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Of Spiders and Flies

"Oh, what tangled webs we weave,
when we practice to deceive..."

- Sir Walter Scott, "Marmion" (Canto VI, Stanza 17)

Sometimes, this industry can be as entertaining as a soap opera, and for all the same reasons. The "he said, she said" over DirectX 10 drivers, the CPU performance crown or the next optical format for your living room; so often, battle royales like these between industry giants are fought in the public arena of PR launches, demos and benchmarks.

Which is why it's so much more entertaining when corporate intrigue lights up someone's hand in the cookie jar before supper. Oops.

Let's take a look at this series of events as we knew them before last weekend:
  • Sony and Microsoft each release consoles with force-feedback controllers,
  • Small-fish company Immersion Technologies sues both companies for patent violations in 2002,
  • Microsoft settles out of court for $26m,
  • Sony contests decision but loses, and Immersion discloses it settled for over $90m,
  • Sony declines to use tactile feedback in PS3 controllers.

What's wrong with this picture? Lots. But let's start at the beginning. Sony has lost almost one hundred million dollars. This is no small chunk of change. Let's put this in perspective - Sony Corporation's entire net profits for Fiscal 2006 (ending March 31st, 2007) was only $608m. In the meantime, Immersion Corp's entire market capitalisation (the value the company has on the market) is only $328m, and it only made $28m in profit last year.

It looks like David brought down Goliath, doesn't it? A small company stood up to not one, but two of the big boys and won at least $116m. Not too shabby.

"David is really bankrolled by Goliath's angry brother-in-law, who's bigger and meaner than Goliath..."

Oh, wait, I missed one little step...
  • Microsoft sues Immersion in 2007 for a "minimum of $15m" for breach of contract.

Why? Well, when Microsoft "settled" out of court, it apparently entered into a contract with Immersion. It would fork over $26m, but if Immersion won against Sony, the small company would pay Microsoft $15m back after settlement. If the company won over $100m from Sony, it could tack on an additional 10 percent of that amount... and 15 percent of anything over $150m.

Suddenly, David isn't so little after all because David is really bankrolled by Goliath's angry brother-in-law, who's bigger and meaner than Goliath - and pretty underhanded to boot. After all, why start an open family feud, when you can let someone else do it for you?

If this seems a bit far fetched, let me explain. Here are the events that I see happening:
  • Immersion sues Microsoft and Sony,
  • MS says, "Heh...you'll never win against two big boys like us, you're too small to even afford the legal fees. But we may just have a deal to work out with you,"
  • MS offers a couple million for the patent issue, but promises Immersion will get plenty of money out of Sony,
  • Immersion and MS "settle" for a whopping $26m. Since it's out of court, they don't have to disclose that Immersion will pay a minimum of $15m of it back, not to mention untold discounts on upcoming patent issues for the Xbox 360 and future consoles,
  • Immersion shows the judge how MS already admitted patent infringement and paid $26m, which biases a decision against Sony...

And the rest, as they say, is history. With Microsoft settling for such a large sum, Immersion's claims prove to not only be valid but tremendously expensive... and if you take a head-count, the PS2 had outsold the Xbox by about 4.5-to-1 at that point. If you do the maths, Sony actually got away cheap in the end.

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Brett Thomas

Of course, that $26m from the MS "settlement" went a long way to hiring very good attorneys to use against Sony - it was like an entire year of Immersion's profits, able to be injected straight into the legal system and patent office. What a fortunate, convenient break to have that money!

With a costly judgement all but guaranteed, Sony had no choice but to step behind the settlement doors with Immersion... and walk out more than $90m lighter. Talk about being bent over... that's a sixth of the entire company's profits in 2006, and almost a quarter of what the Games division made in 2005.

It was really a brilliant scheme. Microsoft gets out of the patent issue for a paltry sum and a small loan (the patent wasn't ever worth that much, anyhow). Its biggest competitor, on the other hand, gets utterly screwed by the legal system and ends up diverting massive resources away from its next console launch (which was subsequently delayed). And all the while, MS makes a new friend out of Immersion, which is laughing all the way to the bank. All that was left was for Immersion to pay back its little loan and nobody would be any the wiser.

This flagrant abuse of US Patent law is exactly why people have been calling for reform to the archaic system. One big company uses a smaller company with a patent to take a swipe at its competitor - and we're not just talking a flesh wound, more like going for the jugular.

How on earth is the tactile-feedback on the controller worth almost the entire sum of profits from the console's actual hardware sales? Did nobody in the legal system say "Wait... what value does this really add?" Surely you did not buy games based on their rumble function... so why did anyone believe that Microsoft, of all companies, would settle for $26m over it?!

"This flagrant abuse of US Patent law is exactly why people have been calling for reform to the archaic system. "

If you actually think about how consoles make profit for companies, the decision makes even less sense. Only Nintendo has ever sold its consoles for a profit - everyone else uses them simply as a distribution method for their main business, which is software media.

It's an intentionally losing product, only becoming profitable in the very last years of its cycle (when production methods and parts have declined in price drastically). The Xbox 360 only might make a profit next year, a whopping three years after release - and that's record time, if it actually occurs. Sony didn't just get screwed, it got something I can't even write on here.

The fact that this type of underhanded move was permitted really makes me question whether the RIAA is so nuts with its own patent and copyright BS after all. We always curse about the organisation's asinine lawsuits and flagrant abuse of the system, but hey - at least it's flagrant. How many other back-end deals lie lurking in the corporate halls? Games played not in the name of justice or fair settlement, but in the name of "one up" and "screw the competition."

The best part is, nobody would have found out about this at all if Immersion just stuck to the script. I'm sure Microsoft never expected the company to go public with the lawsuit, being as it's worth more than half of what it makes in a year. Such news seems like it could be a death knell to the company's stock price - that's certainly a good 'hush' incentive.

Of course, Microsoft should have figured that Immersion would learn a lesson from the power it was given - with the right lawyers and a good "bully" story, the courts will choose David every time. I sure hope Redmond isn't really counting on that $15m back.

Oh, what tangled webs we weave, indeed... particularly when we can't even tell spiders from flies anymore.