Microsoft must rename its SkyDrive online storage service after losing a trademark infringement case in a U.K. court.
Analysts and legal experts said that Microsoft's blunder would cost it dearly, and wondered how the American technology giant could have made such a mistake.
"It's unbelievable to me that Microsoft did not see this coming," said Peter LaMotte, an analyst with Levick, a Washington, D.C.-based strategic communications consultancy. "They should have seen it coming. And this is not the first time that this has happened to them."
LaMotte, who before he joined Levick had helped numerous startups with their branding efforts, was referring to last year, when Microsoft backed away from the "Metro" name to describe the new Windows 8 and Windows RT user interface and the apps that run on those platforms.
Microsoft dropped Metro in August 2012 after Metro AG, a Dusseldorf, Germany-based conglomerate that's the world's fifth-largest retailer, threatened the company. Microsoft has failed to find a catchy replacement for Metro: At one point it cited "Modern" as the new term, but then settled on the forgettable "Windows Store" to label the apps.
Microsoft and British Sky Broadcasting Group announced a settlement on Wednesday that "reflects the desire of both companies to focus on joint projects to benefit their customers," according to a joint statement. The agreement lets Microsoft use the SkyDrive name for a "reasonable period of time to allow for an orderly transition to a new brand." In return, the company pledged to drop its plans to appeal. Financial terms were to be kept confidential.
Sky provides television and broadband Internet service throughout the U.K. Among past offerings, Sky had operated a digital storage service, called Sky Store & Share, which opened in 2008 but shut down in late 2011.
A cornerstone of Microsoft's new strategy
SkyDrive, a cornerstone of Microsoft's service strategy, is integrated with a wide range of the company's software and hardware products, serving, for example, as the storage service for Windows 8, its Surface line of tablets, Office 2013 and Office 365, and the Xbox game console. Windows 8.1, the update planned to ship later this year, makes SkyDrive the default storage location for customers' files.
Microsoft is in the midst of a major reorganization, and determined to execute CEO Steve Ballmer's vision of the company as a devices-and-services vendor, not one reliant on packaged software. SkyDrive is an important part of the "services" part of that plan.
In a mid-July memo outlining the changes, Ballmer cited SkyDrive along with other services, such as the Bing search engine, the Skype Internet calling and chat service, Outlook.com and Xbox's online options. "They all deliver critical services that consumers need in the areas of insight and information, task completion, communication and fun," said Ballmer.
The broad reliance on SkyDrive means that Microsoft will incur significant costs to rebrand the service, requiring new URLs, new code in existing products and revamped apps for smartphones and tablets.
"We're talking serious money here," said LaMotte, who is familiar with rebranding costs from his time consulting with startups.
And then there's the money already spent on marketing SkyDrive as a brand, and pushing it as a name that customers recognize and associate with online storage. "This was a colossal waste of money for any marketing they did on SkyDrive," said Patrick Moorhead, principal analyst with Moor Insights & Strategy. "They might has well have flushed it down the toilet."
What puzzled the experts was how Microsoft ended up here.
They unanimously agreed that Microsoft's legal team would have checked for possible infringing trademarks when it decided on SkyDrive as a name for the online storage service.
"Microsoft has an extensive and very good legal team, so it's highly unlikely that they didn't do due diligence," said Eric Priest, a professor of intellectual property law at the University of Oregon. Microsoft's lawyers would have run extensive and international searches, perhaps even hired an outside firm specializing in that task, to locate possible problems.
That leaves out a simple oversight, but puts the spotlight on a grievous error of judgment: After recognizing that Sky was a risk, Microsoft proceeded anyway, confident in the legal team's analysis that it was unlikely the U.K. communications company would prevail if a dispute went to court.
Christine Farley, professor of law at American University, said that made sense. "I'm sure [Microsoft] was aware of these marks, but the fact is, you really cannot choose a descriptive term or trademark that is clear worldwide."
But Microsoft blundered when it took that risk because, in the end, it lost in court.
"They could have avoided this at the front end by buying the mark," said LaMotte, referring to a deal, even a preemptive one, that Microsoft could have made years ago with Sky.
So what is Microsoft to do?
The joint statement notwithstanding, some bet that Microsoft would hand Sky a basket of money to retain the SkyDrive name.
"They could take that money [they'll spend on rebranding] and give it to Sky," Moorhead said. When asked about the joint statement, which said Microsoft was going to transition to a new brand, he scoffed. "You aren't going to lead with the notion that you'll pay for it," he said. Instead, Microsoft would say that it was planning on rebranding to gain what leverage it could for future negotiations.
LaMotte also thought it possible Microsoft would pay Sky rather than go through the hassle and expense of coming up with a new name for the service. "They may decide it will save them in the end to pay a sizable fee to Sky, or reach some kind of annual licensing agreement," said LaMotte.
Priest didn't agree. "I think it would be difficult for Microsoft to pay a fee and receive an ongoing license," he said. "Because you're not just licensing the mark, but also the good will of that name."
In other words, Priest believed it very unlikely that Sky would put its brand at risk -- especially since it's already taken the very expensive step of litigation and won the case in court -- by agreeing to put its brand's reputation in Microsoft's hands.
Assuming Microsoft does pull the rebranding trigger, Farley suggested how the company might avoid another fiasco. "Microsoft must be more creative in the trademarks that they select," Farley said. "Their brands typically say what they are, and as long as they continue using those kinds of trademark they are going to have trouble."
Such trademarks, called "descriptive trademarks," rely on words which have a dictionary meaning -- like "Sky" -- that have become associated with a product simply because of long use. Descriptive trademarks are among the weakest on the trademark scale.
"Microsoft needs to come up with a unique word or term, then spend money to educate consumers," Farley added.
Moorhead put it in perspective. "Microsoft really blew some basic brand blocking and tackling," said Moorhead. "This was a major gaffe, but I don't think it will leave a long-term scar. I really think this won't be a tremendous loss. SkyDrive is not ingrained in the minds of people, like Office and Windows are. In a few years, no one will remember this."
Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is firstname.lastname@example.org.
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