Two days after winning a $105.75 million jury verdict against the software giant, VirnetX has filed a new complaint claiming Windows 7 and Windows Server 2008 R2 infringe those patents as well. Those products hadn’t yet been released when VirnetX first went after Microsoft, so the company is now circling back, hoping to collect damages for their alleged infringement.

“This is a tactical and procedural post-trial action to ensure and protect our property rights as we proceed to final resolution with Microsoft,” Kendall Larsen, VirnetX president and CEO, wrote in a March 18 statement.

Microsoft (MSFT) has vowed to appeal the first verdict, which it described as “legally and factually unsupported,” and took a similarly dim view of the latest VirnetX assault. “Microsoft respects intellectual property, and we believe our products do not infringe the patents involved,” Microsoft flack Kevin Kutz told the Seattle Post Intelligencer. “Moreover, we believe those patents are invalid. We will challenge VirnetX’s claims.”

To that end, the company has petitioned the U.S. Patent and Trademark Office to re-examine the VirnetX patents, evidently with some success. In a preliminary review, the USPTO has found all but one of the VirnetX claims invalid. This doesn’t necessarily mean they’ll be rejected, but for Microsoft, it’s a step in the right direction.

That’s not the $242 million VirnetX sought when it first sued in 2007, but it’s a substantial sum–and it could increase. If Microsoft’s infringement is found to be willful, the damage award could be tripled.

Microsoft (MSFT), which views VirnetX’s patents as dross and the company itself as a patent troll, said it will challenge the court’s decision. “We respect others’ intellectual property, and we believe the evidence demonstrated that we do not infringe and the patents are invalid,” Microsoft spokesman Kevin Kutz said in a statement. “We believe the award of damages is legally and factually unsupported, so we will ask the court to overturn the verdict.”

And the industry will no doubt be rooting for the software giant to succeed. Because if Microsoft is vulnerable to an action like this, then presumably, other companies using VPN technology are as well.

“Any time you can successfully enforce a patent against a behemoth like Microsoft, it opens the door for more lawsuits,” patent attorney Cole Stuart told Nick Eaton at the Seattle Post Intelligencer, which has been doing a great job covering the case. “It’s called ‘rolling up the industry.’ If it’s a technology Microsoft uses, it’s likely other companies use it.”

OK. But exactly how much less?

I’ve been asking Mark Josephson that question for months, and now he has an answer. Josephson, the CEO of local news platform Outside.in, figures the local, online-only newspaper of tomorrow, for a decent-sized city, will have a staff of 20 people. That’s 20 people, period. Perhaps six of them will be “news gatherers.”

Josephson was kind enough to model his future newspaper in a spreadsheet for me, and I’ll get to that in a minute.

But first, the context. Josephson’s opinion is worth noting because his company is supposed to play a role in creating said future newspaper/news site.

The pitch: Outside.in wants to help local news sites by supplying them with a river of extra content created by local bloggers, Twitterers and lots of people who don’t even think of themselves as content creators, like people who post real estate listings. The local site is supposed to aggregate and filter the stuff and sell ads on it. The people supplying the content get more exposure via links from the bigger site.

The three-year-old company has just rolled out a new tool that’s supposed to make all of this easier for local publishers, which could be a newspaper site but doesn’t have to be. For instance, the company has tested its “Outside.in for Publishers” offering with sites run by local TV stations. You can read more about it here.

Now back to Josephson’s news site of the future: He imagines that the tiny editorial staff of the model newspaper produces an extraordinary number of page views–40 million per month, in this example–and then augments it with twice as many page views from a third-party network (which could be, but doesn’t have to be, supplied by Outside.in).

A sales force of a dozen people sells ads for both buckets of inventory, and uses ad networks to fill in remnant space they don’t sell. Net result: A very healthy 43 percent operating margin, much better than the 27 percent margins the newspaper industry enjoyed from 2000 through 2007, before the business imploded.

Here’s what the math looks like: I’ve broken up the P&L into three sections, and clicking on each of them will enlarge the image. Or you can view the whole thing as  a Google document here.

Josephson stresses that his model is a starting point, and he’s happy to tweak any of the inputs.

If you think his assumptions about ad rates are too aggressive (and some local publishers I’ve talked have given me that feedback), you could knock them down. Same thing with page view goals. Or if you decided you wanted to run the business at break-even instead of trying to make a profit, you could do that too, and see how many more people you could afford to hire.

But no matter how you fiddle with the numbers, there’s no way that Josephson’s model gets you anywhere close to old newspaper staffing levels, whereby a paper like the Seattle Post-Intelligencer employed 150 people on the editorial side alone.

