Enterprise 2.0

People are lining up to kick Jerry Yang as he departs Yahoo's top spot, this is typical (from the NYT):

The announcement comes a year and a half after Mr. Yang assumed control of Yahoo from Terry Semel, a Hollywood studio boss that he handpicked for the job. Mr. Yang’s tenure has been marked by a precipitously declining stock price and the high profile collapse of a $44 billion acquisition offer from Microsoft last spring.

“It’s definitely positive from a shareholder perspective,” said Ross Sandler, an analyst at RBC Capital Markets. “Jerry has done less than a stellar job after taking the reins from Terry Semel last year, not just completely botching the Microsoft deal but with poor execution and multiple company restructurings that have done little to restore confidence of any of Yahoo’s shareholders, employees or customers.”

Amazon and Google, of course, who are admired by all as an exemplar of great management and flawless execution, has fared nearly exactly the same:



Yet (as of today anyway) no-one is calling for Messrs Schmidts or Bezos' heads or publicly stoning them in blogland.

They, of course, are merely struggling under adverse market conditions , but clearly - from what the blogosphere and the less financially savvy journalists say anyway - Yahoo's decline is all due to Jerry. Sack him and Yahoo could surely have defied global economics and seen its share prise rise while all about it fell. I await this phenomena now he's gone with eager anticipation!

One of course could argue that they should have sold to Microsoft 6 months ago - a great idea in hindsight, because of course everyone knew the crunch was coming, right? Right! But Yang, imho not unreasonably, felt that the business was worth more than a breakup price. Not only that, but one suspects that Microsoft would no doubt have tried to negotiate as the market dropped - these sort of deals are not sealed on the day.

From Silicon Alley Insider:

Forrester Research says the financial sector's troubled firms (Lehman, Merrill, Bear Stearns, AIG, Fannie, Freddie) all together equal about 2% of tech spending. Given Forrester sizes the US tech market at $572 billion, that's about $11.4 billion dollars at risk.

That 2% puts things into perspective, though the knock on effects would make it bigger than just the immediately effected business, as SAI goes on to note quote Forrester CEO George Colony:

The biggest risk to the tech market comes, not from the Wall Street collapse, but from a collateral U.S. recession. Forrester expects a mild recession in the U.S. and Europe lasting through Q3 and Q4 of 2008, and Q1 of 2009. While tech spending grew 8% in the U.S. in 2007, we are forecasting tech purchases to be up 5% in 2008, and up 6% in 2009.

SAI notes that the government bailouts are keeping some of those firms and their billions of dollars in tech spending alive. And even in death banks like Lehman and Merill spur Wall Street IT spending. Colony again:

the rigors of mergers and integration could also be drivers of new tech spending. Bank of America, Barclays, and JP Morgan have 36 months of intensive technology integration work ahead -- this will drive professional service, software, and to a lesser extent, hardware spending.

As SAI notes:

Translation: Bank of America took over Merrill, and Barclays bought Lehman's data centers. The work to get technology and enterprise systems like general ledger and human resources under the same umbrella can be a bonanza for tech consulting firms like Accenture (ACN) or HP's (HPQ) EDS.

True, and thats not really a spend that New Tech will see - unless the Enterprise 2.0 movement can persuade these players that there are significant benefits to adopting new technologies during rationalisation.

Sorry, no real conclusions yet, this is just an early datapoint. This is a big thing we are seeing happen, and it will take some time to play out.

Saw this on the WSJ stream via Techmeme: yet another refrain about the End of CIO's as you know it, this time from Rebecca Wettemann, an analyst at Nucleus Research:

There was a time when IT departments could get away with forcing employees to use complicated and hard-to-use software. The average worker didn’t know that better alternatives were out there. But as workers gain experience with consumer-focused software – either in their personal lives or at the office – they’re starting to realize that software can be easy to use and quick to get started on. It started with productivity boosters like instant messaging and collaboration software, but it’s crept into the realm of software that’s traditionally the realm of IT departments, such as sales automation.

