- 1 -

Speech to IPPR 14 July 2006 – IP at the Heart of Innovation

Good morning. I would like to thank the IPPR for asking me to speak today and congratulate them on organizing an excellent event. What I would like to talk to you about this morning is the importance of intellectual property to innovative businesses and to the economy as a whole. It’s great to be able to talk today to such a high profile and informed audience. It isn’t always the case when we sit down and try to explain why intellectual property matters so much to prosperity and the environment for innovation. For most of us I think it is clear that a strong knowledge economy gives countries a great economic opportunity to successfully compete in an increasingly global economy. Unfortunatelythe crucial link between this and the need to maintain a strong IP legal regime is less well understood by non-IP experts. The importance of a strong and vibrant IP system is at the heart of innovation and this needs to be better understood by all of us not least our political leaders.

I believe that Intellectual propertyhas inspired, and continues to inspire, social and economic progress. Itprovides the foundation for rewarding individual initiative and innovation. This foundation both stimulates creativity and provides the resources for further investmentin the creative process. The patent system, for example, has been instrumental in moving technology from candle light to electricity; from horseback to the railroad, automobile, and airplane; from post cards and letters to the e-mail and Internet we know today.

Intellectual property, innovation, and social and economic progress are tied together. It is no coincidence that the gradual adoption of stronger IP laws worldwide since 1970 has coincided with tremendous advances in technology and exceptional growth in the number of companies and employees in technology industries. This, in turn, has had far-reaching benefits in both developed and developing markets across the globe.

Take the UK software industry for example. The Office of National Statistics estimates that the UK software economy currently employs 1 million people and is worth £20b per year. £13b of this comes from in-house development and the remainder from the commercial software development market.

On an individual or company basis: protection and licensing of IP allows companies and individuals to obtain a return on investment. This is integral to sustaining business development whichthen pays for future rounds of R&D spending. More R&D spendingin turn should create more IP, thus completing a virtuous circle.

It is very important to note that IP is an enabler. A strong Patent portfolio for example encourages a company or individual to share its innovation with another company or individual safe in the knowledge that they will be rewarded for their innovation. This encourages further innovation and transparency because you have to rely less and less on trade secrets. Very often IP,and especially patents, are described in terms of closing the door to innovation but in fact thecomplete opposite is true.

In an interconnected world where transparency is crucial to aid innovation, patents are playing an increasingly important role in software development. As has often been the case when patents rights have been extended to new fields of invention there has been a big debate around whether this will somehow stifle any other innovation in the same space. These arguments are not new or exclusive to the IT sector.

When Thomas Edison and other inventors first harnessed the power of electricity into all sorts of useful deviceswhich we view as everyday essentials today, there was debate about whether anything powered by electricity should be outside the scope of patent protection because electricity was a fundamental “force of nature”. Of course, we all know how the debate turned out. Over the last hundred years, there have been over 1,000 patents for “light bulbs” – each patent covering improvements on the first design. Even with patent protection, many companies have entered the market and provided consumers with new products. Patents didn’t stifle innovation, they encouraged it by incentivising it!

So patents are an increasingly key part of any IP portfolio. Patents enable innovators both to protect and share their inventions and are integral tocompetitiveness.

But the system is not perfect. We believe that reform is needed in the Patent regime especially in the US system. Many people mistakenly assume that Microsoft – as a US founded and headquartered company – is a fervent and uncritical supporter of the US patent system. This is not the case. It is certainly true that we believe that the strong IP protection in the United States is a major factor in the country’sdynamic economy. That said, we believe that the US system should be improved and that all who participate in it and rely upon it would be well served by improvements.

In general terms, the UK and EU systems for patent, copyright, trademark and trade secret protection work well in providing the incentives and rewards necessary to attract investment, fund research and development, secure a return on investment, and re-invest in further innovation. The underlying substantive IP laws are well established and largely consistent. Each reflects a balance between encouraging creative and inventive individuals and enterprises to innovate and taking account of a wide range of other public-interest considerations. We believe it’s unnecessary and perhaps counter-productive to pursue further EU harmonisation or to substantially redefine the balances reflected in current UK IP legislation.

