All Things Digital

You wouldn’t know it from the protests over Microsoft’s decision to retire Windows XP at the end of June or the PC users exercising their Windows Vista downgrade rights, but Vista is actually selling quite well. Microsoft (MSFT) Chairman Bill Gates said today that sales of Windows Vista have reached 140 million copies worldwide. “That’s a very rapid sales rate,” Gates explained.

Sure is. Especially for an operating system that’s met with such a middling reception. That said, you’ve got to wonder if the 140 million copies to which Gates refers are deployed copies or licenses sold. Because if it’s the latter, the number would be decidedly less impressive. It wouldn’t really account for volume licenses sold to corporate customers, copies pre-installed on OEM computers, and copies downgraded to Windows XP. And Gates has made exactly this type of oblique statement before, the last time Microsoft announced Vista sales figures.

With the Apple TV Take Two, we think we have it right this time. I think we have a great product.”

–Apple Chief Operating Officer Tim Cook, Jan. 23

Promises, promises, promises … When Apple (AAPL) debuted iTunes Movie Rentals this past January, the company pledged to offer “over 1,000 titles by the end of February, including over 100 titles in stunning high-definition video with 5.1 Dolby Digital surround sound.” Well, today’s March 4 and, as best I can tell, Apple hasn’t kept its promise. Browse iTunes this morning with the software’s “Power Search,” and you’ll find just 411 films for rent–91 of them available in high definition. That’s 589 short of the promised 1,000–a discrepancy of nearly 60%.

Seems Apple may not have Apple TV quite right yet after all–the Hollywood licensing part of it, anyway.

UPDATE: At the Apple shareholder meeting yesterday, CEO Steve Jobs confirmed the discrepancy, saying the company’s goal of 1,000 rental titles on iTunes was short by around 600.

Microsoft (MSFT) made a “significant” company announcement this morning, one thankfully unrelated to its bid for the much diminished Yahoo (YHOO) Inc.

But what is there for the software giant to talk about these days other than Yahoo, really? Why that old saw, software interoperability, of course. In a statement issued this morning, the software giant announced changes to its technology and business practices intended to “increase the openness of its products and drive greater interoperability, opportunity and choice for developers, partners, customers and competitors”–which translates roughly as “appease European antitrust officials.”

Among the key changes:

• Microsoft will make the protocols and APIs in its high-volume products openly available to the developer community.
• Microsoft will indicate which protocols are covered by Microsoft patents and will issue licenses to those patents on “reasonable and nondiscriminatory terms, at low royalty rates.”
• Microsoft will implement a covenant not to sue open-source developers for development or noncommercial distribution of implementations of those protocols.
• Microsoft will support open standards and work with developers and standards-setting bodies to enable the transfer of user data from Microsoft applications to apps designed by third-party developers.

“Customers need all their vendors, including and especially Microsoft, to deliver software and services that are flexible enough such that any developer can use their open interfaces and data to effectively integrate applications or to compose entirely new solutions,” Ray Ozzie, Microsoft’s chief software architect, said in a statement. “By increasing the openness of our products, we will provide developers additional opportunity to innovate and deliver value for customers.”

Quite a move for a company whose leadership once likened Linux to “cancer” and derided open-source licensing models as “Pacman-like.” Though it’s not like we haven’t seen this all before.

“They are not making the source codes open, but they are opening the gates that allow you into the compound,” said Matt Asay, a general manager at open-source management company Alfresco. “It’s a great first step. … It’s a bold move by Microsoft. It’s a good indication of Microsoft’s self-confidence that it feels it can open up what effectively are its crown jewels and not lobotomize its company at the same time.”

Here’s a savvy way to debut your new advertising-supported music service: announce that it will offer some 25 million songs from “all the major labels,” and then hope that those labels follow your lead. And if they don’t, just hang in there until they do.

Which is essentially what Qtrax, which claims to be the world’s first free and legal peer-to-peer music service, has done. Qtrax launched over the weekend with the alleged support of EMI, Universal, Warner and Sony. Today, all four labels are saying that while they have discussed relationships with Qtrax, they have not inked any formal agreements. “EMI Music had an initial agreement with QTrax, essentially a license designed to help them experiment with this ad-supported model,” an EMI spokeswoman told Wired. “QTrax didn’t launch the service during the period of the agreement–I think we initially did this two years ago. We’re now in talks with the company about a possible new deal, but as of today, they don’t have a license with EMI Music.”