“No CIO is going to tell me that [a software project] is going to take 12 to 18 months,” Wettemann tells us. Workers will just find an alternative on their own.

Thats cool - one hopes that the workers will also find ways to integrate it with all the other systems in the enterprise, and maintain and fix it on their own too, and take responsibility for the updates and all the re-jigging required when another system updates itself. (And will decommission it in 6 months time when the next New Shiny Thing comes along )

I didn't think so.......

This sort of reporting makes this interesting assumption that "user delight" rather than "does it work" is the key determinant of a CIO's continued employment,. What people like Ms Wetteman don't get (one suspects because they have little experience of actually running any big IT operation) is its not the User Presentation Layer that is hard to do - which is why N thousand Web 2.0 startups running on shoestrings are blooming. The hard thing is integrating the many complex components at the infrastructure level. A CIO is not fired if the users think an interface is clunky - a CIO is fired if the critical systems don't work.

But, CIO dinosaurs clearly needs to get their priorities right:

An IT pro’s “job is to pay attention to what is going on out there with the humans in your organization, not the servers", and...

Managing tech equipment and maintaining older systems will become decreasingly important. Identifying the best new tools early on and figuring out how to get them into the hands of the people they’ll benefit will be the more important skill.

Actually, that is exactly a CIO's role - with the underlying proviso that it all has to work. One is tempted to see what decisions Ms Wetteman and her ilk would make re rate of adoption of shiny new things if they were actually put in charge of running a company's IT, and their jobs - and reputation - depended on it.

(Afterthought - that is not to say that better user interfaces are not a good idea, just that they are not a first order priority - consumers, on the other hand, are initially far more "sold" on system UI rather than capability, hence the huge emphasis on that area in consumer systems. There is no doubt that the newer "stuff that works" will be brought into the enterprise, but it will be on a more careful, more selective basis.)

So - had a look at the YouNoodle startup predictor (we covered it here, applied for the beta, got no response so just clicked on via the TechCrunch link) - it is interesting in terms of where it spends its prediction resources:

- fairly high level analysis of the company structure, market you are in, and you can only have one sector so there are mutual exclusions - eg Internet and Computing for example
- extremely detailed analysis of the team, their experience, qualifications, relationships etc

The output comes in terms of a score out of 1000, and a valuation. Its hard to see how the score is made up, as there is no ability to analyse contributing factors - so for e.g. I don't know whether it would be higher impact to have an experienced advisor or another engineer who is better qualified for example. What was also interesting is it valued the company at roughly the value we put on it - but we told it first what we thought the business was worth, so one hopes it arrived at this independently.

I must say I thought some of these questions would probably breach some NDA's, and the personal data requirements were extremely detailed in some areas - and quite a bit of the personal data was not relevant to valuation but seemed more relevant to building up a funders' database.

Anyway, the other thought I had was I could see how it was valuing the company as a "black box", but I wondered how it was valuing the company within its ecosystem - that is:

- the 1st company doing X is valuable, the 10th is....well, it needs to have more to it.
- different ecosystems go in and out of fashion (the Gartner Hype curve)
- the overall market goes up and down - all our prediction models take account of sector and market sentiment.

I assume the model does this sort of activity deductively, but it was interesting it did not ask more specific questions (competitors identified, sectors we think we're in) etc - given its extreme interest in our personal networks its interesting it had so little interest in our value chain network.

Anyway, very educational process - we are certain this sort of analysis will be used more going forward, but would I really trust my company's detailed data to a small Webservice startup that could be acquired by who knows who? I'm not sure - would you? (For the record, we used an anonymised case study)

Update - on the sentiment value adjustmet issue, I saw this on VentureBeat

To get a better sense of YouNoodle’s accuracy, TechCrunch asked the company to calculate a few more valuations of high-profile companies based on available information about their early stages. Goodson sent the analysis along to me. In cases where real-world numbers are available for comparison, YouNoodle was usually a bit off. For example, it predicted a $124 million valuation for social application startup Slide, and a $71 million valuation for competitor RockYou. As of their most recent fundings, the companies were actually valued $550 million and $250 million, respectively. That’s pretty far off, but Goodson notes that YouNoodle did predict that Slide’s founding team was stronger.

