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International Business Machines Corp
Paul Maritz has witnessed a number of patent skirmishes. The chief executive officer of VMware (VMW) spent 14 years at Microsoft (MSFT), much of it during the 1990s when the company was quickly extending its dominance and threatening older technology powerhouses. He remembers visiting Hewlett-Packard (HPQ), Digital Equipment Corp., and other behemoths to essentially pay obeisance, ponying up for licensing deals that gave Microsoft access to key intellectual property—and kept the Redmond (Wash.) company from prolonged legal battles. “We had to do that,” says Maritz. “We were the new kids on the block.”
He sees a similar dynamic playing out in the tech industry today. So far, Silicon Valley’s rising stars—companies such as Facebook, Twitter, Zynga, LinkedIn (LNKD), and other social media darlings—have mostly avoided becoming casualties in the ongoing patent wars, which have centered on the world of mobile devices. Yet as Maritz puts it, “When the continents shift and new players come into a space, it results in an unstable situation.” According to legal experts and technology executives, plenty more patent confrontations loom. Older technology companies such as Oracle (ORCL), IBM (IBM), and Microsoft maintain rich patent portfolios covering essential technologies used by the Web set, especially database and file-management applications. “The new-generation companies like Google (GOOG), Facebook, and LinkedIn will eventually run afoul of the established companies,” says Timothy D. Casey, a former patent lawyer at Apple (AAPL) and co-founder of the SilverSky Group, an intellectual property and business strategy consultancy. “It’s a familiar pattern in the technology industry.”
Part of the risk for the new generation of Web companies comes from their weak patent portfolios. Facebook has only 12 patents to its name, while the totals for Twitter, Zynga, LinkedIn, and Groupon range from zero to two each, according to filings with the U.S. Patent and Trademark Office. That puts them in a position similar to where Google was earlier this year, when it had far fewer mobile-related patents than its competitors. According to one study by the investment bank MDB Capital Group, Google had applied for or received a total of 307 mobile-related patents as of early August, compared with 3,134 for Research In Motion (RIMM), 2,655 for Nokia (NOK), and 2,594 for Microsoft. That relative weakness spurred the search giant to pay $12.5 billion for Motorola Mobility (MMI) and its 17,000 patents on Aug. 15, its biggest acquisition ever. Newer Web companies may ultimately have to take similar steps to bolster their position. “If you want to be a permanent fixture of the landscape, you better get some defense,” says Maritz.
One possible battleground is in the data center. Oracle, IBM, and Microsoft, in particular, have spent decades patenting technology for managing files and storing information. Rather than pay for products offered by these companies, the trend among Facebook, Twitter, and others has been to use free, open-source software that borrows, at least conceptually, from this past work. These companies make heavy use of programs such as the MySQL and Cassandra databases, for instance, and the Hadoop file-management system. Quite often, the Web companies even build new open-source applications and release them to the public, undercutting some of the Old Guard’s most lucrative franchises.
To date, database patent holders such as Oracle and IBM have had little motivation to target the open-source products with lawsuits. Most of their largest customers, which include major Wall Street firms and retailers, also use open-source software, and patent battles would just create unease among them. The same rules of engagement, however, may not apply to their relationship with the Web giants. This new generation prides itself on not buying technology from established Silicon Valley players, says Jonathan Schwartz, the former CEO at Sun Microsystems, which was acquired by Oracle in 2009. “To the extent that is true, they are very attractive targets,” he says. (IBM, Oracle, and Microsoft declined to comment.) And the open-source label did little to keep Google’s Android software out of trouble. That mobile operating system is at the heart of the recent tech-world patent battle that has attracted lawsuits from Apple, Microsoft, and Oracle.
The rise of cloud computing further complicates matters. Consumer-facing companies such as Amazon.com (AMZN) and Google now offer Web services to businesses, encroaching on the turf of Microsoft, IBM, Oracle, and others. With the data center turning into the focal point of innovation, a host of new conflicts might arise. Google, for example, has numerous patents covering how it stores and analyzes information across hundreds of thousands of servers. In July, Google paid an undisclosed sum for more than 1,000 IBM patents—many of which cover key data-center innovations. It has made some of its database work public, and Facebook, among others, piggybacked on that information to build their own, crucial data-center technology. “Does Google come after Facebook for that now?” Maritz asks. Google and Facebook declined to comment.
Mark F. Radcliffe, an intellectual-property lawyer at DLA Piper in Palo Alto, Calif., doubts that a data-center patent war will ensnare the younger companies. He argues that the battles have so far been confined to mobile for good reason. “You can take apart a phone and tell when someone is infringing,” he says. “With a data center, you don’t really know what is going on, and it would be hard to determine damages with so much speculation.” In addition, many of the open-source products used by the new Web companies—software such as OpenStack and Hadoop, which are applications essential to cloud computing and data analytics, respectively—borrow ideas from a disparate set of creators, with each company customizing and adding to the core technology. “There is just a much more collaborative environment for developing products,” Radcliffe says. Yet he adds, “people haven’t quite come to terms with the liability issues that come when you have multiple people adding stuff to products.”
Casey, the former Apple lawyer, notes that the Cupertino (Calif.) company had only one patent when he worked there in the late 1980s. Over time the computer maker developed more patents and signed cross-licensing deals. The Web set will likely do the same, he says, as they come to view patents as “insurance policies”—or what the old-timers like to refer to as revenue streams.
The bottom line: Facebook, Twitter, and other rising Web stars have few patents and could become embroiled in data-center-related legal battles.