Seoul National University

College of Engineering
Technology Management, Economics and Policy Program

Licensing Issues, Markets and Innovation in

Software Industry in the United States

Submitted in partial fulfillment for the requirement of the

“Law, Technology and Public Policy” Class by
Prof. Son-U Michael Paik

Aung Kyaw Oo
2006-30684
Ph.D. Student

Spring Semester, 2007

June 17, 2007
 TABLE OF CONTENTS

1. Introduction...........................................................................................................................3
2. Software Issues Today...........................................................................................................3
3. Research Questions…….......................................................................................................4
4. Software Market…………………………………………………………………………...4
4.1 The Software Companies Ranked by Revenue Growth………………………………4
4.2 Software Types………………………………………………………………………. 5
5. Licensed versus Open Source Software..............................................................................5
6. Software Patents & Licenses ……………………………….……………………………7
6.1 US Software Patent (1985-2004)…………………………………………………….8
6.2 Patent Litigations in Software Industry in U.S……………………………………….9
6.3 Patents, Licenses and Innovation…………………………………………………….9
7. Findings to the Issues at hand ……………………………………………………………9
8. Conclusion………………………………………………………………………………10

References..............................................................................................................................11

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1. Introduction
Today, the new world order has been changing from Industry-based economy to Knowledge-
based one since the late 90’s. Knowledge-based economy is based on Information in general
sense. Undoubtedly, Internet is the life-blood engine behind the Economy. Software plays its key
role to drive the Internet Economy. From perspectives of the software publishers, licensing and
copyrights for their innovations and products are also necessary to their R & D alive and
dynamic, for their business survivability and ultimately for the acknowledgement of the
ownership of the respective software technologies. In the arena of intellectual property rights
(IPR), commercialization of software through innovation is effectively and efficiently protected
by two main categories of IPR, i.e. patent and copyright, among others.
This paper is organized with eight chapters. Chapter (2) points out the prevailing issues in
today’s software (S/W) industry. Next chapter presents the research questions for the current
research. Chapter (4) is for the general description of the global software market focused on the
U.S. Chapter (5) explains licensed and open source S/W including the freeware. In the next
chapter, litigations about patents, licenses in S/W industry in U.S are elaborated with some
highlight on the inter-relationship among patents, licensing and innovation in the industry. Some
findings about the current issues of S/W industry are launched in chapter (7) and finally
conclusion is seen in the chapter (8).
Key-words: innovation, software, licensing, technology, public

2. Software Issues Today

Microsoft's accuses that the open-source software industry has infringed 235 Microsoft
(MS) patents [11]. In addition, it is said that Linux kernel infringes (42) MS patents in any one of
its commercial products. From MS perspective, it has paid $1.4 billion in three years (2004-2006)
to license others ‘patents. So, in here, is it possible to guess that the other companies worldwide
pay licensing fees to what and whom they owe? In order to solve those kinds of infringement
problems, one famous legal firm in U.S gives $1,000 for a patent infringement search to anyone
or any companies. Regarding with the copyright issues, questions like “Is software ownership
necessary for the end-users (customers) rather than formal entities?” and “Do we need to buy (5)
MS-Windows Vista installers for (5) computers in our house?” are being raised in almost every
corner of the world. In Russia, one headmaster was fined US $ 194 by Microsoft for using illegal
copies of MS-Windows XP with $6 per copy [12].