This tells me that YouNoodle is probably looking at company worth without huge adjustment for market sector sentiment (the Slide/Rock You sector being quite high-hype right now) - so it's great if you are getting valuations in offf-the boil technology, not so good if you are the hot hot thing.

But of course the great thing about prediction systems is they learn from new data.

Given the current Cloud hypefest in the blogosphere, a warning for devotees of Cloud Computing comes from the direction of Chris Brogan:

Nick Saber isn’t happy now. Monday afternoon, after lunch, Nick came back from lunch to find out that he couldn’t get into his Gmail account. Further, he couldn’t get into anything that Google made (beside search) where his account credentials once worked. When attempting to log in, Nick got a single line message:

Sorry, your account has been disabled. [?]

That’s it.

Nick sent a message or three to Google for support. He got back this:

Thank you for your report. We’ve completed our investigation. Because our
investigation was inconclusive, we are unable to return your account at
this time. At Google we take the privacy and security of our users very
seriously. For this reason, we’re unable to reveal any further information
about this account.

And that’s it.

Suddenly, Nick can’t access his Gmail account, can’t open Google Talk (our office IM app), can’t open Picasa where his family pictures are, can’t use his Google Docs, and oh by the way, he paid for additional storage. So, this is a paying customer with no access to the Google empire.

He eventually got back in after 24 hours and quite a lot of effort, but there are 2 lessons here for anyone thinking of handing over responsibility for their important services to The Cloud at the moment:

(i) Don't. It's not really open for business yet.

(ii) Especially, don't do it with free services - even Google, or at least not with any critical path stuff - you pays for what you gets and no SLA means just that.

It's interesting - how many other areas of life would you advise yourself to put all your eggs in one basket?

(Update - I've been reading some of the comments on other blogs about this with a mounting sense of wonder at the sheer naivete of some users. For anything that is important: Firstly, always plan for redundancy in your systems - have an online and on computer service that are synched. Secondly, do frequent backups to a 3rd source. Thirdly, if its important, pay for it. Ad funded services are responsive to the advertisers, not to the users - its that pipers / tune thing. )

Here endeth the lesson........ until the next example.

Forget Grids, and the "network is the computer", and Distributed Computing and all those ideas from yesterday. We now have Cloud computing, which will solve all those tricky problems the last N iterations of networked server computing could not. The zeitgeist is upon us, with posts on my reader from far and wide, and has even made Techmeme via Businessweek:

The term "cloud computing" encompasses many areas of tech, including software as a service, a software distribution method pioneered by Salesforce.com about a decade ago. It also includes newer avenues such as hardware as a service, a way to order storage and server capacity on demand from Amazon and others. What all these cloud computing services have in common, though, is that they're all delivered over the Internet, on demand, from massive data centers.

A Sea Change in Computing

Some analysts say cloud computing represents a sea change in the way computing is done in corporations. Merrill Lynch (MER) estimates that within the next five years, the annual global market for cloud computing will surge to $95 billion. In a May 2008 report, Merrill Lynch estimated that 12% of the worldwide software market would go to the cloud in that period.

A fortnight ago I was on a panel at the Wealth of Networks Conference talking about the evolution of Service Infrastructures (Disclosure - we strategise, design, build and fix these infrastructures for a living), of which Cloud Computing is the current topic du Jour (Service Oriented Architectures being so 2007). I think I was put on as the token sceptic . And I must admit to being a little nonplussed - about once a year we tend to pick up a client assignment predicting the future of the overall service infrastructure market, and what is required for it to progress - and whether it's Top Meme is Clouds, or Grids, or SOA, or PaaS or whatever, its all comprised of the same basic submarkets, comprising of the Digital Logistics - the "trucks n' sheds" of the internet. The datacentres, backbones, OSS/BSS, middleware, and client side software subsectors to make all this happen.

