kline phelps intellectual property and the … · 4-color glossy intellectual property and the...

4-COLOR GLOSSY

INTELLECTUAL PROPERTY AND THE TRANSFORMATION

OF MICROSOFT

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MARSHALL PHELPSDAVID KLINE

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At the start of this decade, Microsoft was on the defensive—beset on all sides by anti-trust suits and costly litigation, and viewed by many in the

technology industry as a monopolist and market bully. How was it going to survive and succeed in the emerging new era of “open innovation,” where collaboration and cooperation between fi rms, rather than market conquest, would be the keystones of success?

This was the challenge facing Microsoft founder and Chairman Bill Gates. But “like Cortez burning his ships at the shores of the New World,” Gates decided to embrace the change that was needed. He recruited Marshall Phelps—the legendary “godfather” of intellec-tual property who had turned IBM’s IP portfolio into a $2-billion-a-year gold mine—out of retirement and into the cauldron of controversy that was Microsoft. Only this time Phelps’s mission was infi nitely more chal-lenging than simply making money from IP. It was to help reform Microsoft’s “man the barricades” culture, encourage the company to abandon its fortress mentality around its technology and share it with others for mutual benefi t, and use intellectual property not as a weapon of competitive warfare but as a bridge to collaboration with other fi rms instead.

Here, for the fi rst time (and 500 collaboration deals later), is the inside story of what one analyst has called “the biggest change Microsoft has undergone since it became a multinational company.”

In this book, authors Marshall Phelps and David Kline take the reader inside the dramatic struggle within Microsoft to fi nd a new direction. They offer an extraordinary behind-the-scenes view of the high-level deliberations of the company’s senior-most executives, the internal debates and confl icts among executives and rank-and-fi le employees alike over the company’s new collaborative direction, and the company’s controversial top-secret partnership-building efforts with major open source companies and others around the world. Nothing was held back from this book save for information specifi cally prohibited from disclosure by confi dentiality agreements that Microsoft signed with other companies. Indeed, the degree of access to Microsoft’s inner workings granted to the authors—and the honest self-criticism offered by Microsoft leaders and employees alike—was unprecedented in the company’s thirty-four-year history.

$29.95 US / $35.95 CAN

There are lessons in this book for executives in every industry—most especially on the role that intellectual property can play in liberating previously untapped value in a company and opening up powerful new business opportunities in today’s era of “open innovation.” Here is a powerful inside account of the dawn of a new era at what is arguably the most powerful technology company on earth.

MARSHALL PHELPS is Microsoft’s corporate Vice President for Intellectual Property Policy and Strategy and is responsible for setting the global intellectual property strategies and policies for the company. He also works with governments, other companies in the technology industry, and outside institutions to broaden awareness of intellectual property issues. Phelps joined Microsoft in June 2003 after a twenty-eight-year career at IBM Corp., where he served as vice president for intellectual property and licensing and built its world-leading $2-billion-a-year licensing program. Phelps is an executive in residence at Duke University’s Fuqua School of Business and was elected to the initial class of the Intellectual Property Hall of Fame in 2006. He may be reached at [email protected].

DAVID KLINE is a journalist, author, and intellectual property consultant who has earned acclaim for his unique ability to demystify complex IP issues and explain them in a clear and relevant manner to a broad business audience. His bestselling 2000 book, Rembrandts in the Attic from Harvard Business School Press, is considered a seminal work in the fi eld of intellectual property strategy within corporate America. As a journalist, Kline has covered some of the world’s most critical wars, famines, and other crises for the New York Times, Christian Science Monitor, NBC and CBS News, the Atlantic, Rolling Stone, Wired, and other major media. He may be reached at [email protected].

Jacket Design: David Riedy

Jacket Photograph: An Action off the Barbary Coast with Galleys and English Ships, c.1695 (oil on canvas), Velde, Willem van de, the Younger (1633–1707) / Yale Center for British Art, Paul Mellon Collection, USA / The Bridgeman Art Library

Praise for

BURNING T H E� SHIPSINTELLECTUAL PROPERTY AND THE TRANSFORMATION OF MICROSOFT

“Told with a litigator’s attention to detail, Burning the Ships recounts the journey that forced Microsoft to face its own ‘succeed or die’ moment. It’s a powerful high-stakes lesson in strat-egy and survival that speaks volumes to business leaders of all stripes about the courage required to embrace radical business transformation.”