But those staffing levels don’t work anymore, which is why Hearst shut down the paper and replaced it with the online-only SeattlePI.com, which has a 20-person edit staff, earlier this year.

So Josephson’s numbers really become an ink-blot test: Do you think they spell doom for news sites in the Web age or an optimistic solution that lets them survive? Let me know in comments below.

But while Hearst isn’t ready to declare victory, it does say that the first two months of seattlepi.com’s life have been “encouraging.” Via a press release, Hearst offers up a bevy of traffic stats that show the site has grown even as its staff has shrunk. Hearst doesn’t offer up any info about revenue, but does say that its “sales and marketing team is highly energized.”

I sincerely hope so, and I sincerely hope it works. I still don’t get the math: Hearst says seattlepi.com is attracting 4.3 million monthly unique visitors. Chris Batty, who runs sales for Nick Denton’s Gawker Media empire, figures that traffic could support a staff of perhaps a dozen editorial workers at one of his sites–not the 20 or so that Hearst has working in editorial.

And bear in mind that Gawker’s titles have a national focus, not a regional one, which makes it much easier to sell than Seattlepi.com.  There may be a thriving business for regional/local online ads one day, and we’ve been hearing about the potential for many years. But it’s not there yet, and it’s not close.

Still, better to have Hearst says it’s encouraged than to have Hearst pull the plug after a few days.

Two months after becoming the nation’s largest newspaper to move to an all-digital news model, seattlepi.com’s year over year numbers show that it has more users this April than last April, when the Post Intelligencer was still publishing with an 80% larger staff, an amazing feat for an online venture with a newsroom of 20.

In April, its first full month of operation, seattlepi.com had 4.3 million unique visitors, up 1.6% from 4.2 million in April 2008 (source: Omniture). Total page views for the month were 37.3 million.

During the last week of April, the site broke its one-day unique user record since going online-only. There were 324,000 unique visitors on April 30—the 4th highest day in terms of unique visitors in 2009—breaking previous records set since going online only on April 29 (290,000) and April 27 (283,000). Total page views for those days were 1.5 million, 1.4 million and 1.5 million, respectively.

Two months into our online-only experiment, we are encouraged by this growth in visitors and expect our numbers to improve as we continue to establish new partnerships.

We get a lot of feedback from readers cheering us on and thanking us for continuing to bring them the local news and information they want and need. It’s great to see that not only have we not lost readers, we’ve actually gained new ones.

A new team of more than a dozen sales and marketing representatives and managers has been tasked with building advertising and marketing partnerships and creating a unique Seattle digital advertising agency.

Our sales and marketing team is highly energized to be working with such a vital and dynamic product. We will leverage existing partnerships with Yahoo!, Kaango, Metrix4Media, and others to create what is essentially a local digital advertising agency offering unique opportunities for business in the Seattle area and across the country. Advertisers and other partners understand that seattlepi.com is in an unrivaled, popular destination for news and information, offering tremendous value for exposing their products, services and brands to a large and very desirable audience.

Thanks to John Cook, who used to work for the PI but left last year to cofound TechFlash, which covers Seattle-area business news, for pointing this one out.

The Post-Intelligencer used to have something like 150 editorial employees. SeattlePI will have 20. Michelle Nicolosi, who ran the paper’s old Web site and will oversee the new one, says “the site won’t have specific reporters, editors or producers—all staff are expected to write, edit, take photos, shoot video and produce multimedia.” That sounds familiar, and not a terrible idea.

Can a 20-person staff, augmented by a bunch of local bloggers, put out the same product as the old paper? Of course not. But no one’s pretending they will. It will be a different animal, but that’s not necessarily a bad thing.

The real question — and the one that Hearst itself says it’s trying to answer with this experiment — is whether even a stripped-down site can be profitable. I’m doubtful it will, for reasons I’ve previously expressed. But I’d love to be proved wrong.

Here’s the Hearst press release.

NEW YORK, March 16, 2009— Hearst Corporation announced today that the Seattle Post-Intelligencer (P-I) will become the nation’s largest daily newspaper to shift to an entirely digital news product. The announcement was made by Frank A. Bennack, Jr., vice chairman and chief executive officer, Hearst Corporation, and Steven R. Swartz, president of Hearst Newspapers. The final print issue of the newspaper will appear tomorrow.

“The P-I has a rich 146-year history of service to the people of the Northwest, which makes the decision to stop publishing the newspaper an extraordinarily difficult one,” Bennack said. “We extend our profound gratitude and admiration to our P-I colleagues who have done such an exemplary job under extremely difficult circumstances over the past several years. Our goal now is to turn seattlepi.com into the leading news and information portal in the region.”

