Thursday, April 27, 2006

The story behind Microsoft opening up its IP

With the formation of Wallop out of Microsoft Research, Microsoft's IP Licensing Group is again in the news. Read about it here, here and here. A year ago, Mary Jo Foley reported on the fact that Microsoft has established a new division charged with licensing Microsoft-Research-developed technologies to startups and venture capitalists. This is the next step started over a year ago. My former colleague Bryan Mistele based his new company (Inrix) on Microsoft Research's predictive traffic technology and received one of the largest seed rounds in Seattle in some time (interview here). I'm going to reach out to a friend in that department to learn more. Stay tuned...Here's a list of what they are making available so far.

David Kaefer is the Director of Business Development for Microsoft’s IP Licensing group. The Seattle area’s largest A round in the last year went to the first licensee of this new effort (Inrix) to more broadly license Microsoft’s broad base of under-utilized IP. It’s worth taking note when something as significant as that happens so thought it was worth sitting down for a chat with David. The technologies they are making available tend to be "pre commercial" in that they aren't quite ready for primetime in terms of a final product form in areas that are getting funding. They tend to be standalone products or at least a substantial feature of a bigger product.

Chase Market Velocity (CMV): How are you going to measure the success of the program?

David Kaefer (DK): Success of this program is indicated in many ways, but in the short term it is shown with every licensing agreement we sign. Because of the nature of these agreements, the ultimate success and benefits from this program will be borne out over the long term.

CMV: The first licensee (Inrix) was all ex-MS people? While I assume you don’t have to be an ex-MSFTie to license the technology, why would an ex-Sun person (as an example) consider licensing your IP?

DK: Inrix technically wasn’t a part of this IP Ventures program, but rather that agreement occurred as a result of the kinds of inquiries we received on a regular basis and is an example of some of the impetus for the creation of the IP Ventures program. This program is open to all comers, and we hope that it is interesting to all parties regardless of their former employer. The program offers rich, stand alone technology that is best utilized by a party who has the capability of taking it from the prototype phase into the production phase and ultimately to market. We want to talk with any interested party who has those capabilities.

CMV: What's a typical deal structure? Equity? Royalty? For how long?

DK: Each agreement is negotiated on an individual basis. We can accept cash or up front payments, but we recognize that many start ups need to conserve cash. Equity or royalties or any sort of creative combination of the two are what we expect to see on a regular basis in these agreements. The length of each agreement will also vary on an individual basis and will depend on the parties, the technology, the perceived market for the technology and other relevant factors.

CMV: You have 20 technologies listed on your site that are available. Why these 20? How many others will come out? Are you going to be focused in particular areas?

DK: We started with these twenty based on feed-back we received from the venture capitalist organizations we spoke with. They helped us identify the technologies that are most marketable and the ones that are receiving the most VC backing right now. We expect many others to be unveiled over time, but it’s impossible to predict exactly how many or when or even the particular technology focus of the innovations added to the IP Ventures program in the future.

CMV: What makes these technologies something MS wants to share vs. other R&D that isn't shared externally? Which do you think are most valuable of what they are licensing? Why?

DK: The main reason these technologies are being shared is that we see a market opportunity for them. They are not currently being used by Microsoft in the manner in which another company could use them. We think that all of the technologies available under this program are valuable.

CMV: What kind of assurances do your licensees get that the IP is defensible? If there's a dispute where a 3rd party claims infringement, how is that handled?

DK: Each agreement will be negotiated individually to the mutual satisfaction of the parties. There are many ways that the potential liabilities can be borne and distributed amongst the parties and each agreement will factor in the unique indemnities and assurances necessary for the parties involved.

CMV: Has any form of market validation or input taken place for these technologies? Do you know what markets are likely to be interested in the various technologies? Is there an objective person/team providing that validation?

DK: Right now, the primary form of market validation has been the input of the VC’s and entrepreneurs we have been talking with in the last few months. For example, we have had discussions with VC’s like 3i plc, Advanced Technology Ventures, MDV-Mohr, Davidow Ventures, OVP Venture Partners, and Insight Venture Partners. The true test will occur when the technology is released to the market, but we feel confident that the outsiders we’ve spoken to represent a broad cross-section of the market place with a sophisticated business sense about which technologies are best to pursue right now.