—William J. Amelio, President and CEO, Lenovo

“Intellectual property does not show up on your balance sheet, and your board of directors would not recognize it if it were set out on a table in the lobby. But do not kid yourself: in an era of ever-commoditizing supply and distribution, IP is the essential fabric out of which your competitive advantage will be fashioned. Burning the Ships gives you an insider’s look into how this engine of economic returns operates and what you can do to maintain it.”

—Geoffrey A. Moore, author, Crossing the Chasm and Dealing with Darwin

“It would be diffi cult to overestimate the infl uence that Marshall Phelps has had on cor-porate thinking in regard to intellectual property. Simply put, he is the one we look to for guidance in such matters. Burning the Ships will be widely read in Japan and Europe as well as America.”

—Michio Naruto, former vice chairman, Fujitsu Corporation

“Phelps and Kline offer us a fi rst look at tomorrow’s business strategy, which of necessity involves the collaborative use of intellectual property. Don’t miss out on the chance to see what future business leaders will be thinking about.”

—Nathan Myhrvold, CEO, Intellectual Ventures

“Academics have spilled a good deal of ink over the past fi fteen years on the question of how intellectual property can be deployed to enhance innovation and enterprise success. Finally we’re getting the skinny on this vital issue—not just from someone who’s been in the trench-es, but from Marshall Phelps himself, the man who revolutionized and set the standard for the management of intellectual property across the whole information technology sector.”

—Wesley Marc Cohen, PhD, Frederick C. Joerg Professor of Business Administration, Professor of Strategy, Economics, and Management, Center for Entrepreneurship

and Innovation, Fuqua School of Business, Duke University

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Praise for Burning the Ships

“When Marshall Phelps took the job at Microsoft in 2003,many in the industry believed he was on a fool’s errand. Thetask of helping to transform the culture and business practicesof Microsoft through the use of its intellectual property seemedimpossible. Burning the Ships proves that Marshall is the unchal-lenged master in designing creative uses of intellectual propertyto enhance business performance. And through his collabora-tion with David Kline, they’ve accomplished something equallyunique: a thoroughly entertaining and informative ‘can’t wait toget to the next page’ read.”

—Daniel McCurdyChairman, Patent Freedom

“Burning the Ships offers a dramatic insider’s account of howMicrosoft used intellectual property to remake its business strat-egy and embrace the open source movement and the new openinnovation world—with real-world benefits for large enterprisecustomers and chief information officers everywhere.”

—Jim NobleChairman, World BPO ForumPast President, Society for Information Management

“When Marshall Phelps talks about intellectual property strat-egy, business leaders would be wise to listen closely. More thananyone else in business today, Marshall understands how openinnovation has changed the rules of the IP strategy game. It’stime we learned the new rules!”

—Ruud J. PetersCEO, Philips Intellectual PropertyExecutive Vice President, Philips International

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“It’s easy to talk open innovation and collaboration but extremelydifficult to actually implement it in any company. Phelps andKline bring to life the painful realities and unexpected rewardsof embracing this change in Microsoft. The important story,though, is not the challenge of changing course, but that othercompanies can reap similar benefits of accelerated innovation,stronger partnerships, and better corporate image by ‘burningthe ships.’ Read it and ‘start a fire.’”

—Jeffrey D. WeedmanVice President, External Business DevelopmentProcter & Gamble

“Through the power of example and compelling firsthandaccounts, the authors have conveyed many practical insightsabout how intellectual property can be harnessed in new andcreative ways to achieve overall business objectives and enablenew collaborations once considered unthinkable. This book isextremely readable and refreshingly devoid of the abstract jar-gon and theoretical frameworks plaguing many works on IPmanagement.”

—Daniel M. McGavockVice President and Intellectual Property Practice LeaderCRA International, Inc.