Nevertheless within the existing framework we believe there are some specific areas where improvements could be made. For example, patent quality must be a top priority and Microsoft supports efforts toward continued improvements in the quality of patents being granted in the UK, Europe and worldwide. Improvements could also be made in efficiency of obtaining and enforcing patents, in remedies for copyright and trademark infringement, and in better promotion of intellectual property protection abroad.

It is also crucial that UK based businesses, especially smaller businesses, are encouraged to protect their innovations using the IP system. The future competitiveness of the UK economy could depend in large part on this. This should be a top priority for the Government with the key drivers being a mixture of awareness and education programmes coupled with incentives to make the learning curve and initial costs incurred by SMEs less burdensome. To support this aim, Microsoft would encourage discussion of patent fee increases for bigger businesses to enable patent fees for SMEs to be reduced.

We are also concerned that the cost of protecting IP can sometimes be a barrier to the success of small companies and individual inventors. We have therefore argued that the Government should extend the R&D Tax Credits system for small companies to help cover the cost of applying for a patent including the legal fees. The day that filing a patent becomes a barrier to aninventor sharing his innovations with the world is a day on which we all lose out.

From Alexander Graham Bell’s telephone to Thomas Edison’s light bulb onwards to the Microchip invented by Jack Kilby and Robert Noyce, their ability to patent their inventions allowed them to share their technological advances with the world, while also ensuring that they saw a return for their hard work and creativity. Whole new industries, millions of jobs and many further technological developments have been built on the basis of just these few patented inventions.

As with everything in business, especially in the IT sector, the way that companies like Microsoft approach management of our IP is constantly changing. We believe that licensing of technology is an essential part of maintaining a healthy cycle of innovation in the IT industry. Interoperability of different devices and types of software is also of great importance and here IP has also an important role to play in delivering a great experience for the consumer. In the pursuance of that objective Microsoft has recently made a number of significant changes to the way it licenses and shares its intellectual property.

For example, in June this year we announced that we have teamed up with the Creative Commons, a non-profit organisation that offers flexible copyright licenses for creative works, to release a copyright licensing tool that enables the easy addition of Creative Commons licensing information for works in popular MicrosoftOffice applications. The copyright licensing tool will be available free of charge at Microsoft Office Online and CreativeCommons.org. The tool will enable the 400 million users of Microsoft Office Word, Excel and PowerPoint to select one of several Creative Commons licenses from within the specific application. This announcement clearly demonstrates Microsoft’s commitment to removing barriers to the sharing of ideas across borders and cultures.

Similarly at the beginning of this month Microsoft also announced that we are helping fund the creation of an Open Document Forum / Open XML converter for Microsoft Office. This Open XML Translator project will create tools to build a technical bridge between the Open XML Formats and OpenDocument Format. In addition to making these translation tools available as free downloadable add-ins for the 2007 version of Microsoft Office, the tools will be developed and licensed as open source software. The translation tools will be broadly available to the industry for use with other individual or commercial projects to accelerate document interoperability between Open XML and other technologies.

Another important development in his respect is our IP Ventures programme whereby we agree to spin off intellectual property to prevent discoveries we do not intend to use from going to waste. In June we announced the first IP Ventures deal to come from Microsoft's research laboratory in Cambridge, with a London-based company called Skinkers which makes desktop software, basically desktop alerts for media companies, including the “Mini-Motti”, a cartoon version of the football commentator John Motson, who delivered updates on the World Cup direct to computer ' desktops.

In return for 10 per cent stake in the company we agreed to give Skinkers access to some new technology that is very useful to them but that we had decided not to use in our packages.

With the Creative Commons, Open XML and IP Ventures announcements I believe that we are demonstrating our open and imaginative commitment to cooperation with others, interoperability and the sharing of IP which drives further innovation.

Intellectual property systems which have been at the heart of innovation for over a century of amazing technological progress can continue to support the great work of engineers and inventors in creating new technologies, economic growth and jobs, but they need to be supported by politicians, business and society.

Thank you very much for the opportunity to share our views on these important issues.

(Word count 1,790)