A new book, “Burning The Ships: Intellectual Property and the Transformation of Microsoft,” gives an inside look at the shift at Microsoft – and corporations at large – toward a more collaborative use of intellectual property for tangible business benefit. The authors, Marshall Phelps, Microsoft’s corporate vice president for intellectual property policy and strategy and a mastermind behind IBM’s and Microsoft’s massive IP valuations, and David Kline, journalist, author, intellectual property consultant and author of “Rembrandts in the Attic”, spoke recently with Intellectual Property Watch.

Intellectual Property Watch (IPW): This book describes a dramatic shift toward business openness and property ownership by a formerly closed, defensive company, resulting in enormous new value for the company. Can you describe the principle here?

MARSHALL PHELPS (PHELPS): The principles were really to open the company up, recognise that open innovation would be the wave of the future, that relationships are paramount in such a world and finally to recognise that even with arguably the world’s biggest R&D budget, Microsoft could not go it alone. It needed to work with others in order to develop the new products and business opportunities of the future.

IPW: You make the assertion in the book that intellectual property has now become “the chief source of wealth of the modern corporation.” How does that reality affect corporate thinking? How does it affect the rest of us, including developing countries where there is much less IP?

PHELPS: One theme of the book is that unfortunately, IP does not generally affect corporate thinking at the highest levels – but it needs to. With respect to the developing world, IP creates a structure that makes it far less problematical for companies to share their ideas and makes it far less risky for companies in developing countries to receive same. Both sides understand the ground rules.

David Kline (KLINE) adds: When you consider that IP represents up to 80 percent of the market value of publicly-traded companies, it’s really a problem that the vast majority of CEOs and corporate boards still treat IP as a “rights” issue for the legal department to handle rather than a business imperative deserving of executive suite strategy attention. There are historical reasons for that, of course – including the fact that most senior business leaders today were educated and came of age in a time (the 1980s) when tangible assets represented 80 percent of firm value and IP accounted for only 20 percent. The next generation of business leaders will certainly pay more attention to IP issues.

As for IP and the developing world, there’s probably no better example of how “getting smart” about IP can affect a country’s economic development than China. Since China implemented a strong IP regime and began educating the public about it, its R&D growth rate has soared. It now has the highest R&D growth rate in the world.

IPW: Is there a lesson (or lessons) in the book that may be applied to the global economic situation?

PHELPS: I think so; the global meltdown just makes the open innovation construct even more imperative and timely – not least because it’s much more cost-effective than having to develop everything yourself.

KLINE: Protectionist pressures are on the rise due to the current economic meltdown, as are calls to both slow R&D spending and abrogate some IP protections. This is exactly the wrong approach. As we say in the book – and it’s something every farmer understands – “don’t eat your seed corn.”

IPW: What is your message to global policymakers?

PHELPS: Do not listen to the siren call to pick technological “winners.” This is hard enough when companies do this on a daily basis – it is next to impossible for governments. Second, do not set forth policies that unnaturally restrict technological invention.

KLINE: The development of high definition television offers a perfect example of the dangers of government technology mandates. Both Europe and Japan in the 1980s invested billions of dollars in a government-mandated analogue HDTV standard, only to see themselves totally outflanked – and all their billions wasted – by the entrepreneurial invention of digital HDTV in the United States in 1990. I would argue that one of the principal reasons that the whole Digital Revolution first flourished in the US is because America did NOT have an industrial policy that attempted to mandate technological “winners” as Europe and Japan did at that time.

IPW: Do patents get in the way of innovation? Are patents right for everybody? And how can the US and global patent system be improved?

PHELPS: Patents do not get in the way of innovation – never have. The economic history of the US would show it if it did. We focus too much on patents when in fact there are other ways to protect IP – contract language, copyrights, trade secrets etc. Each has its place and this is not a one size fits all game. The easiest and cheapest fixes for the global patent system lie in harmonising the major patent regimes – US, Japan, China, Europe and probably Korea. That way, for example, a search in one could be valid in another. This just makes sense in a digital age as we pretty much have access to the same data bases. Unifying language would reduce costs as well. Finally, some break for the “little guys” would be great too.

KLINE: In every country studied so far, economists have found that it is not education or capital resources but rather the existence of a strong and fair IP system that is the principal spur to innovation and economic growth. That’s just a fact, and those who argue that IP hinders innovation usually argue their case not on the basis of fact but on ideological biases. Since the advent of patenting in the US software industry, for example, the formation of new entrepreneurial firms has increased, domination by big companies has diminished, and software development has grown from 1% to 10% of total US R&D.

IPW: A basic lesson in the book could be interpreted as, ‘We were getting hurt by others who had patents, so we used our market power to require partners to agree not to enforce their patents until we had enough of our own patents to start enforcing them the way we didn’t want others to do to us.’ Can you address that?