“Burning the Ships is the dramatic story of how Microsoft learnedto collaborate for open innovation by using intellectual propertyto develop new corporate strategies.”

—Hisamitsu AraiFormer Commissioner, Japan Patent OfficeFormer Cabinet Member, Secretary General,

Japan’s Intellectual Property SecretariatCEO of Tokyo Small and Medium Business

Investment Organization

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“Burning the Ships gives a rare insider perspective on the thoughtprocesses behind the intellectual property strategies of companieslike Microsoft and IBM. It offers revealing insights to practition-ers in the field.”

—Willy ShihProfessor of Management PracticeHarvard Business School

“Marshall Phelps is the internationally recognized leader in theuse of intellectual property as a strategic corporate asset. Herecognizes that long-term survival in the constantly evolving in-formation technology industry requires a flexible and nuancedintellectual property policy. Burning the Ships shows businessleaders how to develop one for today’s open innovation en-vironment.”

—Masanobu KatohCorporate Vice PresidentSenior Vice President, Global Business Group

(in charge of North America)Fujitsu Limited

“Marshall Phelps is the principal architect of two dramaticallydifferent but equally compelling examples—one at IBM and oneat Microsoft—of how intellectual property can be a transforma-tional business tool when thoughtfully used to drive businessstrategy. It is a critically important message that he and DavidKline make understandable to any company seeking to learnhow it is done.”

—Don DavisManaging DirectorCommercial Strategy, LLC

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“Once again a book involving David Kline—this time in part-nership with the formidable Marshall Phelps—has moved theIP revolution forward. The story of Microsoft’s open innovationefforts, led by Phelps, is fascinating and informative. But thebook also provides a whole new level of understanding of thenecessity of managing and fully leveraging intellectual propertyas a strategic class of business assets. Intelligent companies thatfollow this example will find that they can grow in ways notpreviously contemplated.”

—Peter AckermanCEO, Innovation Asset Group

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Burning the Ships

Intellectual Propertyand the Transformation

of Microsoft

Marshall PhelpsDavid Kline

John Wiley & Sons, Inc.

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Copyright c© 2009 by Marshall Phelps and David Kline. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmittedin any form or by any means, electronic, mechanical, photocopying, recording, scanning,or otherwise, except as permitted under Section 107 or 108 of the 1976 United StatesCopyright Act, without either the prior written permission of the Publisher, orauthorization through payment of the appropriate per-copy fee to the CopyrightClearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax978-646-8600, or on the web at www.copyright.com. Requests to the Publisher forpermission should be addressed to the Permissions Department, John Wiley & Sons, Inc.,111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online athttp://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used theirbest efforts in preparing this book, they make no representations or warranties with respectto the accuracy or completeness of the contents of this book and specifically disclaim anyimplied warranties of merchantability or fitness for a particular purpose. No warranty maybe created or extended by sales representatives or written sales materials. The advice andstrategies contained herein may not be suitable for your situation. You should consult witha professional where appropriate. Neither the publisher nor author shall be liable for anyloss of profit or any other commercial damages, including but not limited to special,incidental, consequential, or other damages.

For general information on our other products and services, or technical support, pleasecontact our Customer Care Department within the United States at 800-762-2974,outside the United States at 317-572-3993 or fax 317-572-4002.

Wiley also publishes its books in a variety of electronic formats. Some content that appearsin print may not be available in electronic books.

For more information about Wiley products, visit our Web site at http://www.wiley.com.

Library of Congress Cataloging-in-Publication Data

Phelps, Marshall.Burning the ships : intellectual property and the transformation of Microsoft /

Marshall Phelps, David Kline.p. cm.

Includes index.ISBN 978-0-470-43215-0 (cloth)

1. Microsoft Corporation. 2. Computer software—United States—Patents.I. Kline, David, 1950– II. Title.

KF3133.C65P47 2009346.7304′86—dc22 2009000832

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

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http://www.wiley.com

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To Eileen Phelps and Sarah Kline

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Contents

About the Authors xiAcknowledgments xvIntroduction xvii

Chapter 1 The Collaboration Imperative 1

Chapter 2 Like Cortez Burning His Ships 33

Chapter 3 Money Isn’t Money Anymore 67

Chapter 4 A Very Secret Mission 97

Chapter 5 Leadership Starts at the Top 131

Chapter 6 The Road Ahead (with Apologiesto Bill Gates) 153

Index 179

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“For us, it was the equivalent of Cortez burning his ships at theshores of the New World. There would be no turning back.”