A source inside Warner told the Times Online a similar story: “Warner Music Group has not authorized the use of our content on Qtrax’s recently announced service.”

Oh, but it will. Just you wait, says Qtrax CEO Alan Klepfisz, who admits that the “ink hadn’t dried” on some of the company’s claimed deals. “We are not idiots,” he told the Times Online.”We wouldn’t have launched the service in front of the whole music industry unless we had secured its backing. We feel we have been unfairly crucified because a competitor tried to damage us. Everyone is very upset. We do have industry agreements including the major labels. Even today we are working on more deals.”

Microsoft’s gone and killed Vista’s infamous “Kill Switch,” a service that hamstrings unlicensed versions of the operating system.

Responding to complaints, the company said today that the upcoming Service Pack 1 update for Windows Vista will remove “Reduced Functionality Mode” from the OS’s copy-protection scheme.

That’s great news for innocent Vista users who’ve had their systems “reduced” for no good reason, although to be frank some users may find the nagware service with which it’s being replaced equally annoying. “Although our overall strategy remains the same, with SP1 we’re adjusting the customer experience that differentiates genuine from nongenuine systems in Windows Vista and later in Windows Server,” Windows product marketing Mike Sievert explained. “Users whose systems are identified as counterfeit will be presented with clear and recurring notices about the status of their system and how to get genuine. They won’t lose access to functionality or features, but it will be very clear to them that their copy of Windows Vista is not genuine and they need to take action.”

Recurring notices, huh? My God … they’ve finally found a new use for Clippy, haven’t they?

Burst has added another notch to its patent-infringement settlement belt. The scrappy three-man company, which once beat a $60 million settlement out of Microsoft over charges that the software giant had stolen its streaming media technology, has managed to squeeze a few million out of Apple as well.

Bringing an end to an often contentious legal battle that began about two years ago, Apple on Wednesday agreed to pay Burst.com $10 million to settle charges that it illegally incorporated the company’s audio and video-on-demand media delivery solutions into the iTunes ecosystem. In return, Burst agreed to grant Apple a nonexclusive license to its patent portfolio–with certain eyebrow-raising exceptions and caveats. The settlement specifically excludes from Apple’s license one issued and three pending Burst patents on digital video-recorder technology. But it also precludes Burst from suing Apple for any future infringement of the those patents. Now that’s an odd twist, isn’t it? Especially since a patent license is often little more than a covenant not to sue the licensee.

Why promise not to sue for infringement, but refuse to license? Why accept a settlement of just $10 million ($4.6 million after court and attorney fees), when a damages award might have been many, many times greater? And why announce the settlement of a bitter legal battle on the eve of the Thanksgiving holiday when so few people will pay attention to the news? Why do all that, unless there’s something more here? An acquisition in the works, perhaps. Or something else entirely.

Oracle isn’t going to pay $21-per-share for BEA Systems. In fact, it won’t even pay $17.01-per-share for it–a penny more than its original $17-per-share offer. Because even that would be too much.

In a letter to BEA late Tuesday night, Oracle President Charles Phillips rejected, with barely restrained incredulity, BEA’s proposed acquisition price of $21 per share. “We believe that your counterproposal at $21 per share price is an impossibly high price for Oracle or any other potential acquirer,” Phillips wrote. “At $21 per share, the BEA board is asking for an 80% premium to BEA’s stock price before the appearance of activist shareholders who are pushing the BEA board to sell the company. The $21 per share price is a multiple of nearly 11 times BEA’s last 12 months reported maintenance revenues. Nobody would seriously consider paying that kind of multiple for a software company with shrinking new license sales. Furthermore, no other company has come forward to bid for BEA. Our proposal at $17 per share is the only offer. Apparently no other companies think that BEA is worth $17 per share, let alone $21 per share. Accordingly, we repeat our proposal to purchase BEA at $17 per share, a price that we are unwilling to increase. We do not believe BEA is worth more than that and we have an obligation to our own shareholders to exercise price discipline when evaluating acquisition opportunities.”

“Nobody would seriously consider paying that kind of multiple.” Suffice to say, that little barb did not go over well at BEA, which rejected Oracle’s $6.7 billion takeover offer a third time this morning. “As fiduciaries, our board cannot endorse a proposal that it has concluded significantly undervalues BEA,” William Klein, BEA’s vice president of business planning and development, said in a letter to Phillips. “We therefore assume that your proposal will expire on Oct. 28.”