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3. Research Questions
Throughout the research, software licensing issues are to be focused with the aim of
arriving at the solutions for the following research questions.
1. How is today’s Software market?
2. Which areas of businesses and what are the vulnerabilities for vendors (licensors)?
3. Is outsourcing a problem to copy-right or patent?
4. Software Market
As the world knows, three-fourth of the global S/W market is from and in the hands of
transnational companies (TNCs) like MS, Oracles, Netscape, and Apple among others in the
United States. Microsoft (established in 1975) with global annual revenue of US$ 44.28 billion
and 76,000 employees in 102 countries monopolizes the market still. Oracle (started in 1977) has
offices in more than 145 countries around the world with more than 50,000 people worldwide
[14]. But, some of the S/W contracts made in U.S go to India, Singapore, Brazil, and China and
so on. Indian S/W Market is US $ 6.2 billion in 2002 [4] and targeted to 50 billion (35 billion in
domestic consumption) in 2008 [3]. India is the second largest one after U.S market. It was found
that 200 of Fortune 500 companies outsource from India [4].
4.1 The 10 Largest Software Companies in the World Ranked by Revenue Growth
As the global economy develops with the innovative infiltration of networked
communication facilities, so does the S/W industry. Annual growth of the top-ranking
S/W companies in the U.S is skyrocketing year by year. According to one report, the
revenues covered by top-ten TNCs in U.S are shown below.
Rank Company Annual growth 2005 Rev 2004 Rev
1 Symantec 160.4% $4.14B $2.58B
2 Autodesk 223.5% $1.52B $1.23B
3 Oracle 322.1% $12.89B $10.56B
4 Adobe Systems 418.0% $1.97B $1.67B
5 Intuit 517.6% $2.20B $1.87B
6 Amdocs 614.9% $2.04B $1.77B
7 SAP 713.3% €8.51B €7.51B
8 Microsoft 87.5% $41.36B $38.47B
9 CA 15.4% $3.80B $3.60B
10 BMC Software 12.7% $1.50B $1.46B
Sources: Company reports [15]
Table-1: Growth of Top-ten S/W companies in U.S

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 4.2 Software Types
Conventionally, software is to be categorized in two general groups based on the way
they operate and function in their respective domains. They are as follows;-
Operational
1. System (Windows XP, Linux, Mac OS, etc…)
2. Application (MS Word, MS Excel, Java, C++, IE, Yahoo Msg, etc…)
Functional
1. Generic (Business-to-Business)
2. Bespoke (Tailor-made) (Business-to-End-User)

5. Licensed Vs Open Source (free) Software

In the domain of the usage and installation of S/W, some of them can be obtained free although
some needs to get licensed before using them. Any kind of S/W which can be downloaded freely
through Internet is called freeware (or) shareware. Some of those freeware releases their own
products’ source codes for the interest of the user primarily and for their company’s interest
secondarily. Such kind of S/W can be termed as open source S/W. Another kind of S/W for which
it is required to get permission from the owner (or) publisher (or) manufacturer to use or install
on a computer (or) a network is called licensed software. Examples of those kinds of S/W are
shown as follows.
(1) Open Source (or) Free Software License

GPL 2 Compatible (e.g. Perl, MIT, x 11)

GPL 2 Incompatible (e.g. Nokia, Mozilla, IBM)
(2) Non-Free Software License

Free Licensed Closed Source (e.g. Solaris)

Pay Licensed Viewable Source (e.g. Microsoft)

Pay Licensed Closed Source (e.g. Microsoft)
No one can imagine giving away a new idea (innovation) free to the public without charging to
cover any costs. It is impossible for any kind of industries in U.S around 1940’s. But now in the
network economy, it is happening [17]! Microsoft gave away Internet Explorer with no licensing
(Why?) [17]. Netscape gave Navigator (including its valuable source code) to help sell
commercial server software. Also, Qualcomm gave Eudora, a popular e-mail program, as a
freeware to sell upgraded version. Similarly, some one million copies of McAfee’s antivirus
software are distributed free each month. Likewise, Sun Microsystems gave away Java
applications to help sell its servers. In 1977, Bill Gates sold BASIC programming tool to Texas

