBM’s early support of Linux and the patent release validated the open software market. So even open software companies that build atop of an open source product, that have a subscription-based product model or that have expertise in how applications fit together can get funding without a strong IP portfolio. “Companies are thinking of the value of software in a new way. The open-source movement is changing the view,” said Nate Redmond, a senior associate who leads open source investment at Rustic Canyon Partners, a venture capital firm in Santa Monica, California.

Rustic Canyon co-led the $5 million Series A round for GlueCode Software, a Californian maker of open-source application infrastructure software. IBM acquired GlueCode last May. “This was IBM acquiring an open source company, so that lends a bit of credence to having an open-source company in the right market,” said IBM’s Sutor.