“Seattlepi.com isn’t a newspaper online—it’s an effort to craft a new type of digital business with a robust, community news and information Web site at its core,” said Swartz. “It will feature the breaking news reporting of Chris Grygiel and others covering City Hall; Levi Pulkkinen reporting on the court system; popular staff blogs like Seattle 911 with Casey McNerthney and the Big Blog by Monica Guzman; columnists like Joel Connelly, Art Thiel and Jim Moore; and of course, the cartooning and commentary of two-time Pulitzer Prize winner David Horsey. The Web is first and foremost a community platform, so we’ll be featuring new columns from prominent Seattle residents; more than 150 reader blogs, community data bases and photo galleries. We’ll also be linking to the great work of other Web sites and blogs in the community.”

“On the business side, we are assembling a staff to form a local digital agency that will sell local businesses advertising on seattlepi.com as well as the digital advertising products of our partners: Yahoo! for display advertising, Kaango for general marketplaces and Google, Yahoo!, MSN and Ask.com for search engine marketing,” Swartz said. “The site will also feature a digital yellow pages directory powered by Hearst’s yellow pages unit, White Directory Publishers.”

On January 9, Hearst announced that it was offering for sale the P-I and its interest in the Joint Operating Agreement (JOA) under which the P-I and The Seattle Times are published. No buyers emerged, resulting in the decision to move to an all-digital news model. Additionally, the JOA is being terminated. The P-I was founded in 1863 as the Seattle Gazette.

Seattlepi.com will be led editorially by Michelle Nicolosi, executive producer, who has headed the site since 2005. Nicolosi was previously an investigative reporter at the Seattle P-I. She was also previously the editor of Online Journalism Review (www.ojr.org) and taught journalism at the University of Southern California. Prior to that, Nicolosi was a reporter at the Orange County Register, where she was a lead reporter on the Pulitzer Prize-winning Fertility Fraud series.

In January, Nielsen ranked seattlepi.com among the top 30 newspaper Web sites with 1.8 million unique users. The site has an average of 4 million unique monthly visitors, according to internal Hearst tracking.

I got that one wrong. Hearst is getting ready to launch a Web version of the paper while shutting down the print version as early as next week, the PI reports.

But Hearst seems to agree with my dubious assessment of a Web-only paper’s chances. Which is why it’s preparing to go ahead with just a handful of the paper’s existing staffers.

The PI says perhaps 20 will stay on at the digital version. It’s possible that number may get bigger once you factor in folks from the business side. But it’s still going to be a tiny crew: The PI currently employs some 180 people.

And I think that number might still be too big: Last time I checked, the PI was attracting some 2.6 million unique visitors a month. That’s basically the size of a decent-sized professional blog, which would perhaps have a dozen employees at most–and would also be selling ads to a national audience.

Meanwhile no one has figured out how to generate advertising at any scale from local advertisers. And Seattle’s online dollars that are available have plenty of suitors. Among them the still-extant Seattle Times daily and The Stranger, the city’s well-established alternative weekly.

Again, it looks as if Hearst has diminished expectations here, too. Check out the pay package it offered a prospective hire, via the PI:

“He said the offer increased his health insurance cost, cut his salary by an unspecified amount, offered to match his 401(k) contributions, required him to forgo his P-I severance pay, reduced his vacation accrual to zero and required him to give up overtime.”

But hey, better a lousy job than no job at all, right? Not according the PI reporter cited above. He says he turned down Hearst’s offer.

Fortune says Hearst, which publishes magazines like Cosmopolitan and Esquire, and, for the time being, newspapers like the Seattle Post-Intelligencer and the San Francisco Chronicle, is working its own Kindle-like device.

“I can’t tell you the details of what we are doing, but I can say we are keenly interested in this, and expect these devices will be a big part of our future,” Hearst digital head Kenneth Bronfin tells the magazine. Some more vague details, which don’t include a launch date:

Insiders familiar with the Hearst device say it has been designed with the needs of publishers in mind. That includes its form, which will approximate the size of a standard sheet of paper, rather than the six-inch diagonal screen found on Kindle, for example. The larger screen better approximates the reading experience of print periodicals, as well as giving advertisers the space and attention they require.

…the Hearst reader is likely to debut in black and white and later transition to high-resolution color with the option for video….Downloading content from participating newspapers and magazines will occur wirelessly….