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Instruments (TI) with US $ 99,000. It was a great success for him at that time. In 1981, Microsoft
gave MS-DOS operating system to IBM with only one-time fee of US $ 80,000 [25].
Patent holders can require infringers of their patents to pay a fee for ongoing use of their patent,
or to stop using the idea covered by the patent software i.e. stop using the software that used the
patented idea. With free software, software users have the additional option of removing the
patented feature from the software. This allows them to continue using of the software, but
without that patented feature. However, if that patented feature is very important, then the
software may not be useful without that feature. Also, this would not exempt the software user
from having to pay damages for the past infringement of the patent [20].
The most popular software used to run websites is called Apache. It is not sold by Netscape, or
MS, or anyone. Apache which has 47 % of the server market compared with those of the
Microsoft—22% and Netscape—10%. That software was written and is maintained by a network
of volunteers. But, the software is giving away free. In the world of software, beside Apache and
Linux there are many other free software suites such as Perl and X-Windows [17].
Next, advantages of licensing for the licensor are to be discussed. Advantages are [24]:-
• Rely on better manufacturing capacity, wider distribution outlets, greater local
knowledge and management expertise of another company
• Commercialize its IP or expand its current operations into new markets more
effectively and with greater ease than on its own
• If the licensor’s trademark is also licensed for use in the market along with other IP,
then the licensee’s marketing efforts essentially benefit the licensor’s reputation and
good will
• Gain access to new markets that are otherwise inaccessible
• A means of turning an infringe or competitor into an ally or a partner
• Retain ownership of the IP and at the same time receive royalty income
Again, disadvantages of licensing for the licensor are as follows;-
• The licensor’s own investment can sometimes generate better profits than operating
only , or through a license agreement
• A licensee can become the licensor’s competitor
• The licensee may suddenly ask for contributions
• The licensor depends on the skills, abilities and resources of the licensee as a source
of revenue

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6. Software Patents & Licenses
In this chapter, much more details will be sought in three sub-sections regarding to patenting
and licensing issues of S/W industry in the United States. First, specific meanings of S/W patent
and S/W license are needed to be quoted as follows for clarity.

Software patent is a "patent on any performance of a computer realised by means of a
computer program [1].”

A software license comprises the permissions, rights and restrictions imposed on
software (whether a component or a free-standing program) [2].
The scope of software license includes following among others [24];-
1. Exclusive (or) non-exclusive
2. Non-sub licensable
3. Object Code only (or source codes included)
4. License should cover documentation
5. May be restricted to a field of use (e.g. internal business of customers only)
6. Perpetual or defined period (Check renewal rights)
7. Rights to modify (who owns modifications?)

In the 1950s, 1960s, and 1970s, the United States Patent and Trademark Office (PTO) did not
grant a patent if the invention used a calculation made by a computer. The PTO's rationale was
that patents could only be granted to processes, machines, articles of manufacture, and
compositions of matter; patents could not be granted to scientific truths or mathematical
expressions of it. Since the PTO viewed computer programs and inventions containing or relating
to computer programs as mathematical algorithms, and not processes or machines, they were
therefore not patentable [19]. In 1995, the PTO established some broad guidelines for examining
and issuing software patents. The PTO interpreted the courts as requiring the PTO to grant
software patents in a broad variety of circumstances. Note, that although the U.S. Congress has
never legislated specifically that software is patentable, the broad description of patentable
subject in the Patent Act of 1952 and the failure of Congress to change the law after the court
decisions allowing software patents, has been interpreted as an indication of Congressional intent.
Another effect of this change was that as courts began to permit software invention to be
patentable, other courts also began restricting the use of copyright law to obtain patent-like
protection of software.

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 6.1 US Software Patent (1985-2004)
According to the USPTO, number of patents issued to various industries (including start-
ups) and academia are increasing year after year. Among them, software industry is on the top
list. The patents issued for computer implemented inventions (classes 700-725) are shown in
the following Exhibit-1.
In the exhibit, it is interesting to find that the number of patents issued in the year 1997
has been almost doubled up in 1998 as comparison among those years is clearly shown on the
Exhibit. The reason for that doubling-up patents is not known exactly (and no other specific
research on this case is found yet) although there was a strong financial crisis affected to
North-America continent and especially to all Asian countries. That shows, in some way, that
negative economic atmosphere cannot stop the innovativeness in the software industry.
Similarly, in 2001, the numbers of patents are not affected by the Internet dot com bust.

Exhibit-1: US patents on Computer Implemented Inventions (1985-2004)

In 1994, Oracle Corporation submitted to USPTO that it opposes the patentability of
software. And, it said it believes that the existing copyright law and available trade secret
protections (in the United States), as opposed to patent law, are better suited to protecting
computer software developments. Again, Robert Barr of Cisco Systems Intellectual Property
Department in 2002 said "The time and money we spend on patent filings, prosecution, and
maintenance, litigation and licensing could be better spent on product development and research
leading to more innovations [18].

