Microsoft unveils two paradigm-shifting deals in 7 days

November 10, 2006, 4:38 PM UTC
Fortune

In the space of less than a week, Microsoft (MSFT) has announced two deals–one with Novell (NOVL), relating to Suse Linux, and the other with Universal Music Group, a unit of Vivendi (V), relating to the Zune digital music player–that are stunning in their game-changing potential. (For a Wall Street Journal story about the Novell deal, click here. For a New York Times story about the UMG deal, click here.)

In an interview with Microsoft’s general counsel Brad Smith yesterday, he said that while the close timing of the two deals was coincidental, they do reflect “a common theme.”

“During the first half of this decade,” he says, “there was growing attention to the intellectual property challenges associated with new technologies. We’re now crossing a milestone, where we’re focusing more on solutions. It doesn’t mean everyone will say, ‘Eureka, Microsoft has found it.’ It does mean we have an opportunity to have a serious discussion about evolving models. It’s a defining moment.”

The Novell deal, announced November 2, attempts to build a technological, marketing and legal bridge across the gap between proprietary and open-source software, which many had assumed would be impossible. Novell is the purveyor of Suse Linux, which competes with Red Hat’s market-leading version of Linux server software. (Neither Novell nor Red Hat charges for Linux, of course–that has to be free under Linux’s free-software license–but they sell subscriptions to provide service and support.) The companies entered into the multi-faceted deal, they have said, in the interests of growing the whole server software market, and serving the needs of the many enterprise customers who have said they want to use both Windows and Linux (sometimes simultaneously on the same servers). One of the legal components of the agreement calls for Novell to, in effect, pay Microsoft a royalty on all of the subscriptions for service and support that is sells, while Microsoft would, in turn, promise patent peace to Novell’s Suse Linux customers. Microsoft and Novell believe this will not violate the terms of Linux’s free-software license, since Novell is not imposing any royalty obligation on its Suse Linux customers. Smith says he believes the patent peace granted to Suse Linux customers by Microsoft would be enforceable by either Novell or the consumers themselves, as third-party beneficiaries of the pact.

In the second deal, announced November 8, Microsoft agreed to give UMG a royalty for every Zune digital music player it sells. (This would be in addition to the small percentage payment on each, say, 99-cent song download.) According to the New York Times, the royalty would amount to about a $1 payment for each $250 device. In other words, Microsoft is voluntarily going to pay what the U.S. Supreme Court’s landmark Sony Betamax case of 1984 has always exempted hardware companies from having to cough up–a payment to content-owners reflecting the role that copyrighted content plays in inducing sales of the devices. (Alternatively, one could see it as a payment to reimburse content-owners for the unauthorized copying of their songs that is facilitated or encouraged by such devices.) Microsoft has said that it plans to offer similar royalties to all the other major recording labels. One has to presume that, in time, the labels will begin pressuring Apple for similar royalties on its iPods.

The reaction to both deals has, so far, been quite muted, presumably as all the potentially affected stakeholders repair to their lawyers’ conference rooms, pore over the details, and try to figure out what Microsoft is up to. As always, question number one is: Was the arrangement crafted by the Kinder, Gentler post-antitrust-suit Redmond, or was it hatched by the old Evil Empire?

The very fact that each deal seems to be having this head-scratching impact suggests that each has truly paradigm-changing potential. In contrast, when deals are self-trumpeted as paradigm-changers, they often prove to be busts. (I’m thinking of Bertelsmann’s much-hyped alliance with the original, pre-legal, peer-to-peer Napster in 2000; despite much hooplah at the time, its only remnants today are the still pending copyright infringement lawsuits that were lodged against Bertelsmann by rival recording labels and music publishers.)

Microsoft general counsel Smith explained to me the impetus for both deals this way: “Any successful information technology business is based on a strong eco-system, including hardware-producers, software-producers, content-creators, distributors, and customers. One thing we’ve learned and applied, is that a product is successful only if the entire ecosystem is healthy. These [two deals are both] ways of trying to ensure that we have have broad and healthy ecosystem. We have to address the needs of all stakeholders in an appropriate way.”(For what it’s worth, there were no sulphurous smells or flames evident when Smith met with me.)

What do people think? Anyone buying it? Though I suspect I know how many people will feel, please note that CNNMoney will only post your comments if you use relatively restrained language.