What Hearst and its partners plan to do is sell the e-readers to publishers and to take a cut of the revenue derived from selling magazines and newspapers on these devices. The company will, however, leave it to the publishers to develop their own branding and payment models. ‘That’s something you will never see Amazon do,’ someone familiar with the Hearst project said. ‘They aren’t going to give up control of the devices.’”

Intriguing? Yes. But I don’t have high hopes for the Hearst reader.

That’s in part because building consumer gadgets is a lot harder than it looks–remember all those awful MP3 players that predated Apple’s (AAPL) iPod? And I’m particularly worried about consumer gadgets designed with publishers in mind instead of consumers/readers.

But I’m also skeptical because I don’t really see how a dedicated magazine/periodical player does much for readers, period.

You can debate the pricing and feature set on Amazon’s (AMZN) Kindle, but at least there’s a use case for the device: It’s designed to let you read for long stretches of time, which is pretty hard to do on iPhones and BlackBerries.

But I can easily plow through newspaper stories and magazine articles on my relatively frill-free BlackBerry 8830 (if you do the same, let me recommend Instapaper.com and/or Handmark’s FreeRange Reader). And bear in mind that Amazon’s device is also designed to let you hoover up newspapers, etc., as well; the New York Times says it is already selling a “modest” number of subscriptions to Kindle users.

So if Hearst’s Kindle Kopy is going to take up space in my gadget array, it’s going to have be something pretty special.

[Image credit: Library of Congress via Flickr]

I’ve also asked Mark Josephson, the CEO of Outside.in, a start-up that’s supposed organize and eventually profit from a proliferation of Web-generated local news, to explain how he’d save the likes of the P.I. He promises to get back to me soon.

Here’s one gambit that won’t work: A PR stunt organized on Facebook.

Some 6,000 people have signed on to support “National Buy a Newspaper Day,” which is supposed to be Feb. 2, and is exactly what it sounds like. The only way this one would work would be if it convinced deep-pocketed philanthropists to buy newspaper companies themselves–you can get a lot of them for very little these days.

But! There is a bit of hope for newspapers. For one thing, they still inspire the passion of people like Chris Freiberg, the 24-year-old reporter at the Daily News-Miner (Fairbanks, Alaska), who is organizing “Buy A Newspaper Day.”

I asked Chris to tell me a bit about himself and why he thought this might work, and his thoughtful and heartfelt response was enough to make me root for him. I’m pretty sure I’ll be reading his work in the future, regardless of the medium.

I recently graduated from Indiana University in 2007 with a degree in journalism. Though I’m still fairly young, I’ve actually done quite a bit in my career already. I started off writing a column for a small Catholic newspaper at the age of 14 and wrote for the Post-Tribune of Northwest Indiana throughout high school. I was the managing editor of the IU paper and have also had two articles published in Hustler magazine because of things that happened at IU (and yes, Hustler does actually print some articles).

My father, who passed away in 2000, started off a newspaperman when he left high school, though he eventually went into radio. My mom is currently a radio talk show host in the Chicago area. Really, it’s no surprise that I decided to pursue some form of journalism, though God knows, my mom tried to discourage me, constantly telling me there was no money in it. But it’s what I love doing and I’m happy.

As for why I started this event, I’ve read in particular the stories about what’s happening at the Seattle Post-Intelligencer and the Chicago Tribune with great concern, that two such well-established newspapers may very well go out of business this year. Obviously though, those are just two of the biggest cases of a greater illness sweeping the industry.

Here in Fairbanks, because of our remoteness and the way the ownership of the paper is set up, we’re actually somewhat insulated from a lot of what happens in the rest of the country, but we’re still feeling some pain with multiple positions not being filled for several months to come. We had a staff meeting about these things last week, about our paper and the status of the industry, and I think one older reporter here put it best when she said that there are probably a lot of bad people out there who would love to see the newspaper industry go belly up.

I mean, there’s always going to be the national media keeping a close eye on what national politicians do, but if local newspapers start dying, who’s going to keep an eye on mayors and city councilmen? I’ve seen it myself that TV reporters ask two questions, get what they need for evening news, and then they’re gone. There’s no depth to their reporting.

That’s not to say that all or even most local politicians are corrupt, but I think it’s important that we have good newspaper reporters there keeping an eye on what goes on in local government, keeping the public well-informed about what’s happening in the community.

Millions of people have dogs to keep them safe, and being a dog owner myself, I know it doesn’t cost much more than 75 cents a day to keep that dog well-fed and happy. Newspapers can be just as effective a watch dog for the entire community, and they don’t require much more than that to survive either.”