Hard as it might be to believe, people are actually buying Windows Vista. After market close yesterday, Microsoft reported a 27% surge in revenue, to $13.76 billion for the first quarter of 2007, its best quarterly revenue growth in eight years, on robust demand for its new operating system.

Vista appears to be selling far better than anyone anticipated. Perhaps even Microsoft itself. Asked during an earnings call for an update on Vista adoption thus far, Microsoft CFO Chris Liddell had this to say:

Clearly we are very happy with the client division overall. As you’ve seen since we launched Vista, the revenue growth has been in excess of 20% three quarters in a row, so the overall [headline] number, very good.

“In terms of the premium mix, also very happy about that. Now, in this case, premium mix brings in both Vista and XP premium sales as well, and that’s tracking in the mid-70s, so 75% for the quarter, and that compares to I believe 59% in the equivalent quarter last year, so up 16 points year over year. So we’re very happy with the adoption of Vista Premium and also happy with the old XP Media sales as well.

“The other thing I’ll point to is on the client annuity agreements, which is probably the best leading indicator we can think of of people’s intention to adopt, that’s still very early in the adoption cycle for businesses, but the volume licensing portion of our business was up 27% in the client area, so that’s a very good leading indicator from our point of view.

“And sort of finally, as a wrapper, year-to-date sales are now 85 million units for Vista. That compares to about 45 million for XP over the same period, so almost twice as much.

“So it’s still early days but progress, we’re very happy with so far.”

Eighty-five million copies of Vista sold. Interesting, considering Vista didn’t exactly arrive at market with rave reviews. Guess “the wow” has got to start sometime, right?

Flash memory maker SanDisk has apparently devised a means of offsetting the legal bills that might arise from the price-fixing suit filed against it (and 23 other companies) earlier this year: suing the better part of the removable flash storage industry for patent infringement.

SanDisk filed three patent-infringement lawsuits against 25 companies that make, sell or import USB flash drives and other removable flash storage products yesterday, seeking damages and a permanent exclusion order from the U.S. International Trade Commission banning importation of infringing products into the United States.

SanDisk hasn’t yet disclosed publicly the patent(s) at issue here–and there are certainly a number of possibilities– but No. 5,602,987, Flash EEprom system may be one of them. After all, the company has used it for these purposes before.

Anyway … Among those on the receiving end of SanDisk’s suit: LG Electronics, Buffalo, Corsair, Kingston, Verbatim Transcend and Imation/Memorex. “These actions demonstrate SanDisk’s long-term commitment to enforcing its patents, both to protect our investment in research and development by obtaining a fair return on that investment, and out of fairness to third parties that participate in our patent-licensing program,” E. Earle Thompson, chief intellectual property counsel at SanDisk, said in a statement, noting that defendants named in SanDisk’s suits would be offered the chance to participate in its patent-licensing program. “Otherwise, we will aggressively pursue these actions, seeking a prompt judicial resolution awarding damages, obtaining injunctive relief and banning importation of infringing product.”

It’s been a year since Microsoft CEO Steve Ballmer first claimed the Linux operating system infringes on Microsoft’s intellectual property and six months since the company’s general counsel, Brad Smith, and vice president of intellectual property and licensing, Horacio Gutierrez, told Fortune magazine that Linux and other open-source software projects between them violate 235 Microsoft patents.

Such anti-Linux declarations being biannual, it’s clear we were about due for another one, which Ballmer dutifully provided last week at a company event in the United Kingdom.

… Our battle is not sort of business model to business model. Our battle is product to product, Windows versus Linux, Office versus OpenOffice.
The only other thing I would say that is probably germane is, we spend a lot of money, the rest of the commercial industry spends a lot of money on R&D. We’ve spent a lot of money licensing patents, when people come to us and say, ‘Hey, this commercial piece of software violates our patent, our intellectual property,’ we’ll either get a court judgment or we’ll pay a big check. And we are going to–I think it is important that the open-source products also have an obligation to participate in the same way in the intellectual property regime.

