Original URL: http://www.theregister.co.uk/2006/12/04/alcatel_microsoft_ip_spat/

Alcatel and Microsoft say 'business as usual' despite patent spat

Let's stay together for the children's sake

By Faultline

Posted in Financial News, 4th December 2006 13:27 GMT

Analysis The legal action uncovered this week between Microsoft and Alcatel is seen by many as sounding the death knell to their cosy carve up of the IPTV market among global tier one telcos.

We wouldn't take the news as being quite so indicative, and would describe it less as the messy divorce that rival players at IBC this year predicted, and more as an agreement to continue living together for the sake of the children.

We asked Microsoft this week for a reaction and executives there said it was business as usual, and that both Microsoft and Alcatel employees were continuing working side by side at customer accounts, specifically the all important AT&T account. We may have received a different story had we reached the right people in Alcatel for comment.

What shocks us is the incredibly small argument that has led to so much fuss. This is a patent breach claim, little more and the two could easily have resolved a license between them for the sake of avoiding all the bad publicity. So given that, we must assume that one of the parties feels it has something to gain in a public statement of dissatisfaction.

It takes a lot for Alcatel to make a fuss at the worst of times, but if in making a fuss it is going to alienate major customers, and a major partner, there must be a extremely good reasons for it, and the board will have taken this decision as a strategic necessity. It's not that these patents are not serious, but they are items that could have been held in check and dealt with by the respective chairmen and CEOs, if the political will remained to be "buddies".

The patents include two for authentication services, another for technology that performs Network Address Translation between two networks and a second suit based on four patents, one for tagging packets and some on frame handling. They related directly to IPTV and trickplay features that by now are embedded in Microsoft software.

Microsoft is also already involved in longstanding patent litigation with Lucent, which is in the middle of merging with Alcatel, and this is over video-decoding technology used in the Xbox 360. We guess these actions won't be dropped now either.

If we had to characterise this, it has the look of the Board of Alcatel calling downstairs and asking "What have we got on Microsoft that will cause a bust up" and this is what the technical teams and the legal department came up with.

The suits were filed late last week in a federal court in Texas and they are all technology areas were their teams are working closely together and technology is flowing freely between them. Our friends over at US research group TDG (The Diffusion Group) have published an opinion that the patents come from work that took place at Oracle relating to trick play, and these were sold to Thirdspace which was later acquired by Alcatel.

TDG's Colin Dixon points out that several ex-Oracle employees from the video server team now work at the Microsoft IPTV group and that this is where the alleged technology transfer may have happened, inadvertently or otherwise.

We think the nature of this complaint is that it has now already served its purpose. It has driven a public wedge between the two players that had up until recently presented a united front in order to keep their delayed AT&T IPTV Project U-Verse on track.

The cracks began to show in September when Alcatel told us at a conference that it would continue to support its OMP platform that had proved so successful around Europe, before it cut its partnership deal with Microsoft. OMP took another shot in the arm when it was used and upgraded to handle High Definition in the Canadian Sasktel contract announced in October.

Also OMP was bid, but lost in the important Telus deal in Canada, and our sources say that Telus did not want a Microsoft bid producing conflict with Alcatel. The fact that OMP was meant to be on life support made it impossible for Telus to consider it seriously.

Christian Van Boven, AVP Solution Management on triple play, told us in September that Alcatel was working on separate improvements to its IPTV software platform, including a MyOwnTV interface for personalised EPGs and local advertising delivery software, which would work with OMP and it is from these pubic displays of indifference to Microsoft, that rumors of a split began.

"We are not moving away from Microsoft IPTV," he insisted at the time. "But we have customers that are committed to stay on our existing Open Media Platform so we are developing a lot of function that is independent of the IPTV middleware.

This all led to an understanding in the marketplace that after all the delays and hostility in the market, and in the light of the success of the Lucent merger, Microsoft now needed Alcatel more than Alcatel needed Microsoft.

Add this to growing fears that Microsoft could engineer dominance of IPTV, but could be tactically discredited if Alcatel moved now, and we see the rationale for the legal action.

While Microsoft talks about 16 live accounts for its service, Telecom Italia this week confirmed to Faultline that it does not have a single line of code from Microsoft in its system, and that it used OMP and that it sees no reason to upgrade, but maintains its stance that it has a "continuing dialog" with Microsoft.

So, with the odd exception, Microsoft and Alcatel appear set to complete the projects that they have begun working on, and if they failed to do that both would lose all credibility in the IPTV market. But as for bidding in the future for new IPTV deals together, this legal action appears to make that no longer a viable option for either company.

So if they are staying together for the sake of the children, at least we know there will be no more children.

The worrying thing is that there have to be more deals for both of them. The network upgrades that are driven by IPTV are the lifeblood of Alcatel, and Microsoft will need its hand held by a major telecoms integrator if it wants any more contracts, and that means that it must declare allegiance to another telco equipment supplier in order to make any more bids.

That cannot be Cisco, which is seen as too competitive with Microsoft and it is this animosity that has driven Microsoft to work exclusively with Nortel in the enterprise and that may limit Microsoft's options to Nortel in the future for IPTV. It is too openly hostile to Nokia Siemens and they offer their own platform, and Ericsson has already begun to cut deals with Kasenna and anyway is mostly wireless, as is Motorola.

So while Alcatel can bid for more business, it would be suicidal to try to explain to a new potential customer why it was suing the partner it is bidding with. It will instead have to bid with either OMP or the system that Lucent has inherited from Telefonica (Imagenio) and it would be sensible to begin the gradual harmonization of the two. In fact, it is likely that a decision to harmonise them may have already been taken.

Lucent hasn't got the in-house software skills to re-write Imagenio as a package, from an in-house system, while what's left of the OMP team at Alcatel do.

If Microsoft tries to enter new bids before all of its existing clients have built out, then it risks going public with a new partner while justifying staying with Alcatel for existing deals. This means Microsoft must temporarily hold fire on new activity in the market for a while. Also the Microsoft system required tight integration with the Alcatel kit, and this would take time.

Perhaps some of this bust up came from the now dominant Lucent executives who are set to take charge at the merged Lucent Alcatel. They may have remained annoyed at having had a partnership with Microsoft on IPTV cancelled, when fickle Microsoft turned to Alcatel two years ago.

Alcatel worked with Microsoft because it wanted a way into the US, which it now realises Lucent ownership can provide. Comments published from Alcatel officials suggest that it will seek an out of court resolution to the litigation once it has served its purpose, saying that it only filed it to preserve Alcatel's rights.

Competing IPTV services have been largely relegated to second and third tier telcos since the partnership between Alcatel and Microsoft began, and there has been a complete absence of activity in top end players since that effort ran into delays. The news may well be used successfully by rivals to unblock the market.

In the middle of all of this AT&T announced that, like other recent Microsoft customers, it is now ready to ship High Definition TV services on 25 channels to its San Antonio, Texas subscribers. It has gone on record as not wanting to roll out too many set tops until it had HD working.

AT&T says it will also release new capabilities such as scheduling DVR programs via the seb, which come bundled on the new Motorola HD set tops. At the moment each set top can only access one HD stream at a time per household, which will rise to two some time next year. HD will be billed at an extra $10 a month.

Copyright © 2006, Faultline

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