Digital Daily was on hand at Macworld ’09 Monday. Despite the flurry of wonky reporting about the health and/or “imminent death” of Steve Jobs–put into perspective here by BoomTown–nothing too remarkable happened during Apple’s (AAPL) final appearance at the annual event. Phil Schiller did a solid job delivering the keynote in Jobs’s place, introducing a new 17-inch MacBook Pro with an eight-hour internal battery and some innovative updates to iWork and iLife. Schiller ended his keynote with the announcement of changes in pricing and digital rights management for iTunes, punctuated by the surprise appearance of crooner Tony Bennett. Apparently, as Bennett sang, the best is yet to come. Crack photojournalist Adam Tow was on hand to capture the keynote in its entirety–All Things Digital’s photo coverage can be found here.

MediaMemo reported from CES about the pervasive 3-D theme of the conference and wondered whether people would pay cash to see a football game in 3-D at a theater instead of just staying home. There was the ongoing litany of the casualties of the econalypse: “Semantic” ad network Peer39 shut down its ad operation this week, Hearst is about to pull the plug on the Seattle Post-Intelligencer, Forbes announced layoffs and Sir Howard Stringer announced the elimination of thousands of jobs at Sony (SNE). MediaMemo also caught the much anticipated introduction of Palm’s (PALM) new smartphone, the Palm Pre, and its new Web OS, a combo Palm deems superior to the iPhone and that many others consider Palm’s last chance for survival. The product’s success or failure will have a lot to do with its pricing, about which there’s much disbelief.

BoomTown had the lowdown this week on an amusing rumor about a Microsoft-backed (MSFT) run at Yahoo (YHOO), the emergence of Carol Bartz as the top prospect for Yahoo CEO and Microsoft’s deal with Verizon (VZ) and Dell (DELL) to distribute search. Jerry Yang submitted to the all-seeing eye of BoomTown’s Flip camera along with Yahoo President Sue Decker to talk about Yahoo’s new product, Connected TV. The camera also caught some chatty attendees and a few demos, including one of a new Disney (DIS) music product given by a guy who looked like a member of ZZ Top.

Speaking of ZZ Top, catch gadget godfather Walt Mossberg trying out some 3-D glasses on his annual odyssey around the convention floor. All he needs is a longer beard and a ’32 Ford and he could be a band member, too. Walt and colleague Katie Boehret caught many of the more interesting gadgets on video, and Walt previewed some more for FOX News.

More next week.

Here’s the paper’s own report on its impending demise:

The Seattle P-I is being put up for sale, and if after 60 days it has not sold, it will either be turned into a Web-only publication with a greatly reduced staff or discontinued entirely.

‘One thing is clear: at the end of the sale process, we do not see ourselves publishing in print,’ said Steven Swartz, president of the Hearst Corp.’s newspaper division.

Swartz addressed the P-I’s newsroom at about noon Friday, flanked by P-I editor and publisher Roger Oglesby and Lincoln Millstein, Hearst’s senior vice president for digital media.

Swartz said the reason for offering the paper for sale is purely economic.

‘Since 2000, the P-I has lost money each year, and the losses have escalated and continue to escalate in 2009,’ he said. ‘We have had to make a very tough decision. This is a business decision and it is no reflection on your work. The decision reflects our inability to see the losses turning around soon.’

In a release circulated shortly after Swartz finished speaking, Hearst said the P-I lost about $14 million in 2008.”

And here’s a reaction from John Cook, a P-I veteran who left the paper last year to start up TechFlash, a tech/biz blog he runs with fellow refugee Todd Bishop:

Could this be its final dance? It’s too early to say. The bigger questions are whether Hearst is doing some behind-the-scenes dealing, and whether the P-I could sustain itself as an online-only operation.

Obviously, we’re big believers in the power of online media. We know it is still an experiment in many ways, but given the rocky state of the daily newspaper business, we’ve always asked ourselves: ‘What’s to lose?’

Anyway, we don’t think the last chapter has been written in this story. The timing is truly bizarre. What the P-I needs now is a white knight to emerge from the Seattle tech community. A savior. Someone with gobs of money who doesn’t mind losing some of it.

What’s Paul Allen doing these days?”

To answer John’s question about the paper’s ability to sustain itself as an online-only offering: It can’t.

Quantcast pegs the paper’s traffic at 2.6 million uniques. That would keep a blog with a handful of writers and editors afloat–if it had a specific niche, like, say technology news. And if it had a national audience to sell to advertisers. But a generalized news site for a local audience? No one’s figured out how to do it yet, and a recession probably isn’t the time to solve that riddle.

It’s hard to see how the paper stays afloat without a white knight. And it’s hard to see how this won’t play out in cities across the country over the next few years.

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