Microsoft unveils two paradigm-shifting deals in 7 days
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.
Posted by Roger Parloff 7:38 AM 21 Comments comment | Add a Comment

It looks like Microsoft realizes it has a limited play in this large arena(bilions per year). So It is still the evil empire but they need a helping hand this time. As a hardware only provider, not the content, no one will buy the device if it cannot be used, or consumers pay royalties.
Posted By Jim Revett, Melbourne FL : 12:21 PM  

So do only the major labels get paid per Zuna? What about the indie's, and movie houses or is it only the major movie houses? Why is their content better then the others? Or will this deal with the devil reinforce the positions of the majors and force the indie's to merge just to get access to the market? Who decides what is worthy? Smells like an anti-trust problem for all concerned.
Posted By A.N.T. Rust, Courtland, Ohio : 4:28 PM  

These deals shows Microsoft's diminished influence and expose them as a company forced to look outside it's walls for help as it struggles to remain relevant.

Their core business (Windows) no longer increases revenue so they have to develop other markets. However, with the exception of the XBox, Microsoft has failed to convert it's own ideas into meaningful businesses and profits.

MSN Music has been a complete failure so Microsoft re-brands an ugly, oversize, overweight (2 times as much as an 40 or 80 gb iPod video) MP3 player made by Toshiba and call it Zune. They open a Zune music store based on a new DRM which isn't compatible with players made for the existing MSN Music DRM and they offer $1 for every player sold to anyone who will give them content.

Will Zune create a paradigm shift? I highly doubt it. Most tech and consumer experts doubt Zune will cause Apple any more heartache than the mighty Dell DJ (discontinued). Apple has 6 flavors of iPods, a hugely successful content delivery system, and has spawned an entire new type of media delivery, Podcasts.

I don't see Apple handing a buck to Universal or any other content provider in the near or distant future. Somewhere Steve Jobs must be laughing.

As for MS/Novell. Hasn't Novell left the building? Before the turn of the century Novell was a captain in the world of networking. They had over 70% market share in the 90's which has been reduced to approx. 10% today.

Microsoft brought a plastic knife (Zune) to a gunfight with Apple. So what do they do in an open source world where Microsoft isn't significant? They marry a has been. Indeed, the reaction is muted. No one cares but Microsoft, Novell and Universal.
Posted By Steve Oltmann, Los Angeles : 7:56 PM  

In answer to the good question of A.N.T. Rust, MSFT would compensate the minor labels, too, though the mechanism has not yet been worked out, according to Smith. It could be through a collection society, or through some sort of computerized clearinghouse, or through individual negotiations with those independent labels.
Posted By Roger Parloff, NY, NY : 6:57 AM  

Why would someone consider an arrangement to share technology that might bring together the benefits of open source technology with proprietary technology a sign of weakness? I think it is a sign of courage and open mindedness to new possibliites.
Posted By Ruth Fisher, Pembroke, MA : 2:42 PM  

This is one reader who thinks this is a kinder, gentler Redmond. It appears that Microsoft is catching on that its users want more from the software giant and the company os stepping up to the plate and delivering. This is great news for businesses and consumers, especially the Microsoft/Novell deal.
Posted By Optimistic, Quincy Massachusetts : 3:15 PM  

Kinder, gentler bollocks. Novell replaces SCO, and the Zune deal uses their bankroll to get RIAA on side in the heartfelt attempt to slash Apples's throat. Leopards, spots...
Posted By B Mendelsohn, London, UK : 9:16 PM  

I think the Novell / Microsoft merger is a great thing and makes god win/win sense for all involved parties and the consumer.
Posted By Dr.John Daoust , Hingham , Ma : 9:21 PM  

When I heard about Microsoft's deal with Univeral, my first thought was, "clever idea". Now I think that Microsoft outsmarted itself. Here's why - Most of the consumers that are being targeted for Zune look at the music companies as greedy. By sucking up to them, Microsoft makes Steve Jobs and Apple look like digital content Robin Hoods. This will work against Microsoft's desire to make Zune into the hip new thing.
Posted By Steve Hubbell, East Lansing, MI : 10:36 AM  

the microsfot/novell agreement is fascinating. this will mark a real, positive turning point in the debate over open source
Posted By Jason, Pittsburgh, PA : 1:22 PM  

The Microsoft/Novell deal is a forward step that promotes technological innovation. The alliance has great potential for the technology industry as well as the consumer.
Posted By Lucy, Tampa, FL : 2:55 PM  