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 6.2 Patent Litigations in software industry in U.S
In this sub-section, some litigations and lawsuits made in the software industry in the
United States are to be discussed. Some of the interesting litigations are shown below. It can
be found out that most of the litigations are with software Giant Microsoft. Almost all
lawsuits, MS had paid the money either to the plaintiff or to the panel of Jury. Microsoft is
something like a prey among the potential plaintiffs including the world-class corporations.

MS with Eolas ($ 520M+) (2003) (‘906 web-browser) [16]

MS with Z4 ($ 115 M)

MS with Sun ($ 900 M) (Server s/w)

MS with Stac Electronics ($ 120 M) (1994) (Double-space data Comp:) [7]

MS with Alcatel-Lucent ($ 1.52 B) ( Feb 2007) ( MP-3/Digital Audio) [8]

Symantec with eight vendors ( Acortech, mPlus) (May’07) US $ 55 mil (Norton
Antivirus) [10]

6.3 Patents, Licenses and Innovation

One of the sources said that reforms of the U.S. patent system have made it too easy to
obtain and defend patents and more costly to challenge patent decisions, thereby limiting the
competition of ideas, discouraging innovation, and ultimately reducing U.S. competitiveness [22].
Keith E. Maskus, Stanford Calderwood Professor of Economics at the University of Colorado, in
one of his reports, offers a fair, thoughtful, and at times counterintuitive account of this issue. He
recognizes the importance of patent protection for innovation but also warns against blind
adherence to the mantra that more protection will necessarily produce more innovation
[27].

7. Findings to the Issues at hand

If Open Source becomes a standard like TCP/IP, the IT Industry especially for the S/W industry
will be affected. That is why; MS is defending for the Industry. There is very little empirical
evidence that builds a correlation between patents and innovation [13]. Microsoft is submitting
applications to patent offices in a global effort to patent its XML format for storing word
processing files [21]. Microsoft has sold almost 40 million copies of Windows Vista so far.
(Need to consider copyright issues compared with the customer-base worldwide?
Because many more PCs and nodes in U.S than the sold copies.) What kind of licensing for the
S/W will be applied--Non-concurrent licensing (e.g. MS) (or) concurrent licensing (e.g.
WordPerfect) in the future?

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 Software manufacturers in the ever-changing market may foster new business model relating to
publish free (or) licensed software in order both to meet the market demand, public interest and to
survive themselves in the market. Or, they may shift from the current software business to some
other IT industry. Who knows exactly?
As the world is interconnected through the Internet, any kind of business running theirs on the
Internet will be affected by some kind of software whether it is free (or) licensed one. From the
supplier side, any new software from any source can change the online businesses today. That is
why; each and every software company not only in the United States but all over the world is
paying attention to innovate in the software sector. After innovation (or) creative idea sparks
within a software company, that innovative idea must be turned into a commercialized one. But,
whether that commercial one is to deliver free on the Internet or with license fees depends on how
the business is to be run. For example, Microsoft discovered that pirated MS S/W, produced
illegally in Thailand, was being sold worldwide as the real thing (including in the United
States). In addition, MS has encountered significant problems with pirated software in China [p-
60, 26]. It was found out that some 90 to 95percent of the software used in China is pirated [p-
90, 26]. Since China is a great market not for Microsoft but for the other software companies, this
kind of problems should be handled strategically.
In connection with software outsourcing, still, no specific problem of copy right or patent is
found between the outsourcing and outsourced parties. A big problem in outsourcing is the
difference in entry-level programmer salaries. In U.S, a newly-appointed programmer asks
around US $ 70,000 per year while his counterpart in India, a challenging competitor for
U.S in software industry, gets only US $ 5,000 per year. This can be the most contributing
factor for market shift in software industry in the near future [p-167, 26].

