Thursday, August 6, 2009

"Moneyball" spurs Microsoft Patent Model

(Editor’s Note: I’m a huge Michael Lewis fan and like Gladwell, his writings always cause one to think. In this case, Microsoft got to thinking as well.)

Infringing a patent owned by another company can be extremely costly, as Microsoft discovered in 2007 when a jury ruled that Microsoft infringed on MP3-related patents owned by Alcatel-Lucent and awarded US$1.5 billion in damages. That ruling was thrown out on appeal and the two companies later reached a settlement that resolved all patent litigation between them. But the case underscores the significant expense and high level of uncertainty, and therefore risk, that technology companies face when fighting over intellectual property.

When it comes to mitigating this risk, companies have several tools at their disposal. They can develop their own technology and file a patent to protect it, they can buy an existing patent, or they can license a patent from a third party. The pricing model is designed to help Microsoft managers determine which one of these options is the most effective choice.

"If you're going to do that, you need to reduce those options to economic units that you can compare with each other, so you can do an apples-to-apples comparison," said Horacio Gutierrez, the corporate vice president of Microsoft's Intellectual Property Group, during an interview in Singapore.

"This is where we get really funky and we have all of our finance people totally excited that we're looking at the business of IP in a way that can be analyzed in the context of a financial structure," he said.

For Gutierrez, who formerly served as Microsoft's associate general counsel in Europe and once worked in corporate finance at an investment bank, the inspiration to build a pricing model for patents sprang from an unlikely source.

"I got this idea from reading 'Moneyball,'" he said, referring to a book about baseball written by Michael Lewis, author of "Liar's Poker."