And if I were just a bit skeptical (surely not) I would argue that this is merely an attempt to rebrand this overall area yet again, as it hasn't really taken off the last times. Nothing has really changed conceptually - we have datacentres, we have the internet, we have PC's (and increasingly mobiles etc) on the receiving end. They are all getting cheaper, bigger, faster etc but that is all pretty predictable (in fact, the $100bn market 5 years from now is pretty much a constant part of the story as well - it comes from aggregating all these submarkets up and hitting it with 5 years projected GDP growth globally).

So what has changed this time - what is the real difference between "The Cloud" and what has come before? There are some subtleties, as Wikipedia notes for example:

Cloud computing is often confused with grid computing (a form of distributed computing whereby a "super and virtual computer" is composed of a cluster of networked, loosely-coupled computers, acting in concert to perform very large tasks), utility computing (the packaging of computing resources, such as computation and storage, as a metered service similar to a traditional public utility such as electricity) and autonomic computing (computer systems capable of self-management). Indeed many cloud computing deployments are today powered by grids, have autonomic characteristics and are billed like utilities, but cloud computing is rather a natural next step from the grid-utility model. Some successful cloud architectures have little or no centralised infrastructure or billing systems whatsoever including Peer to peer networks like BitTorrent and Skype and Volunteer computing like SETI.

I await with interest to see how "monetisation" will happen without a billing system (except flogging yourself to eBay )

But technically this is still not much more than the inevitable progress of innovation learning curves, and economically not much more than the inevitable progress of Moore's and Reed's Laws. It is hard to see why this is a step change from what has come before.

Strategically its far more interesting, because what we are seeing is The Convergence, and corporates of various stripes scrabbling for the high ground (and in Dell's case, the Right to Brand). Consider the stripes - from the Web 2.0 corner comes Google, from the Web 1.0 corner comes Amazon, from the Web 0.0 corner comes Microsoft, and from the 4th corner come the resurgent Telco 2.0's who have networks and think they may as well be computers too.

In the centre sit a host of "traditional" ICT incumbents - the hardware and software companies, who are finding these large tanks increasingly parking on their (and each others) lawns.

The prize they all believe is worth winning is that moment of magical Enterprise 2.0 Enlightenment, when large corporates and SME's outsource all that infrastructure to them. Just in time, for today's outsourcers, to avoid the crippling race to the bottom of pricing in that market that has occurred in he last 5 years or so.

And of course they are all hoping that they can get the benefit of network effects - aka the rich get richer - in which early leaders find they get a positive feedback loop going and pull ahead of les autres. Similarly, the risk of not getting in early is being consigned to the long tail of Also-Ran's.

But in this noble rush for the New Outsourcing Eldorado, the cloud enthusiasts are prone to being a bit dewy eyed over its benefits, and try and pull the mist over the eyes of customers as to why - by and large - these efforts have failed in the past. The issue with Cloud computing is that its a new tech fix, but core reasons for failure in the past have had little to do with the technology, and everything to do with business risk:

(i) Risk of service failure - you need high service availability. Students of probability theory will know that to get 99.999% reliability in a one chain link system (from your computer to your server) is "interesting". To get it in a 2 chain link system requires each chain link to to be 99.9995% reliable, which is most kindly described as "challenging". Clouds usually have more links in the chain, especially those envisioned by enthusiasts where the functionality is distributed all over the cloud. The transaction messaging required for this distributed scenario is still in its early days.

(ii) Risk of Service Centralisation - because of the above issue, the most rational architecture is not a cloud, but to centralise all the services somewhere. But then you run into the problem of "who owns the service". It works like this:

- Hand service over to supplier
- Sign supplier's Service Level Agreement
- Hand your data, workflow, etc to the supplier (after considerable cost & effort to systemise it for a 3rd party to be able to run)
- Find the SLA is more for the supplier's, not your benefit, and their response to your needs as a company is not as flexible as you may desire. Get used to filling change requests!
- Find, in disputing the SLA, that the supplier has a tight grip on your corporate testicles - switching you off sends you rapidly down Swanee, sans paddle

If you have been around the block more than once, its possibly the opposite case - you negotiate such a good SLA with the supplier that they can't actually afford to maintain it, and things slowly fall apart.

