Microsoft’s New Toll Road

Microsoft watchers have two interesting stories to follow this week. First is the new Intellectual Property (IP) licensing scheme. The second is a feverish round speculation (just a rumor) that Microsoft will buy AMD. Both tie into an older story about plans for the next generation Xbox.

Editorial Notice: All opinions are those of the author and not necessarily those of

The IP story alone is quite interesting. The AMD story, while a long shot, is potentially huge. The older Xbox story has gained significance in light of the other two. Together, these stories suggest Microsoft may be about to launch a new hardware related business strategy.

Microsoft announced their new IP scheme with great fanfare last week. Read a more objective report here. They positioned this new scheme as a fit of generosity. On a side note, this is why MS is so disliked in the industry. They come up with a self-serving gambit, and solemnly tell you its entirely for your benefit. The infuriating thing is that they really believe it. That explains their petulance when these things are criticised.

Anyway, the two specific initiatives they announced were licensing regimes for Clear Type and the FAT file system. The FAT regime requires 25¢ payment to MS per formatted device. To a maximum of $250,000 per company. The main effect of this will be on digital storage devices for things like cameras. $250,000 will not break any manufacturer, and the 25¢ per device can be hidden easily in the price. Microsoft is well within their rights here. They hold patents on FAT and the fees are not excessive. However, hardware manufacturers won’t like to pay for what used to be free. And they’re not going to like paying Microsoft for using something that became the standard because it was free.

In a Register story , Andrew Orlowski reports Microsoft hired Marshall Phelps away from IBM in June. Phelps was the man that monetized IBM’s patent portfolio. The story quotes Eben Moglen of the Free Software Foundation as saying, “from 1935 to 1984, IBM did not ever enforce a patent for license revenue.” IBM’s 2002 annual report states their patent revenue for that year was $1.1 billion. This was down from a peak of $1.6 billion in 2000. Phelps is widely credited with inventing this business.

We all know that Microsoft is desperate for new sources in income. Office and Windows are the only divisions making money. Microsoft has acknowledged that growth is flattening in these sectors as well. They have made big investments in cable TV, game consoles, an ISP, embedded operating systems, and phones. None of these have paid off so far. A new income stream based on Microsoft’s patent portfolio is a no-brainer.

Orlowski observes that Microsoft is well positioned to push Linux and Linux distributors on patent issues. He writes

“Microsoft’s actions so far don’t constitute a full frontal attack on free software. It’s often been rumored that Microsoft has a number of patents – the number varies – on the Linux kernel itself. But it has chosen not to pursue such an inflammatory tactic, just yet, and may not even need to at all in order to succeed.”
He reckons by crippling the likes of RedHat and Novell with legal threat, MS may be able to manage the Linux contagion. Things may not be so simple anymore, however. SCO has radicalized the community and make it clear that while fractious, the open source community is no pushover.

Too much pressure could also bring unwelcome anti-trust attention. John Ashcroft will not run the Department of Justice forever. And the individual states have shown they are not shy about acting on their own. A convicted monopolist using patents to cripple technological development would be a tempting political target. Even a pro-business regime like the Bush administration needs to throw an occasional scrap to the hounds.

An Inquirer story by Arron Rouse notes that with its co-design deal with IBM for the Xbox2 CPU, Microsoft is directly entering the hardware business. He also cites the FAT license and puts the two together in an interesting way. The opportunity, he says, is not just to collect royalties for existing IP, but to get new MS intellectual property into silicon. Then they can collect on every device sold. Not to mention the boost for Trusted Computing and content control. Rouse speculates Microsoft could bootstrap their IP via Longhorn extensions in the Xbox2 CPU. They could also play AMD and Intel off against each other. They may not need to. This CNet article says,

In a sense, “Microsoft is becoming a fabless semiconductor design firm,” said Peter Glaskowsky, editor in chief of The Microprocessor Report. These companies–without their own chip-fabrication factories, or “fabs”–design their processors but outsource manufacturing to foundry companies… Commercially, Microsoft will differ from other fabless companies, such as Transmeta, in that its main customer will be itself. Still, Microsoft could conceivably leverage its investment by using the chips in many products.”
Not only will Microsoft co-design the CPU, they are partnering with ATI to design a custom graphics chips, and with SIS to design the chip set. This is a big difference from their experience with the first Xbox. For that, MS bought off the shelf OEM components. As another story today on CNet reports, the stakes in the set top box war are going up. Both Sony and Microsoft are determined to win at all costs. Microsoft has never been shy about using control of one technology to advance another.