8. Conclusion

The core issue in the patent debate is how to balance the positive effect patents have
on technological innovation and the negative effect they have on competition and the
diffusion of new technologies. Efforts to strike this balance have been complicated, however, as
the U.S. Patent and Trademark Office has become backlogged with far more patent applications
than its staff can manage. The negative impact of this pileup is twofold: First, some industry
analysts say patents of dubious merit, or patents filed solely to stir up a lawsuit, are often granted.
Second, the authority of patents is undermined more generally and the incentive to innovate is
weakened. An erosion of patent protections has broad economic ramifications by a lobby group

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called USA for Innovation values U.S. intellectual property at $5.5 trillion, or roughly 40 percent
of gross domestic product [23].

In the current real world situations, the software can be freely downloadable and
accessible. But, as the business stories go, the manual for the software could be as much as $
10,000. Cygnus Solutions, based in Sunnyvale , California, rakes in US $ 20 million per year in
revenue selling support for free Unix-like software. As it is mentioned above, Apache is free but
support and upgrades can be bought from C2Net. Similarly, Novell, the network provider, does
sell network software. In reality, that is not what they are selling. What Novell Inc. really selling
is its Certified NetWare Engineers, Instructors and Administrators plus the next release of
NetWare [17].

In the not-far-away future, software market and business models applied by various
software manufacturers will decide whether the promising (or) outgoing software is to be
delivered free (or) with license fees on the Internet! Because the ever-changing network
economy will command any business including software industry in the world to shift their
paradigm for their survivability in do-or-die interconnected economy.

References
1. http://en.wikipedia.org/wiki/Software_patent
2. http://en.wikipedia.org/wiki/Software_license
3. http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN005936.p
df
4. http://www.qaiindia.com/Misc/archives/sepg_2002.pdf
5. http://www.indianembassy.org/policy/ipr/ipr_2000.htm
6. http://www.universityofcalifornia.edu/news/2005/sep28.html
7. http://en.wikipedia.org/wiki/List_of_software_patents
8. http://www.physorg.com/news91425550.html
9. http://en.wikipedia.org/wiki/Alcatel-Lucent_v._Microsoft
10. http://news.com.com/Symantec+seeks+55+million+in+piracy+lawsuits/2110-7350_3-
6184240.html?tag=topicIndex
11. http://news.com.com/Experts+say+Microsofts+patent+quest+wont+go+far/2100-
7344_3-6184062.html?tag=topicIndex
12. http://news.com.com/Court+fines+Russian+teacher+in+Microsoft+piracy+case/2100
-7348_3-6181988.html?tag=topicIndex

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13. http://news.com.com/Red+Hat+CEO+decries+software+patents/2100- 7344_3-
6185805.html?tag=topicIndex
14. http://en.wikipedia.org/wiki/Oracle_Corporation
15. http://www.baselinemag.com/article2/0,1540,2021738,00.asp
16. Fish & Richardson P.C: United States Patent Law and Litigation; One-day
Seminar in Korea; December 12, 2006.
17. Kevin Kelly: New Rules for the New Economy; Penguin Books 1999.
18. http://en.wikipedia.org/wiki/Software_patent_debate#Bill_Gates_.28Microsoft.29_2005
19. http://en.wikipedia.org/wiki/Software_patents_under_United_States_patent_law
20. http://en.wikipedia.org/wiki/Software_patents_and_free_software
21. http://www.ftisa.org.za/home?wid=18&func=viewSubmission&sid=7
22. http://www.cfr.org/publication/12073/current_patent_system_is_misguided_and_hinders_
us_competitiveness_argues_new_council_special_report.html?breadcrumb=%2Fregion%
2F
23. http://www.cfr.org/publication/12948/patching_up_the_patent_system.html
24. Son-U Michael Paik: Technology Licenses and Contracts; CALS—May Workshop,
2007; Injae University, Korea.
25. Bill Gates: The Road Ahead; Penguin Books 1996.
26. Charles W. L. Hill: Global Business Today; Published by McGraw-Hill/Irwin 2004.
27. http://www.cfr.org/publication/12087/reforming_us_patent_policy.html
28. Suzanne Scotchmer: Innovation and Incentives; © 2004 Massachusetts Institute of
Technology.

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