On the eve of the World Intellectual Proper Day, Horacio E. Gutiérrez, Vice President and Deputy General Counsel of the Intellectual Property Group of Microsoft came to China to attend the 6th International Conference on the Intellectual Property Protection of High Technology, and accepted the interview invitation from China IP.

Before the interview, Mr. Gutiérrez emphasized once and again the importance of IP to technology companies like Microsoft and entrepreneurs generally, and talked about how IP and IQ (talents within the companies) worked together to accelerate the development of companies such as Huawei and ZTE, boosting the technology industry and contributing to producing a thriving economy. However, he also expressed concerns towards the abuse of IP rights in the industry, especially when it came to setting industry standards. He stated that since competition and litigation were inevitable, the patent protection system should be improved. His introductory comments suggest that Microsoft prefers the “gentler approach” of licensing over that of litigation when it comes to protecting interests of both the company and the consumers; evidenced by the fact that the company has signed over 1,000 IP licensing agreements with other companies over the last decade. He also hopes that the patent market will become more “open.” The interview focused chiefly on:

Microsoft’s role in the mobile phone industry

Gutierrez_print

China IP

: Microsoft has launched two revolutionary products—the Windows 8 and Windows Phone 7.5 in 2012. However, recently there has been a surge in litigation in the mobile phone industry and Microsoft is currently playing a very crucial role. What are your comments on current affairs and how Microsoft will avoid getting caught up in the risks of litigation? Mr. Gutiérrez: Litigation in the technology area is not new. We tend to see litigation from time to time between companies in the sector, because for them, protection of their innovation is so important. But it is also true that litigation is a very insufficient way to solve disputes. That is why Microsoft focused on licensing over litigation. Microsoft has entered into licensing agreements with most of the top distributors of Android smartphones around the world, such as Samsung, HTC, LG, and a number of other companies. More than 70% of all android smartphones sold in the United States are sold by companies we have agreements with.

Licensing is a gentler approach that allows companies to resolve their differences in a way that does not hurt their consumers. Litigation sometimes ends up hurting consumers. Cases may take many years to resolve and deprive the companies of opportunities to cooperate. We believe that everyone in the industry will be better off if we all focus more on resolving disputes through licensing than through litigation.

China IP: Microsoft is currently cooperating with Nokia on the Windows Phone. So does Microsoft have a specific strategy in mind for the Windows Phone?

Mr. Gutiérrez: The relationship between Nokia and Microsoft is an example of the type of relationship commonly seen between Microsoft, as the developer of the operating system, and a device manufacturer. There is clearly a high level of cooperation between the two companies; however, it is not fundamentally different from the relationship we have with other hardware companies, such as HTC, Samsung, LG and Huawei. On the IP front, there is also nothing particularly different about the relationship with Nokia. In all cases, Microsoft always ensures that its IP is used with proper license agreements; no matter it is Nokia or Nokia’s competitors.

Microsoft’s IP strategy in licensing and purchasing

China IP: What kinds of patent Microsoft prepares to license? Is it limited to peripheral patents, or are even core patents negotiable? When conducting license agreements, does Microsoft require other parties, in return, license Microsoft their IP as well? Mr. Gutiérrez: In 2003, Microsoft stated that it was changing its position on IP licensing. Essentially Microsoft is open for business and is prepared to license the vast majority of our IP rights to other companies. This includes patents that may relate to all our operating systems, which I think you would consider as some of the core IP; the main products that Microsoft has developed.

As long as we are not talking about technologies that identify Microsoft products or distinguish ourselves from others, for example the user interface, Microsoft typically is prepared to license all of its patent portfolios. We have signed license agreements with companies all around the world. In those agreements we have provided a portfolio license that covered not only all of their products, but also included virtually all the licensable Microsoft patents in our portfolio as well.

On the second point of the question, we have entered into both types of patent license agreements. We have signed patent cross-licenses, where both parties license their patents to each other and we have also entered into many one-side licensing agreements with no reciprocity. It is a choice and both parties must decide one; whether they want to structure the deals as cross-licenses and reduce cost, or whether it is more appropriate to just do a one way license agreement. We are open to both approaches and we have entered into both kinds of agreements with companies.

China IP: What kind of role do you think this kind of licensing approach has played or will play in bringing innovation to the industry as a whole? In particular for the Chinese companies, has Microsoft entered into any such licensing agreement with Chinese companies? Mr. Gutiérrez: We live in a world of open innovation. Thirty years ago, a typical approach was for a company like IBM, for example, to have an in-house R&D Department which would create every component of the products IBM would sell. In a world of open innovation, that model does not work.

