Fact-checking some tweets about Linux Foundation’s newest member and their harvesting of other members’ money.

Microsoft recently joined the Linux Foundation while still asserting its patents against the rest of the membership. As I found that odd, I tweeted some casually-calculated statistics about Microsoft’s patent revenues that seemed to me to simply be the aggregation of common knowledge. But maybe people have forgotten the details; at least two respondents asked me to substantiate the figures. Having struck a nerve, this post is by way of explanation.

Linux Foundation

Microsoft has joined the Linux Foundation as a Platinum member. According to Schedule A of its bylaws, the payment needed to gain this membership level is $500,000. In return, as well as joining an elite club of super-rich corporations (for example, Red Hat can’t afford this level and is a Silver member), Microsoft also gets a seat on the Board of Directors, which was recently flushed of the last two member-elected directors (Linux Foundation appointed two very capable women to the large Board instead).

Microsoft’s representative employee is Azure architect John Gossman. The appointment of an employee from Microsoft’s Azure (cloud) business unit reflects the driving force behind this and all other open source moves by the company. There is little indication that the rest of the company shares the Azure product group’s commitment to open source, especially not the patent licensing group.

Revenue From Patents

Microsoft’s revenue for 2016 was $85bn using conservative accounting rules. Microsoft does not break out patent income in their 10-K, so it can only be estimated (and doing so involves a decoder ring according to Ed Bott who suggests about $8bn of Microsoft’s revenue comes from IP licensing). As a report in CRN explains,

Microsoft is believed to make between $5 and $15 in royalties on each Android device sold. In 2013, Wall Street analyst Rick Sherlund estimated this was generating a $2 billion annual revenue stream, while other estimates have ranged as high as $6 billion.

That $2bn figure comes from a Nomura research note according to Business Insider. As the lowest frequently-cited figure, I prefer to cite this than any other estimated number but it is clearly a matter of preference rather than objective fact which number is used.

Nature Of Patents

The revenue Microsoft gains comes a range of targets than can be colloquially called “Linux” with varying qualification. That includes embedded Linux and things that use it such as Android and shared SMB filesystems as well as Linux as a server and things that use it. Again, identifying the ratio of income per usage is impossible for anyone outside Microsoft (and probably for most people inside).

Certainly the range of patents Microsoft is known to be attempting to monetise includes a broad range of functions. The best list I have found appears to have been inadvertently published by the Chinese Ministry of Commerce in 2014. But licensing activity is certainly not limited to Android; Microsoft also targets ChromeOS, Linux servers, Linux in consumer devices (each of those is a sample; there are plenty of other press releases) and much of the Android licensing actually appears to related to xFAT filesystem interoperability as in the Tom Tom case.

“Threats”

Although those figures refer to “licensing”, take care not to assume that relates to intentional licensing of innovative technology sourced from a inventors or researchers. The 95% margin on the revenue suggests that the patents Microsoft is monetising here do not relate to technologies where their mark has sought assistance or advice. Rather, each company is likely to have been proactively approached by Microsoft and invited to take a license based on a somewhat vague assertion that they are infringing a basket of rights.

The “sales process” is lawyer-led and well-understood. The target “customer” is likely to be asked to sign an NDA at the beginning of the process, and the price is likely to be set to be a little less expensive than contesting a patent lawsuit. This approach, introduced by IP Hall Of Fame inductee Marshall Phelps (who invented it first for IBM), is similar to the approach used by patent trolls. Almost everyone settles rather than fighting — everyone remembers Tom Tom — and the NDA means there’s little public information to study.

The Tweets

Putting all these points together:

The $500k Microsoft paid to join Linux Foundation is about ¼% of their revenue from patent threats against Linux, as far as I can tell. — Simon Phipps (@webmink) November 17, 2016

This year Red Hat reported $2bn in revenue. Adding that to the mix:

Linux Foundation member Microsoft's income from patent threats against Linux is about the same as Red Hat's entire turnover. — Simon Phipps (@webmink) November 17, 2016

I thus believe all those statements are correct, but I would welcome better sources for any of the points made and will correct anything that’s clearly wrong.

Action

What could Microsoft and the Linux Foundation do?

The Linux Foundation should include in its membership agreement a good-faith commitment not to initiate any patent litigation relating to the Linux platform against anyone and exclude those who break it. A trade association should not permit its members to fight among themselves.

Microsoft should declare that no part of the company will in future initiate software patent claims against the Linux platform and as a sign of its good faith join the Open Invention Network. That’s not of itself magical — Oracle and Google are both OIN members and still litigating Android patents — but the combination of gestures could make a tremendous difference to community trust.

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