(Or, you find that its a startup and there is no SLA in effect)

(iii) Risk of security compromise - when there are multiple parties in the transaction, even of good faith, then breaching security becomes far more of a possibility. It just does.

(iv) Risk of Handing over Control - the reason the PC was so popular vs the mainframe (the "first cloud" architecture) was that the user had control of the operating environment.

There is a more subtle version of this last one - ie Who Do We Trust with our data (as in who won't peek / datamine / resell) . This is a battleground that will be interesting to watch, as in general the lower cost the service, the more its costs will potentially be offset in this way (see this post on FreeConomics - why your data is free but everywhere in chains)

The issue quite simply is this - in my business, I am committed. The infrastructure partner is only involved.

Now, I hear you argue, Outsourcing has done very well - and it has - but it is instructive to look at what is usually outsourced and by whom. By and large its non core, non customer facing applications (we have in fact done a number of pieces of work re-insourcing customer facing services). So Email, HR, Sales Analysis and Order Management etc are outsourced, but core workflow far less so. Also (whisper this who dars) outsourcing is often a piece of financial, not technical, engineering. Smaller companies do tend to outsource more critical services, but its driven by their economic necessity (lower resource levels, lower cost plus trying to get a jump ahead of large players) rather than choice in many cases.

The other point about existing outsourcing and webservicing is that it has - in our view - still scooped up the 80/20 economic benefits from the low hanging fruits (I'm looking at a McKinsey study from 2006/7 as I write this, I can't see where the next "step change" comes from via Cloud Computing. In other words, the existing "good enoughs" are probably good enough to prevent most Cloud business cases from passing corporate muster in the near term, and the real next level benefits are still in the "hard to do" category.

So what to do?

For larger companies, our view is that this a technology to try out in some small, non core activity - maybe an area that does need a certain bit of sizzle. It feels to us like a "prepare to be a fast follower" game at the moment. For SOHOs and SE's its more of a gambler's advice gambit - make sure that you can afford to lose what you stake (and even better, back it up to the nines).

Update - Gapingvoid has posted an article on this that I liked - ( it comes to similar conclusions ) and Confused of Calcutta has an interesting argument, that Open Source will be the antidote to the "Rich Get Richer" dynamic. I don't think so - Open Source is a tool here, we have built various pieces of service infrastructure using Open Source in this space - the key issue is who is willing to take on the SLA - ie under-write the Risks

Article in GigaOM about where datacentres will be built notes that Siberia is a useful area:

Power is seen as the biggest constraint when it comes to building data center capacity. As a way around this conundrum, large consumers of Internet data center capacity have located their facilities closer to energy sources. For instance, Google, Microsoft, and Yahoo have built data centers in Quincy in the state of Washington near a hydroelectric dam where they pay a lot less for power than, say, in Silicon Valley. Google has built a massive facility in The Dalles, Oregon, another location close to power source.

There are 3 issues with Datacentre power needs:

(i) They need ever more power as they get bigger and pack more processors per square foot, and this means serious electricity - big ones consume the needs of cities or large industrial plants today.
(ii) Electricity has high transmission losses over distance, so its far more efficient to be close to power sources.
(iii) Nearly every watt of power sent into a datacentre is transformed into heat and needs to be removed, and this conumes as much (if not more) power than the datacentre computers. Being in cool climates and close to cooling sources helps hugely.