If you open up a laptop computer you will find that there are hundreds or even thousands of components created by dozens of companies around the world and that the company selling the computer does not own all the IP rights for all of those components. So it is clear for every company in the technology world that in order to be able to sell a modern technological product, they need to enter into licensing agreements with the companies providing components for their product.

From the consumers’ perspective, these all happen behind the scenes. The consumers can see the technological product, but what they don’t see the invisible web of licensing agreements that have been entered into by the companies which made it possible for the product to be delivered to them.

We’ve entered into a number of licensing agreements with companies around the world, including companies that operate in China and Chinese companies. Some licensing negotiations include things that are subjected to confidentiality and the agreement cannot be exposed. In some other cases, we disclose them and do a press release.

In the recent past we have noticed an increasing level of interest by some of the leading technology companies in having professional sophisticated licensing discussions to secure the IP rights they needed in order to continue the sales of successful products.

China IP: You mentioned that the patent protection system needs to be improved and be more open, so what is the aim of Microsoft in promoting such an improvement? Will such “openness” cause losses to the IP rights of other companies?

Mr. Gutiérrez: The kind of changes that Microsoft is advocating are discrete changes in some areas that Microsoft believes have allowed companies to abuse the system in ways that it is not intended to be used. However, Microsoft does still believe that it is appropriate for companies to generate profits from licensing IP. In fact, over the last decade, Microsoft has paid out more than 4.5 billion dollars in royalties to third parties for patent licensing.

Our area of concern is the intersection of patents and industry standards. Companies sometimes participate in the creation of industry standards and promise the industry that they will license the related IP on reasonable terms. However, they break the promise later in order to obtain excessive royalty gains. Those companies are taking advantage of the success of the industry standards, and that was not the intention of the creation of the standards.

China IP: You mentioned that the cost Microsoft has paid for getting IP licenses was 4.5 billion dollars, what about the revenue Microsoft has generated from licensing out its IP?

Mr. Gutiérrez: Essentially all of Microsoft’s revenue is derived from the licensing of IP rights, whether it is the copyrights on our software, the use of our trademarks, or the licensing of our patents. Technology companies are fundamentally IP companies and therefore all of our revenue in direct or indirect manner really comes from the licensing of IP.

China IP: Recently Microsoft bought some patents from AOL and then sold them to Facebook. What was the purpose of the transaction? Is Microsoft planning to directly profit from these transactions or was it part of strategic long-term thinking?

Mr. Gutiérrez: The patent market is very active. Microsoft is a large company and we try to maintain a sophisticated IP function that is working at the patent portfolios that exist in the market, and trying to determine whether it is important to either obtain licenses to those patents or even own some of them.

The AOL portfolio was a portfolio which we have been tracking and examining for years and we believed that it has a number of patents which were very relevant and important to our business.

So we had two goals when we did the AOL transaction. The first was to make sure that Microsoft obtained a license to all the patents of AOL, not only the ones that AOL was selling, but also the 10% of the patents that AOL was retaining. This is because we were concerned that many of these patents may end up in the hands of companies who are interested in suing Microsoft. The second goal was to own a small portion of the patents in the areas where Microsoft does not have a large patent portfolio. The purpose of the sale to Facebook was to recover more than half of the cost that we incurred in buying the AOL portfolio.

So from the very beginning, Microsoft intended to sell the majority of the portfolio after acquiring it, but always keeping a license to the patents that we sold.

Anti-piracy activities in China China IP: It is known that Microsoft has conducted much litigation against enterprises end users in China over copyright infringements. Has Microsoft made any progress? What kind of difficulties has it encountered during this process?

Mr. Gutiérrez: Piracy and counterfeiting of software is a serious problem that requires a lot of attention. We have been very focused on making progresses against piracy of Microsoft software in China in the last few years, and we have been encouraged by the level of effort and attention that the Chinese government has put into this issue. Indeed, we believe that we are starting to see some progress. But these are large problems that require a combination of efforts. They require the element of education so that people can recognize the differences between legitimate software and pirated software, and understand the risks associated with the use of pirated software. It also requires a technological approach and Microsoft has been working on technological methods trying to make the products harder to be counterfeited, and a sustained effort on the part of government agencies and law enforcement on finding and prosecuting those who are engaged in the counterfeiting and piracy. We have been working in all of these areas, and cooperating closely with the Chinese government. We are encouraged by the early progresses but also understand that there is still a long road ahead of us.