PHELPS: Remember, this was back before software patents were a fact of life. MS was just getting a real head of steam but wasn’t at all sure patenting was the way to go. The NAP clause [which disallowed enforcement of patents in licence agreements] was a way to keep peace in the Windows ecosystem – and it was largely successful. But once MS started getting lots of patents, it looked to the larger OEM’s like a forced unilateral disarmament. Remember, generally the smaller OEM’s and distributors liked the clauses because they offered protection.

KLINE: The fact is, Microsoft is probably the LEAST litigious company in the whole IT sector when it comes to “enforcing” its patents. It has filed a grand total of 3 patent suits in its history, with one of them (the TomTom suit) just being settled this week. The principal aim of Microsoft licensing and cross-licensing its IP with others is not confiscatory. Its total income from IP licensing is probably less than 1 percent of what it was at IBM when Marshall was there running their IP department. Rather, the main tangible business benefits of IP collaborations with other companies has been (as we say in the book) that it “has enabled Microsoft to pursue valuable joint product development opportunities with other firms, acquire needed outside technologies, disseminate more broadly and rapidly our own technologies and products into the market, bolster margins and market share, gain entry into new markets or broaden our freedom of action within a market, and also create joint sales and marketing opportunities with other companies for mutual benefit.”

IPW: Recently your former employer IBM gained some good will for releasing some patents and making them available for public use. Is Microsoft following suit, and if so, what kinds of criteria should be used to choose which patents are given away?

PHELPS: I would say MS is pretty open to new ideas and I can certainly understand why this could be a good idea going forward. You will have to make a judgment whether IBM really did a lot or was this largely sleeves out of the vest. With a portfolio as large as IBM’s, they abandon quite a few annually anyway just for cost reasons alone – something MS will have to do as well, so I am not really sure what the ultimate significance was for IBM beyond an initial burst of positive PR from the “open” community.

KLINE: My understanding is that Microsoft does look at opportunities to make its technology and IP available royalty-free. It already does some of this with the academic community. My guess is that the two principle criteria for giving away IP would be: one, does it make good business sense? – that is, will it speed product or market development for everyone’s benefit?, or two, is it in the public interest? – that is, would IP giveaways help foster the growth of new industry and economic growth.

IPW: You give in the book the example of IBM giving access to Microsoft to the DOS operating system – which was critical to Microsoft’s rise – as a mistake not to be repeated. But isn’t that contrary to the notion that sharing ideas and technologies promotes innovation?

PHELPS: From a corporate benefit perspective, the mistake IBM made was not that they shared the DOS operating system, but that they didn’t realise the importance of owning the IP for it so they could collaborate with other firms around it for mutual benefit. In any event, we cite the DOS example as one of the initial sources of resistance within Microsoft to the idea of sharing technology – with some people fearing that sharing IP meant allowing another company to eat your business. But once business leaders were convinced that IP sharing and collaboration would result in greater benefit to MS than keeping it restricted within the company, then employees got behind it.

IPW: In the book you also say there was financial support for the Creative Commons licence at its inception. What happened to that effort and how does it fit in now with Microsoft’s IP ideology? How does this model address the ever-changing technology landscape and increasingly popular issues like open source software or others?

PHELPS: MS developed a plug-in for Office that enables the automatic publishing of content under a Creative Commons licence if that’s what the user wishes. How does that fit into Microsoft’s ideology? We understand that in today’s world, no single company – not even Microsoft, with the largest R&D budget in the world – can hold all the pieces of its technology future in its own hands. It must collaborate with others and turn former “enemies” into friends wherever possible in order to remain at the forefront of new markets and business opportunities. You might say that the lesson MS learned is, “collaborate or die.”

IPW: Does the recent case involving TomTom navigational devices and open-source software – in which Microsoft sued over patent infringement and TomTom sued back – represent the kind of business environment Microsoft promotes? Why or why not?

PHELPS: What happened here and has happened on a very few cases, is that MS had great difficulty getting attention from TomTom and was forced into action. There have been a couple of others and all were settled quickly as was TomTom. But, whatever business model a company follows, the IP it invents needs to be respected and sometimes it’s necessary to show you’re willing to defend your legal rights to force the issue. Some say this doesn’t apply to open source companies, but they’re wrong. Just try appropriating RedHat’s famous logo and see what happens.

KLINE: In fact, Red Hat has probably filed more IP suits than Microsoft has to protect their IP. [Correction: David Kline has corrected this to say it appears Red Hat has filed only one IP lawsuit to Microsoft’s three.]

IPW: Is there anything else you would like to add?

PHELPS: What we’ve tried to do with “Burning the Ships” is take IP questions out of the realm of arcane debate among lawyers and show real people, in the midst of a highly dramatic internal struggle at Microsoft, learning how to deploy IP for tangible business benefit. As one reader put it, the book is a “thoroughly entertaining and informative can’t-wait-to-get-to-the-next-page read.”

IPW: Thank you.

“Burning The Ships” is available on Amazon.com.