CMV: What's the process once someone sends a mail to the team expressing interest?

DK: The complete details about how to take advantage of this program are available at

CMV: With corporate VC investment on the rise, will MSFT ever be a financial backer of these companies in addition to providing IP?

DK: That is not how we envision our participation in these agreements but it isn’t something that we would necessary rule out.

CMV: How will the researchers who developed the technology be available to the startup?

DK: To operate this program successfully, we recognize the need for a high-touch approach. We intend to work with the licensee to provide them with what they need to implement this technology into their products. Access to Microsoft researchers may be important to transfer basic know-how about the products that isn’t well documented in some other form. Access to these researchers will be a consideration for a number of the deals.

CMV: How do you plan to reach out to the entrepreneurial and VC communities to make them aware of what has been developed?

DK: Our outreach has already begun. We have been meeting with VCs and entrepreneurs over the last few months. We have spoken to large groups of VC’s at the NAVC conference in New York last week and the VC summit in the Bay Area this week. Our IP Ventures team is going to Europe next week to continue the engagement we’ve begun with venture groups like 3i plc. Additionally, we’ve issued a press release and conducted many media briefings on this program roll-out.

CMV: Are there any upcoming events where people can learn more?

DK: To this point, we have done 1:1 meetings with VCs as well we are included in forums Microsoft puts on that target VCs. We have also had meetings with established companies looking for specific IP. What often happens is we share some of what we have and they indicate specific areas they are looking for. In some of those cases, we have technologies that are applicable.

CMV: Have you reached out to angel alliances or individual angel investors?

DK: We are experimenting with a variety of different groups to reach out to. While we have spoken with individual investors, it's an interesting idea that we'll consider.

CMV: Do you have any technologies applicable to the emerging Smart Energy arena?

DK: The technology behind Inrix is focused on "machine learning" and has been applied in areas ranging from anti-spam to traffic (Inrix) where there are repetitive and predictable outcomes. It's entirely possible that the same technology could be applied into Smart Energy. In addition, a Utility could use a technology that we call "Zone Zoom" that would allow a utility to drill down on problem areas on the grid. We have also done work in battery cell technologies.

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Friday, April 21, 2006

New West Network and SunValleyOnline become partners

The New West Network (NWN) is a well-backed enterprise focused on covering the changes in the Rocky Mountain West which is region transforming from an agriculture and extraction based economy to a more mixed economy with significant high tech and tourism industries (typically one of their top 3-4 industries economically). New West found that the traditional media in the communities throughout the Rocky Mountain West weren’t adequately covering this transformation. NWN and (SVO) recently established a relationship where SVO is an affiliate of NWN since they complement each other.

Roughly a year ago I began informally advising the owner of the SVO business. It’s a local site focused not surprisingly on Sun Valley, Idaho. He started it 2 years ago and it has grown into a major presence in the Sun Valley and surrounding area. I have had interest and involvement in local online businesses since I managed half of the Sidewalk (later purchased by Barry Diller’s CitySearch business) cities. [Sidewalk is a whole other story I may blog about at one point that gives a window into big and engineering-driven company politics.] Virtually all of the big Internet players (Google, Yahoo, Microsoft, IAC and AOL) covet the large pool of local ad dollars that are typically captured by monopoly newspapers and yellow pages. To date, the only real success the big guys have had is capturing local advertisers via Search that is most likely affecting yellow pages spend.