To be honest, this deal bliss. Simultaneously running Windows and Linux on an Suse server would solve countless problems and it�s great that open and closed source can work together. It�s about time. The consumer wins and I think it�s a fresh outlook to a age old problem.
Posted By Will Reys, Carson City, NV : 2:50 AM  

Many people have thought that it would be �impossible� to bridge the proprietary and open source models, but the Novell/Microsoft deal seems to do just that. For that reason, it is pretty historic and should be welcome news to a cross section of the industry.
Posted By Mike, Sacramento, CA : 1:00 PM  

I think the Microsoft/Novell deal in particular is a paradigm shifting announcement and it signals some significant changes in the industry. In the deal, Microsoft seems to recognize the changing nature of the industry and has taken an important step, with Novell, to bridge the gap between open and proprietary software. Since a growing share of businesses are using both solutions, the deal makes a lot of sense.
Posted By Brian Mitra, Farmingdale, NY : 7:35 PM  

I vote for kinder and gentler Redmond too. But quite frankly who cares why? The end result of the Microsoft/Novell deal is a benefit for the consumer. Sound like they really are trying to address the needs of the stakeholder.
Posted By Catherine, Boston, MA : 8:03 PM  

I think MS is just responding to the writing on the wall. I expect we will see more partnerships like this. They should be given the benefit of the doubt. Ultimately, users will benefit.
Posted By Meghan Justman, Modesto CA : 9:54 AM  

I'll notice that there is a hint of evil in this offering.
Microsoft isn't selling many Zunes. The cost of 1 additional dollar per unit reflects this. Apple is selling many more i-pods. Apple will have to pump out more money.
This may not seem like a lot, however when you figure that it's 1 dollar per recording company the effects multiply. And also you can't over look the effects it would have on the iTunes music store that's been so successful. If Apple doesn't fork over it's (higher) dues, these companies may blacklist the iTunes store and start moving their content over to the MSN Music store. With this and their deal to enforce DRMed music they are making a play for the recording industry, reasoning (correctly) that customers will be forced to use their services if they want the content.
Posted By Jordan, Grand Rapids, MI : 4:31 PM  

If the Microsoft/Novell deal is for interoperability and openness and is so great great both sides, why does Novell get paid $348M (chump change for MS)?

If it is so wonderful why limit this wonderful "patent covenant" to 5 years only?

If Microsoft wanted to live in peace with Linux why did they fund "The SCO Group" fraudulent litigation against IBM and others behind Linux to the tune of $25M?

If openness is so great, why is Microsoft trying so hard to kill universal non-proprietary standards like ODF (Open Document Format)?

What do the "royalties" cover? Why not put those patents on the table so the Linux developers can reimplement the parts that "allegedly infringe".

Why does the "hint" to "other Linux distributors" to sign "similar deals" sound like a wish to get protection money?

In the end, it is real sincere actions that count, not hollow promises. Sad to say, but Microsoft still doesn't get it.
Posted By Ariel, Sunnyvale, CA : 3:08 AM  

This is a greatpartnership. It brings together the benefits of proprietary and open source software. We benifit, the Consumer! I think Microsft is moving in the direction of the future
Posted By Allen, Los Angeles, CA : 3:41 AM  

I love the idea that Universal may "blacklist" the store that sells more than 70% of all music sold online...almost as much as I like the idea that MS spent millions conniving people into trusting "PlaysForSure", then releases its own player that turns "PlaysForSure" into "PlaysNotAtAll"! "Screw the consumer--and industry partners!" is probably the caption on a motivational poster in a MS conference room. MS clearly believes music consumers are idiots but, judging from all the iPods that are sold--and all the Zunes that WON'T be--they clearly are not.
Posted By Jeff, Albuquerque, NM : 3:54 PM  

If Microsoft really "got it" then they would follow the lead of Sun Microsystems which has open sourced both its Unix OS, Solaris and the very popular Java. Open source does not equal Linux...Linux is just one example of open source software. What Sun has done is take an OS that it continues to develop and improve and open source it. This is a true example of merging and taking advantage of the "proprietary" and open source worlds. Until Microsoft open sources Windows any such deals like the one with Novell are all a sham and is not indicative of a "kindler gentler Microsoft" but an example of trying to save their skin. As for the the Zune..there are so many limitations to that device that it will be irrelevant in the MP3-player wars.
Posted By Tom, Lake Oswego, Oregon : 5:03 PM  

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About this blog
This blog is about legal issues that matter to business people, and it's geared for nonlawyers and lawyers alike. Roger Parloff is Fortune magazine's senior editor (legal affairs). He practiced law for five years in Manhattan before becoming a full-time journalist. To join in the discussion or suggest topics, please email