Thus, instead of great big mines, steel towns and smelting furnaces in the wilds, will we see datacentres and their attendant troglodytes being banished to Siberia?

it is not so far fetched to imagine that these and other companies could plan on building data centers in Russia. Microsoft has already made its intentions very clear and is planning a data center in Siberia. Google has been slowly expanding its presence in Russia including a recent purchase of Rambler for $140 million. Of course, the big problem is a lack of massive Internet backbone pipes in and out of Russia, but that might be an issue that could be addressed easily.

(Never mind the political/economic "features" of doing business in Russia....)

But, as the 90's showed us , given a speculative boom you can lay huge amounts of network cable very fast - and the transmission losses on data are far, far lower than for electricity. Big picture - the endgame for the big datamills is in cool climates next to serious powerplants. But that leads to strategic bottleneck issues so we expect to see other, smaller datacentres located elsewhere as well.

We also now also eagerly await the opening up of the Canadian Tundra (Hudson Bay Datamining and Searching ) and Antarctica as Datacentre havens too. And maybe even the north of Scotland.....

Suw Charman-Anderson blogs about an Andrew McAfee observation at Enterprise 2.0:

Andrew McAfee asked a deceptively simple question to a panel at Enterprise 2.0 last week, "If Enterprise 2.0 tools and approaches really are so beneficial and powerful, why haven’t they spread like wildfire?" He was surprised that no one fingered management as the culprits.

In their initial responses all of them identified users, not bad managers or inadequate technologies, as the biggest barriers to faster and deeper adoption of Enterprise 2.0. Entrenched practices and mindsets, some degree of technophobia, busyness, and the 9X Problem of email as an incumbent technology combine, they said, to limit the pace of adoption. These factors slow the migration from channels to platforms and necessitate continued patience, evangelism, and training and coaching....

....That is in fact what they were telling me, and I didn’t get the impression that they were just being diplomatic. They said that managers were just another category of users that needed to migrate over to new ways of working, and not anything more. In other words, the panelists hadn’t seen managers in their organizations actively trying to impede Enterprise 2.0.

Now Suw has written an interesting take on her blog on the failures of Managers which is well worth a read. I'd like to defend them a bit here in response, as we have worked with many CIOs over the years (even ones putting in Enterprise 2.0 tools) and know them to by and large be interested in new technology but also diligent and careful. We did a survey for a client earlier this year on adoption of a range of new technologies (incl E2.0). Some findings that may be relevant here are:

(i) SOHO/SMEs are adopting more than large corporates, faster, mainly due to cost benefits rather than any inherent superiority.

(ii) In quite a few cases the tools are felt to be less robust than commercially available ones - and the O/S support model has its limitations in real operating environments, which worries CIOs who are on the hook for reliability, uptime, data security etc as well as functionalty. Can you imagine basing your UC strategy on Twitter for example? Great functionality, lousy uptime.

(iii) Many larger companies already have existing "good enoughs" - ie why would the IT support X 2.0 when they already support say Lotus Notes. Especially as Notes comes with SLAs

(iv) Most of the CIO's we met were not against E2.0 per se, but as Ian Betteridge noted in the comments on Suw's article, they are very interested in ROI - and that's total lifecycle ROI - and are worried that they have to fill in the support costs as so little is provided by the (small, often flaky) supplier companies.

(v) CIO's have to manage risk and balance the risk of not doing the New Thing soon vs the risk of going down the wrong path too soon. The wrong path cost is often huge, so they tend to hold back until some form of standard / consensus emerges.

(vi) In fact what CIOs wanted was more unbiased information on what works, what doesn't etc - they felt that there was a lot of hype out there and not a lot of fact backing much of it up - bitter experience tells them to do small pilots in areas where they can see a real need, and wait and see what survives the initial hype.

If you look at the latest adoption predictions by Forrester, Gartner, Analysys etc you can get more nuances of this sort of view too. Companies are not against the new tools, but typically its not the most pressing need they have right now. The CIO game theory here is simple - failure to adopt potentially useful new technology fast enough = lose a bit of karma with the Digerati, whereas failure to keep the infrastructure delivering BAU reliably = lose job. Game over.

