A little patent law, plus a little of the old embrace and extend, is how Microsoft (NASDAQ:MSFT) plans to get back into the tech game. While most analysts are discounting its purchase of Skype, and its decision to add virtualization to its next Windows client, as window-dressing, they're actually part of a larger strategy based on the idea that patent and copyright law can now protect monopoly rents.
Last year's decision in Bilski, which was supported by a $280 million judgment against Microsoft itself, means we're entering a new tech era in which innovation matters less than your ability to defend it in court.
Since committing to patents as protection early in the last decade, Microsoft has been steadily building its own portfolio, and its former CTO, Nathan Myrhvold, has become one of the industry's most notorious patent trolls. This new environment has now bound the company Microsoft considers its chief rival, Google (NASDAQ:GOOG), which now faces billions of dollars in potential damages on its Android operating system. What was sold as a mobile Linux was made semi-proprietary by Google in an effort to control the ecosystem, but this stepped on patents and copyrights held by Oracle (NASDAQ:ORCL) and many other companies.
While Google is stuck in patent court, Microsoft has finally gotten out of the U.S. government's antitrust jail. The end of the idea of a Windows monopoly means Microsoft can easily tie web telephony and virtualization into the operating system, increasing its revenues dramatically. This was already its play in games and entertainment through Xbox Live.
All this will be done through Microsoft's Azure cloud, which is the key to everything. Azure will provide the infrastructure under which services like virtualization, telephony, games, TV, and business apps can pay off, not through yearly license fees but in monthly bills. By offering those services to Apple (NASDAQ:AAPL), it gets more cash to invest in Azure. By taking it global (starting in Japan through Fujitsu (OTC:FJTSF)), it can replicate Google's reach.
The difference between the Google and Microsoft clouds, in Microsoft's view, will be that Azure will make money while Google is stuck offering free services. This will let it play catch-up in infrastructure. And Microsoft will control its customers through its IP (which in this case stands for both Internet Protocol and Intellectual Property), which was the dream it was pursuing when the government stepped in during the 1990s -- only now, it's perfectly legal.
Disclosure: I am long GOOG.