A billion? Maybe good value if they’re good patents

At first glance, the news that Microsoft has agreed to pay AOL more than $1 billion for a trove of 925 patents (plus access to 300 patents kept by AOL) might seem to be an expensive purchase to some. Microsoft then offset some of their expenditure by selling access to some 600 patents to Facebook for $550 million. Facebook, who was interested in the AOL patent collection, has agreed to purchase 650 patents and patent applications from the portfolio acquired by Microsoft and to license the patents retained by Microsoft.

I have no idea what’s covered by the patents that have been traded, but aside from selling a good proportion of the AOL patents to Facebook, I think that the overall deal could be reasonable business, even if it’s just a matter of Microsoft equipping itself with some extra protection against the patent trolls that search out fundamental patents and use them as weapons to extract cash from companies who might infringe the patents in some way. Often companies pay out quickly when faced with the prospect of expensive and protracted law suits that can drag on for years. Having an extensive selection of patents, in this case gathered from companies like Netscape and CompuServe as well as AOL itself, provides a certain degree of protection against law suits because a broad and deep patent portfolio can be used to retaliate against any attempt to sue. The wider and broader the portfolio, the more likely that a patent exists that can be used to countersue. For this reason, patent trolls typically don’t like taking on companies such as Microsoft, IBM, or HP that hold tens of thousands of patents, but it does happen.

There are good and bad points about having a large patent portfolio. The biggest downside is the sheer cost of maintaining the portfolio as fees have to be paid to keep the patents current. Apart from fees, there’s the small matter of lawyer and other personnel expenses incurred to keep track of patents, including the need to examine and defend incoming claims. Old and obsolete patents have to be trimmed from the portfolio when they are no longer useful, new patent ideas have to be examined and tested to establish whether the ideas are in fact patentable, and if this is the case, patent applications have to be created in the form required by patent examiners and submitted for review. It can take many years before a patent is actually granted. Two-three years would be deemed fast for the U.S. patent office (USPO) to make a decision while four-five years is average.

It’s worth mentioning that a huge portfolio does not necessarily mean that all of the patents are useful at either a technical or commercial level. Indeed, in my time working with patent lawyers, the rule of thumb that I often heard cited was that only 1-2% of a patent portfolio is interesting for one of the reasons described below, up to 10% are useful in terms of licensing or other purposes, but the other 90% are marginally useful if at all. A company like HP or IBM will have many patents that were interesting and useful ten years ago but aren’t at all useful today. Think of the patents dealing with floppy disks, for instance.

Apart from avoiding the unwanted attentions of patent trolls, large patent portfolios offer three major advantages. First, you have the chance to make cross-patent licensing agreements with other companies. Essentially, this means that you can access the technology described in the patents owned by the other company and that both companies agree that they will not sue the other if the technology is used in a product. It’s common to find that the largest IT companies have many cross-patent agreements in place that are renewed every three to five years.

The second advantage is the ability to block competitors by denying them the ability to use specific technology. A good patent is one that describes fundamental technology that is then built on and used by many products. Think of the patents that describe the gestures used to control tablet and smartphone devices, such as the “slide to unlock” patents that Apple has been granted by the USPO and now form the basis of law suits against companies such as HTC. US Patent 7,657,849 claims:

“A device with a touch-sensitive display may be unlocked via gestures performed on the touch-sensitive display. The device is unlocked if contact with the display corresponds to a predefined gesture for unlocking the device… The performance of the predefined gesture with respect to the unlock image may include moving the unlock image to a predefined location and/or moving the unlock image along a predefined path.”

Sounds like this might be the way that you’d think any high-end smartphone might be unlocked today! The patent was filed by Apple in December 2005 and granted in February 2010.

Patents that control fundamental methods are very attractive because every company that wants to work in a particular space is likely to want to implement a feature that might infringe the patent and therefore opens that company up to litigation and potentially highly expensive fees.

The third advantage is gained through lucrative licensing fees. If you hold a patent that everyone wants to use then you can charge for the privilege of using your technology. The best thing about this revenue is its high margin, usually higher than even the best software margins. Companies that take good care of their patent portfolio can extract huge profits through licensing fees.

No one writes a check for a billion dollars lightly. And although it seems like a lot of money to pay for 925 patents, I imagine that Microsoft did a lot of due diligence to ensure that they’re getting something valuable in return. In this case, that something means some patents they can use immediately, most likely for defense purposes, and some that they can license or sell on, which is exactly what they’ve done with Facebook.

It seems like Microsoft has chosen to retain some 275 of the AOL patents. I assume that these are of reasonable quality and of direct relevance to what Microsoft wants to do in the future. But in any case, even if the patents are not really interesting in an immediate commercial sense, given that they do come from the likes of Netscape, CompuServe, and AOL, the patents will at least describe part of IT’s history. And that’s always nice to preserve.

– Tony

Follow my ramblings @12Knocksinna

About Tony Redmond

Lead author for the Office 365 for IT Pros eBook and writer about all aspects of the Office 365 ecosystem.
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1 Response to A billion? Maybe good value if they’re good patents

  1. Pingback: A billion dollars? Maybe good value if they’re good patents - The Microsoft Enterprise Blog

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