Also, most CIO's have been around the block often enough to know that fast following with stuff that works pays off better than very early adoption.

Our take - its easy and convenient to blame managers, (and it was ever thus, just as it was ever thus that there are consultants beating the drum - MRP, ERP, 4GL, CRM...the list goes on) but their barriers to adoption are both rational and systemic. In fact, as one of the commentators observed this systemic replacement has been noted before in technology adoption:

The 15 year adoption rule for technologies has been mapped to introduction of: relational databases, 4GL, client-server architectures, case tools, mobile computing and many more. There are academic studies that might be of interest (it's not an arbitrary "rule" like sod's law or the peter principle).

Its also easy and convenient to exonerate users, or paint them as the go-ahead groovy types fighting against The Man and The System - but we've been implementing technology in enterprises for c 20 years now, and like anyone who has done this for a while we can bore for England on how impatient / ignorant / self serving / stupid / negligent / arrogant / well meaning / ordinary (insert your epithet) users can really f*ck up even the simplest systems - and there are a lot of them (yup, and some of those users are Managers ), and one tends to forget most are not Digerati - heck, most of them only use Apples for iTunes

And don't even mention all the virusses the little bleeders introduce into the company networks if you don't lock their systems down

Boring, I know, but our findings match those on the panel.

(Afterthought - there is a whole 'nother issue I want to write about regarding social media in Enterprises, and how enterprise real life social networks, which are hierarchical, do not map to the ones modelled in consumer Socnets, but that is for another day)

...and Yahoo and Microsoft are the only ones still unhitched. They were dancing together earlier, but Yahoo went off and had a little shimmy with Google, but all Google was offering was a casual relationship - no commitment.

So here they are, getting it on again.......

There are a few other geezers hanging around, but none seems to have made a move yet, apart from some huffing and puffing.

Closing time at the digital Disco is approaching though....

One wonders in fact whether the clear out of a lot of the management was done in preparation of making the company more attractive - they would not be the first company to clear the decks like this, in eager anticipation.

Update...according to The Blodget, Microsoft also only wants Yahoo for her Search.

From El Reg:

The US Supreme court has overturned a lower court ruling that let South Korea's LG Electronics double-dip on royalty licensing.

In a unanimous decision today, the court favored Taiwan's Quanta Computers, delivering a ruling that will limit a patent holder's ability to collect royalties from companies at different stages of the production process.

The case reverses a previous Federal appeals circuit decision on patent exhaustion. The high court agreed to review the licensing dispute last September at the urging of the Bush administration.

LG had licensed a set of patents to Intel for use in its chips and chipsets, but the agreement specifically barred Intel from mixing the technology with components from other manufacturers.

Intel then sold the chipsets to PC manufacturers such as Quanta — which in turn used the chipsets to make computers for vendors such as Dell and Hewlett-Packard.

LG sued Quanta in 2000, accusing the manufacturer of infringing on three patents because computers with the Intel chipsets also had kit from other companies.

A US District Court in California ruled in Quanta's favor, but an appellate court overturned the decision. The Bush administration then urged the Supremes to take the case on grounds the ruling went too far in letting patent holders extract royalties from down-stream companies.

The high court ruling today said LG couldn't extract royalties from Quanta because the initial sale to Intel had "exhausted" LG's ability to control how the technology was used.

About time too...interesting that a lower court actually agreed with the shakedown though. I wonder what they saw in this that made them go that way?

Update - perceptive bit from the EFF:

Unfortunately, the Court did not take the opportunity to issue a broad ruling on whether other sorts of labels, or licenses, or contracts might be enough to defeat the patent exhaustion doctrine. So the Court's ruling leaves the door open for patent owners to experiment with these tactics, all in a continuing effort to transform purchases into "conditional sales" and stick consumers with restrictions on post-sale activities, such as resale (as we've seen in cases like UMG v. Augusto and Vernor v. AutoDesk in the copyright context), reuse (as we've seen in the case involving Lexmark's "not for refill" printer cartridges), repair, and modification, among other things.