Which brings us to AMD. Microsoft moving into the CPU business doesn’t seem as big a stretch anymore, does it? I have no idea where this story originated. It may be a leak, it may be wishful thinking, it may be a trial balloon, or it may be rank speculation. Another Inquirer article by Phil Trent discusses the advantages of such a move. I think this article as mostly correct but Trent under estimates the potential antitrust trouble. There might also be significant resistance in the Far-East. Not enough to spoil the deal, but enough to make it difficult. It is no secret that Computer OEMs and consumer electronic companies love Linux. They have learned from 25 years of Sony taxes and the hated VHS royalty to support open standards whenever possible. And they don’t trust Microsoft, but then they don’t trust anybody. Apparently with good reason. The disastrous Xbox experience in Japan and Korea may also indicate intrinsic market resistance. Or, may simply indicate the Xbox’s older demographic focus doesn’t work in those markets. But it can’t be ignored.

AMD is a very good buy at the moment. The financial markets have yet to digest the magnitude of their 64 bit victory. Microsoft also has piles of cash and very little that they can buy. Since the Intuit purchase of 1995 fell through because of antitrust concerns, Microsoft has been constrained in its purchases.

I tend to think AMD would be more trouble than they’re worth to Microsoft. I also don’t see a master plan in play. Except for initiatives like Longhorn and the Xbox, Microsoft tends to try lots of things and then reinforce success. All of these potential initiatives carry significant risks. Microsoft has historically been poor of dealing with strategic problems, but has effectively offset that failing with brilliant tactics. And Ballmer must be looking for an opportunity to put his own mark on the company. Not to boost his ego, he seems to have that under control, but to cement his regime.

Linux is clearly gaining momentum in the marketplace. In particular Sun’s Java Desktop appears poised for some big wins. It must be clear in Redmond that margins in the operating system business are in decline. The delay of Longhorn puts their traditional means of boosting income out of immediate reach. The need for new sources of revenue is about to become acute. If they intend to move decisively into the silicon business we can expect that to happen quickly. However, the monetization of patents is going to move ahead smartly. I’d be very surprised if we don’t see almost weekly announcements on this front. This is likely to become a significant revenue source for Microsoft, and a major cost of doing business for the rest of industry.


  1. 2003-12-12 7:02 am
  2. 2003-12-12 7:03 am
  3. 2003-12-12 7:27 am
  4. 2003-12-12 8:05 am
  5. 2003-12-12 8:06 am
  6. 2003-12-12 8:08 am
  7. 2003-12-12 8:12 am
  8. 2003-12-12 8:16 am
  9. 2003-12-12 8:39 am
  10. 2003-12-12 8:52 am
  11. 2003-12-12 8:53 am
  12. 2003-12-12 9:11 am
  13. 2003-12-12 9:17 am
  14. 2003-12-12 9:20 am
  15. 2003-12-12 9:38 am
  16. 2003-12-12 9:57 am
  17. 2003-12-12 10:15 am
  18. 2003-12-12 10:20 am
  19. 2003-12-12 10:44 am
  20. 2003-12-12 11:30 am
  21. 2003-12-12 11:44 am
  22. 2003-12-12 12:18 pm
  23. 2003-12-12 12:31 pm
  24. 2003-12-12 1:10 pm
  25. 2003-12-12 1:14 pm
  26. 2003-12-12 1:31 pm
  27. 2003-12-12 1:33 pm
  28. 2003-12-12 1:34 pm
  29. 2003-12-12 2:02 pm
  30. 2003-12-12 2:27 pm
  31. 2003-12-12 2:33 pm
  32. 2003-12-12 2:42 pm
  33. 2003-12-12 2:55 pm
  34. 2003-12-12 2:55 pm
  35. 2003-12-12 3:07 pm
  36. 2003-12-12 3:29 pm
  37. 2003-12-12 4:16 pm
  38. 2003-12-12 4:18 pm
  39. 2003-12-12 4:21 pm
  40. 2003-12-12 4:36 pm
  41. 2003-12-12 4:42 pm
  42. 2003-12-12 4:46 pm
  43. 2003-12-12 4:55 pm
  44. 2003-12-12 5:02 pm
  45. 2003-12-12 5:14 pm
  46. 2003-12-12 5:20 pm
  47. 2003-12-12 5:48 pm
  48. 2003-12-12 5:54 pm
  49. 2003-12-12 6:08 pm
  50. 2003-12-12 6:21 pm
  51. 2003-12-12 6:37 pm
  52. 2003-12-12 6:46 pm
  53. 2003-12-12 7:01 pm
  54. 2003-12-12 7:32 pm
  55. 2003-12-12 8:00 pm
  56. 2003-12-12 8:12 pm
  57. 2003-12-12 8:34 pm
  58. 2003-12-12 9:16 pm
  59. 2003-12-12 9:28 pm
  60. 2003-12-12 9:47 pm
  61. 2003-12-12 9:57 pm
  62. 2003-12-12 10:01 pm
  63. 2003-12-12 10:04 pm
  64. 2003-12-12 10:05 pm
  65. 2003-12-13 1:56 am
  66. 2003-12-13 3:01 am
  67. 2003-12-13 3:05 pm
  68. 2003-12-13 6:31 pm
  69. 2003-12-13 10:22 pm