The thing that has made the dollars that especially the newspapers have captured attractive for the big guys is the ever growing disparity between media consumption and media spend and the audience loss newspapers have suffered. Consider the following:

  • Overall population: 4.7x usage to spend for Internet while 0.3x for Newspapers + Magazines
  • Youth population: 11.3x usage to spend imbalance for Internet while 0.4x for Newspapers + Magazines (usage weighted towards magazines)
  • The average age of a newspaper reader is ~60 – an age group that has typically passed their peak spending years and have already made decisions on what brands they are loyal to
  • Adults 18-54 have the Internet as their #1 media choice (45.6%) vs. newspapers (3.2%)
  • Free classifieds such as Craigslist and Google Base are eating away at the most profitable portion of newspapers business

While much has been written about newspapers demise, they are still quite profitable especially in small markets. In fact, the Wall Street Journal recently wrote about the success of one of Lee Enterprise’s newspapers in Bismarck, North Dakota. Lee is an Iowa-based owner of newspapers (mainly in small towns) with nearly $900M in annual revenues. Coincidentally, Lee has a newspaper in the Sun Valley area. Doing “back-of-the-envelope” math, one finds that a site like SVO has anywhere from 1/15th to 1/40th the amount of revenue that the local newspapers have yet they have an audience is as big or bigger than their newspaper counterparts.

Since the online local ad market is of ever-increasing focus by the big and emerging Internet players, I expect I will blog periodically on what I’m observing in this local community (Sun Valley) as it ought to be a microcosm of what’s happening on a broader level. Understanding the inherent strengths and weaknesses of both the Internet players as well as the local newspapers and yellow pages will be instructive for other arenas. There are many reasons why small businesses which make up the bulk of newspaper advertising spend in a market like this are only spending 1% of their budgets online yet their customers are spending more than 30% of their time consuming Internet media. The real question is when the consumption vs. spend gap will close as it has done on a national basis even though that disparity is still large.

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Sunday, April 09, 2006

The 6 most valuable letters of all time

Fred Wilson recently commented on whether technical innovation or business model innovation was more powerful for a startup. He cites examples of both being drivers. I'd argue that business model innovation is more durable. Mark Leslie (a rare CEO who took a tech company from $0 to over $1B in sales) has commented on the fact that execution risk for most startups has shifted from technology to go-to-market as development tools have gotten so much better. Consequently, technical innovation has become much easier to replicate. One only has to look at a couple of the most sustained successes in tech over the last few decades to see how busines model innovation has been very durable -- IBM and Microsoft. Having competitive (though not always the best) products was clearly important but not sufficient to drive their long-term success. For IBM, it has been their world class sales & marketing machine that allowed them to weather their darkest days yet still have over $60B in revenue. With Microsoft, they've had two monster successes that boiled down to 6 letters encapsulating their business models that each changed the rules of the game in their market space and proved to be very durable.

Windows -- The 6 critical letters were O-E-M and I-S-V. There's little doubt that OEM'ing Windows to hardware companies rather than taking the path to maximize short-term profits as Apple did in the 80's and 90's by controlling both the OS and the hardware was instrumental in their success. Secondly, their investment in and success with ISV relations dwarfed any of their competitors. The byproduct was many customers had no choice but to go with Windows as that was the only platform that their applications ran on top of. While Microsoft certainly has taken a beating for the issues that come along with a platform that has infinite combinations of software and hardware vs. a limited set with the Mac, they have happily taking that beating as they ran to the bank with trainloads of cash.

Office -- It boils down to 6 letters again -- b-u-n-d-l-e. Initially they just did "marketecture" (initially there was no integration between Word, Excel & Powerpoint) by slapping three products in the same box for a combined much lower price than buying WordPerfect, Lotus 123 and Harvard Graphics. Over time, the products became more integrated but they changed the discussion within I.T. shops from individual productivity apps to having an Office suite. Their competitors were slow to move and then got severe indigestion while acquiring companies to compete with office. There were 6 other letters that were also critical in Office's success -- S-e-l-e-c-t (another business model innovation). Select was the name of their volume licensing program with enterprises that made Office very difficult to unseat.

Each of those 6 letters for Windows and Office have probably generated more combined profits than any other product over their lifespan in the computer industry.

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Tuesday, April 04, 2006

Tips on Working with Microsoft

Jim Lejeal, CEO and Cofounder of Oxlo Systems Inc. has been a partner of Microsoft's in a few different companies. He has some great tips on how to work successfully with Microsoft. Having worked on various partner programs at Microsoft, it was terrific to see companies who leveraged the heck out of Microsoft, but it was also frustrating to see others spin their wheels.

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