“That’s why we’ve done the deal we have with Novell, where not only are we working on technical interoperability between Linux and Windows, but we’ve also made sure that we could provide the appropriate, for the appropriate fee, Novell customers to also get essentially the right to use our patented intellectual property. And I think it’s great the way Novell stepped up to kind of say intellectual property matters. People who use Red Hat, at least with respect to our intellectual property, in a sense have an obligation to eventually compensate us.”

So according to Ballmer, if you’re a Red Hat customer you may have an “undisclosed balance-sheet liability” to deal with in the near future. And if you’re not, you probably want to stay away from free software entirely. Because, as Groklaw’s Pamela Jones suggests, Microsoft apparently plans to eradicate it.

Ballmer “has just clearly outlined how Microsoft intends to extinguish Linux as we know it,” Jones writes. “Microsoft knows full well that in any intellectual-property regime based on software patents, particularly when used as weapons against innovation to protect and reward the old, no one can compete with Microsoft. They have all the money. FOSS is written by individuals who don’t have a pile of gold under the bed to go to court and get a court judgment or pay ‘a big check.’ Ballmer of course knows that. So this is the anticompetitive plan, under the guise of everyone having to play by the same rules.”

These patents are invalid. We don’t owe them a dime.”
– Vonage lawyer Louis Jameson, Sept. 21

Vonage lawyer Louis Jameson was right. Vonage doesn’t owe Sprint Nextel a dime. It owes the company 800 million of them. Vonage settled its patent dispute with Sprint Nextel this morning for $80 million–$35 million for past use of Sprint’s patented technology and $40 million for future licensing, along with a $5 million prepayment.

Sprint, in turn, has agreed to license Vonage its VOIP portfolio, which includes more than 100 patents covering methods and components to connect voice calls between a traditional telephone network and an IP network. The settlement comes two weeks after a federal jury ruled that Vonage illegally used Sprint patents and awarded Sprint $69.5 million in damages.

In a statement today, Vonage General Counsel Sharon O’Leary said, “We believe this deal is good news for Vonage, our customers and our shareholders. It allows us to put this litigation behind us and continue to focus on our core business by removing the uncertainty of legal reviews and long-term court action.”

Presumably with the “uncertainty of legal reviews” removed, Vonage will have that much more time to focus on other uncertainties, like its financial viability. As of June 30, Vonage only had $344 million in cash. Of that, $66 million is restricted cash used as collateral for the Verizon bond. (Verizon also won its patent-infringement case against Vonage.) And it’s carrying $248.2 million in debt, with a put option that may mean it is due as soon as December 2008.

But why dwell on matters so bleak. There is, after all, good cause for celebration: Vonage stock soared as much as 80% this morning–if soaring is what you call reaching for $2 per share from a baseline of $1.56–on the news, giving the company its biggest single-day advance since going public last year.

Apple’s fight to keep the iPhone off unauthorized networks will apparently begin in earnest later this week. In a statement released Monday, Cupertino warned users that they can “cause irreparable damage” to their iPhones by modifying them to work on unauthorized wireless networks.

By “irreparable,” Apple seems to mean damage that may turn unlocked iPhones into iBricks when it issues future software upgrades. Perhaps even the one that will arrive later this week.

“Apple strongly discourages users from installing unauthorized unlocking programs on their iPhones,” the company’s statement read. “Users who make unauthorized modifications to the software on their iPhone violate their iPhone software license agreement and void their warranty.”

So what are owners of unlocked iPhones to do? Avoid the forthcoming software update until the iPhone Dev Team releases a tool to restore or re-lock your phone. And according to a statement issued by the group today, that’s likely to happen sometime next week:

Sept. 25 statement from the iPhone unlockers

“Based on download numbers, the iPhone Dev Team believes that, worldwide, several hundred thousand people have unlocked their iPhones. That number continues growing every day. The removal of the lock, a bug, was a major step forward in the iPhone development. It made the iPhone free and useful to anyone, not only to those in certain countries.

“Apple now announces that the next firmware update, expected later this week, will possibly break the handset of all of us free users in the World. It speaks of “damage” done to the firmware and “unauthorized access” to our own property, The removal of those firmware problems, which were built in in favor for AT&T, does not cause “damage” as they want to make us believe.

“We will provide you with a tool in the next week which will be able to recover your nck counter and seczones and even enables you to restore your phone to a factory-like state.

“In the meantime we advise you not to update your free iPhone with the upcoming firmware. Wait for the next version to be fixed to work properly with your carrier and not break your phone.”