According to industry experts, Commerce One Inc.'s fire sale auction this week of patents on XML and Web services-related protocols poses a disturbing worst-case scenario for smaller enterprises trying their hand at conducting business-to-business transactions.
A mysterious bidder, known only as JGR Acquisitions, acquired the patents Monday in United States Bankruptcy Court in San Francisco for $15.5 million. Not only is JGR's identity a secret, but its intentions remain veiled.
Companies are afraid that this group could begin seeking royalties if they use the protocols in their products or services. While this is unlikely to stifle innovation in the Web services market, it could hit smaller companies in a big way.
"The worst-case scenario for the industry is that some companies are extorted to pay money for royalties they cannot afford, and it begins to affect business," said Jason Bloomberg, senior analyst with ZapThink LLC of Waltham, Mass. He said a $50 million bill for royalties may be insignificant to a company of Microsoft's size, but such a bill could affect the way a smaller company does business.
Bloomberg added that Web services innovation is likely to stay strong, because companies will license the technology if there is a solid business case to do so.
"The best-case scenario is that we never hear of this again," Bloomberg said.
Commerce One filed for Chapter 11 bankruptcy protection on Oct. 6, and decided to liquidate its assets. General counsel Paul Warenski said the one-time leading enterprise procurement software vendor decided the patents were its most valuable asset and that it would sell them separately.
John Amster, managing director of investment bank ICMB Ocean Tomo, which specializes in helping companies maximize the value of their intellectual property, said the 36 patents in question were far more lucrative than the rest of the business, which fetched $4.1 million.
Amster, however, downplayed the notion that JGR acquired the patents to charge royalties.
"[Commerce One] is doing what it was supposed to do -- maximize its value for its creditors and shareholders," Amster said. "Everyone is assuming the bidders showed up to charge royalties, and that's a bad assumption. There are lots of ways to use IP -- and yes, licensing and suing is one way. But there are other ways. The bidders could be acquiring these patents to pool them with other Web services patents to create a one-stop shop in that field. Another possibility is that the bidders made the acquisition for defensive purposes. It's a mistake to assume this is purely an issue of them doing licenses."
Amster said he did not know JGR's intentions, nor was he willing to reveal their identity.
The patents, meanwhile, are primarily XML related. Commerce One was known as an e-marketplace innovator, especially in the area of using XML as a B2B exchange. The company was a pioneer in developing the XCBL or XML Common Business Library, a library of components critical to B2B document exchanges. Three of the most valuable XML patents were acquired in 2000 from Veo Systems Inc., Warenski said.
Warenski said Commerce One's aim here was not necessarily to find a royalty-bearing home for the patents.
"There was no filter that said you were qualified to bid based on how you would use the patents," he said. Warenski added there various bidders from different markets, and that the auction exceeded his expectations. "It's a good result for creditors, and for shareholders, if there's any money left."
Published reports said the other bidders included venture firms connected to former Microsoft executive Nathan Myhrvold who is now with Intellectual Ventures, a company whose business model is collecting and enforcing patents.
Microsoft would not comment for this story when contacted by SearchWebServices.com.
Microsoft, Sun, Oracle and others have already deployed many of these protocols in their products, and some speculated that these giant vendors and others had formed a consortium that would bid on the patents as a defensive measure. That has not been confirmed.
ZapThink's Bloomberg wasn't buying it, however.
"This cloak-and-dagger stuff doesn't sound like one of big players; they wouldn't do this funny stuff," Bloomberg said. "This sounds like a smaller player wanting to make a splash."
The growing popularity of Web services could make this market ripe for a business model based on enforcing intellectual property -- something that is not without precedent.
"The bigger concern and the danger the industry faces, with what' s happening with file sharing and open source, is that we are slowly eroding the value of IP because we are forcing people to circumvent IP in order to be innovative," said ZapThink founder and senior analyst Ronald Schmelzer. "The last thing you want to do is decay the value of IP, because it's getting harder to base a business on IP. Others can always claim prior art."
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