Editor’s note: Myhrvold is the former chief strategist and chief technology officer at Microsoft and the founder of Intellectual Ventures, which buys and licenses high-tech patents.

Patents rarely make headlines, but they did last month when Nortel Networks Corp., the defunct Canadian telecommunications giant, auctioned off its patent portfolio and drew an astonishing winning bid of $4.5 billion from a group of companies that includes Apple Inc. and Microsoft Corp.

The sale marks a watershed in the maturity of intellectual property markets and a dramatic shift in strategy for technology companies. Suddenly, these companies are acknowledging that patents are a strategic asset worth billions.

HERE’S AN INSIDE LOOK AT WHAT HAPPENED — AND WHAT’S AT STAKE

Most big tech companies inhabit winner-take-most markets in which any company that gets out in front can develop an enormous lead. This is how Microsoft came to dominate in software, Intel Corp. in processors, Google Inc. in Web search, Oracle Corp. in databases, Amazon.com Inc. in Web retail, and so on.

As a result, the tech world has seen a series of mad scrambles by companies wanting to be king of the hill. In the late 1980s, the battle was for dominance of spreadsheet and word-processing software. In the late 1990s, it was about e-commerce on the emerging Internet. The latest whatever-it-takes struggle has been over social networks, with enough drama to script a Hollywood movie.

In each case, the recipe for success was to bring to market, at a furious pace, products that incorporate new features. Along the way, inconvenient intellectual property rights were ignored.

Yes, copyright was almost religiously enforced. Copyrights are trivial to obtain (just type the “c” in a circle symbol), and software companies see them as essential to restraining piracy, which hurts revenue. Patents are a different story. It takes time for engineers to apply for patents and even more time if they diligently respect other people’s patents. So technology companies typically did neither.

As tech giants commercialized ideas that had been pioneered by small companies and merged once-separate technologies into new products, they infringed on other people’s patents. Personal computers took over publishing, photo processing, cash handling and a million other functions once performed by other companies’ patented products. Smartphones likewise displaced more specialized devices, such as GPS units and bar-code readers. When the TV commercial says, “There’s an app for that,” the “that” part is sometimes covered by patents the app creator doesn’t own.

ONCE TECH GIANTS GOT TO THE TOP, THEY KNEW THEY HAD A PROBLEM

Their cavalier treatment of patents left them vulnerable.

If you already control 90 percent of the market, your own patent portfolio does little for you. But outside patent owners sometimes show up and ask to be paid. In June, the Supreme Court decided that Microsoft must pay almost $300 million to a Toronto company called I4i LP, which claimed its patented technology was used in Microsoft Word. All tech companies face this sort of claim, and they’re not happy about it.

The biggest companies, which have always touted their brilliant innovations to justify the billions of dollars in stock options they pay their executives, have been in the odd position of attacking the patent system and publicly deprecating the innovations of others. Patents attempt to create a level playing field, but the last thing an 800-pound gorilla of a company wants is a fair fight. After succeeding in part by stealing other people’s inventions, they decry any inventors who have the temerity to ask for a share of the returns.

In Congress, lobbyists for every major semiconductor, software and Internet-services company worked for seven years to undermine the much-needed patent reform bill and to delay its passage. (The House and Senate each recently passed a version of the bill; they are now working to reconcile the two measures.)

Yet even as that was going on, a growing number of tech companies started to discover that patents might be useful after all. In 2009, Micron Technology, a major computer chipmaker, transferred about 4,500 of its patents to a renowned patent litigator in the hope that he could make some money on them.

And in the past two years, Microsoft has sued companies that were using the Linux computer operating system and Android, Google’s mobile-phone platform, to collect on what it viewed as its share of the patent liability that is hidden in a lot of “free” software.

IT ISN’T JUST ABOUT MONEY. THESE ARE STRATEGIC MOVES, TOO.

Apple, flush with the iPhone’s success but understandably worried that it might wind up becoming the R&D outfit that prototyped ideas that made others rich, has recently sued HTC Corp., Samsung and others. Last month, the company won a preliminary ruling from the International Trade Commission, which if upheld will prevent HTC from importing smartphones into the U.S., essentially wiping out its business here.

This and other tussles set the stage for Nortel to sell more than 6,000 patents and patent applications, which cover many features of current and future mobile phones. Just six months ago, the expected selling price had been from $200 million to $400 million. Google tendered a public stalking-horse offer of $900 million, sending shock waves through the industry.

Many people were surprised that Google stepped forward; it has consistently been one of the most outspoken critics of the patent system, presumably because it faces enormous potential patent liability. Google has very few of its own patents; with Nortel’s portfolio, it could change the balance of power in the smartphone industry. It could threaten to countersue any company that attacked Android, or it could even take a page from Apple’s book and go on the attack.

The stalking-horse offer set in motion unprecedented counterscheming among strange bedfellows. A consortium of six companies — Microsoft, Apple, RIM, Sony Ericsson Mobile Communications and EMC Corp/Massachusetts — won with an astounding $4.5 billion bid.

The result means Google still has no strategic weapon to compensate for the patent liability inherent in Android, so the lawsuits will continue.

More importantly, this sale validates the notion that patents will be a fundamental tool in the tech industry. Patents virtually define the pharmaceutical and biotech markets, and in the future they could play the same role for tech.

Source: http://www.idahostatesman.com/2011/08/24/1769789/tech-giants-discover-the-great.html#ixzz1YMy4gjm5