Microsoft to Pay a Patent Fee in IBM Accord

Michael W. Miller, Staff Reporter
The Wall Street Journal

June 29, 1992

Microsoft Corp. will pay International Business Machines Corp. between $10 million and $35 million to resolve a messy divorce battle between the two computer giants.

The payment results from a novel hardball gambit by IBM amid the two companies' nine-month dispute over software royalties. IBM surprised Microsoft by brandishing a secret weapon: a portfolio of more than 1,000 patents relating to software, covering procedures as basic as the way a cursor moves when a user hits the "tab" key.

IBM had never before demanded a patent license from a company in the software industry -- where patent coverage is new and controversial. Moreover, the two companies had originally been disputing an altogether different subject -- royalties for the OS/2 software they jointly developed.

Nevertheless, Microsoft ultimately conceded the IBM patents were so numerous and basic that it was willing to pay a large one-time fee for them, according to officials close to the talks. The two companies did reach terms on OS/2 royalties, which they refused to disclose. A Microsoft official suggested the royalties were roughly $20 to $25 a copy, but an IBM official insisted that figure is too high.

The Wall Street Journal reported last week that IBM and Microsoft had reached a resolution. The two companies had planned to announce the pact in early July, but rushed out an official announcement over the weekend.

While the resolution brings down the curtain on a historic 12-year partnership between IBM and Microsoft, its arcane details won't have any significant impact on consumers. IBM and Microsoft launched rival personal-computer strategies more than a year ago. Ever since, PC buyers have been deluged with competing, often confusing claims about Microsoft's Windows operating system and OS/2, which the post-divorce IBM is aggressively pushing on its own.

Operating systems, the internal programs that control a PC's most basic workings, command rich royalties and influence the shape of the entire software industry. IBM bought its first PC operating system in 1980 from an obscure, young hacker named Bill Gates, who parlayed that deal to make Microsoft the industry's most influential company and to become one of the world's richest men.

Steven Ballmer, who was one of Mr. Gates's first employees, yesterday likened the Microsoft-IBM relationship to a failed marriage and said the recent dispute was analogous to a fight over a pre-nuptial agreement.

"We didn't even agree what the pre-nup said," said Mr. Ballmer, now Microsoft's executive vice president. "Now we're divorced --- there's no doubt about that."

He admitted that IBM's voluminous software patents were a potent weapon at the bargaining table. "There was a point at which it made sense for us not to have to make an issue out of the patents," he said.

IBM executives said they were relieved to clear the air about the contracts encumbering OS/2 -- now the linchpin of its PC strategy and the subject of an upcoming TV ad blitz.

"It removes some confusion customers may have had about our ability to continue with the strategy we've been on," said Leland Reiswig, the assistant general manager in charge of IBM's PC programming.

Mr. Reiswig signed the final IBM-Microsoft resolution in mid-June. Microsoft added its own signatures and faxed the agreement back to IBM near midnight Pacific time on June. 21.

In using its software patents as a negotiating weapon, IBM chose its adversary well. Courts and scholars disagree widely over whether patent law -- originally written to protect mechanical inventions -- should also extend to software, a hybrid of text and machine. But Microsoft, the software industry's biggest player, takes a hard line on software protection, and indeed is busily amassing its own software patents.

Under the IBM-Microsoft resolution's terms, each company will give the other a long-term license to software patents. IBM demanded an additional sum from Microsoft -- said by participants to be in the range of $20 million to $30 million -- because IBM has many more patents than Microsoft.

IBM has similar cross-licensing agreements with hundreds of makers of computer hardware, but said the Microsoft partnership marked the first time it has entered such a deal with a company that principally makes software.

IBM officials also indicated they are likely to approach other software companies and seek similar accords. That will be a delicate balancing act for Big Blue: It could legally be in a position to demand steep payments from thousands of large and small software companies. At the same time, in its mounting competition against Windows, it is courting these same software companies to write programs for OS/2.

As part of the resolution, Microsoft said it will continue showing IBM the underlying code for Windows until September 1993. IBM has used portions of Windows in OS/2 so that OS/2 can handle programs designed for Windows.

Microsoft also said it won't show IBM the underlying code for its next big operating system, called NT. That will complete the evolution of IBM and Microsoft's PC strategies into two completely different software designs.