Bonum Certa Men Certa

Just In: Novell Earns More Money From MS Patent Deal Than it Pays

Justin Steinman confirms, $240M > $40M

Okay, actually there is absolutely nothing new about the revelation in the post title, nor the (unpatentable) mathematical statement above, but what is new is how Novell's Justin Steinman finally recognizes why Novell got so much more money, because of the sheer difference in customer base - not patent portfolio quality, as was often insinuated early after the deal's announcement.

Q: How did you come up with the value for the “promise” that Microsoft made?

Nat Friedman: I have no idea how they did that. In general, when it comes to patent questions, you look at two things: 1. The patents that the patent holder has. 2. The business over the person who wants patent protection or coverage. And the dollar amount is usually a function of these two values. So, for example, you might only hold one patent, but if you sue company X for infringing your one patent, and company X makes $1 billion/year in revenue based on their product that infringes your patent, then even though you only have one patent, you can extract a lot of money from company X.

So I’m guessing the team that put together the deal considered both the Microsoft and the Novell revenue. You notice that the balance of payments is heavily in Novell’s favor. Microsoft is giving us much more money than we are giving them.

Novell has a few hundred patents, and Microsoft has thousands. So you can guess that the quality of the patents and the revenue streams of both companies were considered.


Contrast Nat Friedman's thoughts above with Justin's below, note that Justin's current story jibes with the one Microsoft was always pushing - a rarity when the two sides agree on an aspect of the deal.

"Actually, Novell gets more money," Steinman said. Even when discounting Microsoft payments to Novell for access to Novell's Suse Linux, Novell still gets more, he said. Steinman attributed the disparity to Microsoft simply having more customers than Novell.

"They're paying for coverage for more customers," Steinman said. He said he did know the difference in the amount of money changing hands.

Steinman recited the often-repeated mantra that the deal with Microsoft was what customers wanted. They wanted the IP issue to go away and they want Linux interoperability with Windows, he said.

Microsoft, in a statement, said the dollar amount of the arrangement will vary.

"Both Microsoft and Novell have patent portfolios, and as part of the patent agreement, each is paying the other for access to these patents. There is an upfront payment from Microsoft to Novell," Microsoft said. "Then, Novell will pay Microsoft on an ongoing basis. The total dollar amount depends on how big certain Novell businesses grow over time. It is impossible to say how all payments will net out until Novell's business performance over the next several years is factored in."


Still, notice how there is no reciprocal royalty from Microsoft to Novell going forward, Novell receives a lump sum up front in exchange for their tacit acknowledgment of their IP claims, which Microsoft will slowly take back in royalties should they survive very long.

Anyhow, as has previously been demonstrated, the money in these deals is absolutely irrelevant to the monopolist: one week of Microsoft profit pays for 5 years of SUSE coupons; I once said that this is a "company that is facing a daily $1.5M fine in the EU and never even blinked. ". What is important to Microsoft is to have a list of protocol licensees who find their interoperability tax to be "reasonable and non-discriminatory" for the E.C., and to get Linux distributors to purchase their right-to-use license directly from the source, rather than via SCO.

Basically, Microsoft is willing to take a loss at first to win some customers for their right-to-use license, and Novell was happy to sign up as the first high-profile "reference" client, for some consideration - namely nearly one-third of a billion dollars or so, all told.

Poor Xandros, according to Groklaw they reportedly got zilch to be reference client #2, but they still have to pay the royalty on shipping products. Ouch.

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