—Brad SmithGeneral Counsel, Microsoft

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About the Authors

Marshall Phelps is Microsoft’s corporate vice president for in-tellectual property policy and strategy and is responsible for set-ting the global intellectual property strategies and policies forthe company. He also works with governments, other com-panies in the technology industry, and outside institutions tobroaden awareness of intellectual property issues.

Before transitioning to his current position in 2006, Phelpsserved as the deputy general counsel for intellectual property inMicrosoft’s Legal & Corporate Affairs group, where he super-vised Microsoft’s intellectual property groups, including thoseresponsible for trademarks, trade secrets, patents, licensing, stan-dards, and copyrights. He oversaw the company’s managementof its intellectual property portfolio, helping to grow the patentportfolio to approximately 55,000 issued and pending patentsworldwide today.

Phelps joined Microsoft in June 2003 after a 28-year careerat IBM Corp., where he served as vice president for intellectual

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A B O U T T H E AU T H O R S

property and licensing. Phelps was instrumental in IBM’s stan-dards, telecommunications policy, industry relations, patentlicensing program, and intellectual property portfolio develop-ment. Phelps also helped establish IBM’s Asia Pacific headquar-ters in Tokyo and served as the company’s director of governmentrelations in Washington, D.C.

Upon retiring from IBM in 2000, he spent two years aschairman and chief executive officer of Spencer Trask Intellec-tual Capital Company LLC, which specialized in spinoffs frommajor corporations such as Motorola Inc., Lockheed MartinCorp. and IBM.

Marshall Phelps is also an advisor on intellectual propertyto the Japanese government, and executive in residence at DukeUniversity’s Fuqua School of Business. He holds a bachelor ofarts degree from Muskingum College, a master of science degreefrom Stanford Graduate School of Business, and a doctorate fromCornell Law School.

Phelps was elected to the initial class of the IntellectualProperty Hall of Fame in 2006. He may be reached [email protected].

David Kline is a journalist, author, and intellectual propertyconsultant who has earned a reputation for his unique abilityto demystify complex IP issues and explain them in a clear andrelevant manner to a broad business audience. His best-selling2000 book, Rembrandts in the Attic from Harvard Business SchoolPress, is considered a seminal work in the field of intellectualproperty strategy within corporate America.

As a journalist, Kline has covered some of the world’s mostdramatic stories for the New York Times, Christian Science Monitor,NBC and CBS News, the Atlantic, Rolling Stone, Wired, and othermajor media. The first Western reporter to go behind the battle

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About the Authors

lines in Afghanistan in the 1979 to report on the developinganti-Soviet resistance war, Kline was nominated for a PulitzerPrize in international reporting by the Christian Science Monitorthat year and covered the war for a variety of major media overthe next eight years. He was also the first reporter to uncoverthe 1983 famine in Ethiopia, as well as the first to document thefailure of the U.S. drug war against the Bolivian “Coca Nostra”in the mid-1980s.

A highly regarded business writer, Kline has also writtenfor the Harvard Business Review, Sloan Management Review, andStrategy + Business—three of the most prestigious U.S. manage-ment journals—as well as for Chief Executive, Business2.0, Wired,and other business and technology publications. He served as the“Market Forces” columnist for Wired’s early online magazine,HotWired, and the “NetProfits” columnist for the former Upsidemagazine. Kline has also been a commentator on public radio’s“Marketplace” business show as well as a frequent speaker beforebusiness audiences.

In addition to Rembrandts in the Attic, Kline is also the authorof Road Warriors: Dreams and Nightmares Along the InformationHighway (Dutton, 1995), and Blog! How the Newest Media Rev-olution Is Changing Politics, Business, and Culture (CDS, October,2005). He may be reached at [email protected].

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