Alcatel vs. Microsoft - What's Really Going On Colin Dixon, IP Media Practice Manager Download this TDG Opinion as a PDF November 27, 2006 With last week's announcement that Alcatel is suing Microsoft over patent infringement, a new chapter in the complex and decaying relationship between the two industry giants has startedi. According to Alcatel, it is simply protecting its intellectual property. According to Microsoft, the suit is merely related to its dispute with Lucent over X-Box video processing. Is either company being completely honest? Of course not! In Alcatel's case, it is an error of omission; in Microsoft's, it is an error of legitimacy. The History Alcatel filed two separate lawsuits against Microsoft on Friday, November 17 in a federal court in Tyler, Texasii. While specifics are few, we know that three of the seven patent infringements alleged against Microsoft relate directly to Microsoft's IPTV solution. The patents in question stem from the work of three brilliant Oracle engineers: Mark Porter, Dave Pawson, and Dan Weaver. Along with many other team members, these three engineers developed the Oracleiii Video Server and came up with some very creative solutions in the area of 'trick play' (fast-forward and rewind) features, three of which were patented. These patents were sold in 2000 to Thirdspace, a company which Alcatel eventually acquired in April 2003. When Alcatel announced its partnership with Microsoft in February 2005, some of the ex-Oracle engineers helped with the integration of Microsoft's IPTV solutioniv, working closely with Microsoft engineers in Mountain View . Today, several ex-Oracle employees, including some very senior engineers from the video server team, now work for the Microsoft IPTV group. Is it likely that the IP covered in the three patents was transferred to the Microsoft IPTV products in the process? This seems extremely likely. Could these patents have anything to do with X-Box? Extremely unlikely. But why would Alcatel choose this moment to file a lawsuit? Isn't Microsoft a key partner in Alcatel's IPTV offering? The Histrionics To understand the answers to these questions we must look at how the relationship between Microsoft and Alcatel is working in practice. TDG believes that the Alcatel/Microsoft partnership was more tactical than strategic. In 2004 and 2005, these two companies had a common desire to appear as a 'unified front' to their mutual customer AT&T. Moreover, they had a keen interest in showcasing executive-level accord and alignment and to reassure AT&T executives of the future of the platform. However, the rapid acceleration of Cisco - bolstered by its 2005 acquisition of Scientific-Atlanta - drove a sizeable wedge between Alcatel and AT&T. Specifically, AT&T ended up allocating its IPTV video network integration to Scientific-Atlanta, a major blow to Alcatel's importance in this project. In that context, the Microsoft IPTV solution was just becoming one of many technology products and pieces to integrate. Solutions? We Got Solutions! When Alcatel announced its partnership with Microsoft in 2005, the company said it would support Microsoft's IPTV platform to its customers. However, Alcatel was careful enough to continue funding its OMP (Open Media Platform, acquired by Alcatel from iMagicTV). Indeed, this solution continues to be operational in several accounts (for example, Free in France and Telecom Italia) and Alcatel continues to sign up sales as these businesses grow and increase licensed deployments. With the Lucent merger, Alcatel also will now own a second IPTV solution - MyViewTV, a solution based on a platform developed for the Telefónica system in Spain and which currently supports some 300,000 subscribers. Lucent is extremely confident that this solution will continue to thrive long after the Alcatel merger, so it would seem that Alcatel is awash in software solutions for IPTV: two internal and the Microsoft solution (from its 2005 partnership). The Bottom Line With integration and deployment delays at AT&T (not the least being the recent HDTV-related setbacks), clearly Alcatel is getting far less from this partnership than Microsoft. Indeed, senior management at Alcatel must be wondering why they need Microsoft at all with two in-house software solutions that are proven and scalable. In this context, TDG believes that the current patent lawsuits will help Alcatel in several ways. · It puts pressure on Microsoft to honor the spirit of the partnership; · It helps position an internal solution well against the Microsoft IPTV solution; and · At the very least, there is smoke around three of the patents, if not the smoking gun. With the situation as it stands today the Alcatel/Microsoft partnership seems headed for a messy court battle and a very public collapse of the IPTV industry's most visible partnership. Alcatel seems very well positioned to emerge from the debacle with a robust solution, a strengthened technology portfolio, and a market advantage over its former partner/emerging competitor, Microsoft. i The cases are Alcatel USA Resources v. Microsoft Corp., 06-cv-499 and 06-cv-500, U.S. District Court, Eastern District of Texas (Tyler). ii The author is not a lawyer and recommends the reader take legal advice before acting on the opinions expressed regarding the patents in this opinion piece. iii The author wishes to make it known that he was a senior manager at Oracle working with the engineers cited in this opinion piece. iv Informitv.com, "Alcatel and Microsoft collaborate on IPTV Strategy", 22 Feb 2005. About The Diffusion Group ( TDG ) - The Diffusion Group is the nation's leading research and advisory firm in all matters related to digital home and new media endeavors. Using a unique blend of consumer insights, executive-level consultants, and hands-on technical experts, we produce more than just research - we create Intelligence in Action®. To sign up for TDG's free weekly analyst opinion piece or for more information, visit our website at www.thediffusiongroup.com. Media Contact: Andy Tarczon andy@thediffusiongroup.com 469.287.8060