For the half-year to 30 June 2014, the IPKat's regular team is supplemented by contributions from guest bloggers Alberto Bellan, Darren Meale and Nadia Zegze.

Two of our regular Kats are currently on blogging sabbaticals. They are David Brophy and Catherine Lee.

Wednesday, 11 April 2012

AOL and Microsoft: Patent Strategy Ain't What It Used To Be

This Kat is once again in a bit of a panic. Having more or less come to terms with the copyright questions that confronted him in preparing the syllabus for his impending course here, he now has a new problem to deal with in class. Somewhere down the line, he will need to address what might constitute corporate patent strategy. Over the years, he has have developed a list of reasons why a company might build a patent portfolio, big or small. However, what has been happening during the last few years departs radically from the conventional reasons that explain patent activity by a company. How is he going to explain to students the massive patent acquisition deals that have captured the headlines in recent times?

In case you missed it, the headline of the Reuters report this week here says it all: "Microsoft trumps Amazon, others for AOL patents." For the sum of more than $1 billion AOL, a once-dominant internet platform, has agreed to sell most of its patent portfolio, more than 800 patents in all, to Microsoft. This is reported to amount to more than $1.3 million per issued patent (this when, in the words of a Clayton Moran, a well-known analyst, "Investors had anticipated little to no value for the portfolio -- a few hundred million at the most.") The acquired patents are said to cover various AOL businesses, including Netscape, ICQ, Mapquest, CompuServe and Advertising.com (in truth, most of these companies are either "past tense", or marginal players in the current high tech world).

As reported, the sale was the result of what was called by AOL CEO Tim Armstrong "a full-blown dynamic auction", which began in the fall and included most of the high tech hi-fliers, including Amazon.com, e-Bay, Google, Facebook as well as the ultimate victor, Microsoft. The announced acquisition by Microsoft is the latest in an lengthening list of such mega-patent acquisitions. There was the multi-billion bankruptcy auction sale of 6,000 patents by Nortel Networks for $4.5 billion, amounting to $1.05 per issued patent. More recently, Google agreed to acquire Motorola Mobility Holdings for $12.5 billion, in material part for its intellectual property (read "patents") rights. In the run-up to the Kodak bankruptcy announcement in January 2012, there was abundant talk of Kodak selling a patent portfolio for $2 billion or more -- much more, it seems, than the overall valuation of the company itself.

Circling back to the question that haunts this Kat, what can we make of this and other like mass patent portfolio acquisitions? Surely neither Nortel, Motorola, Kodak nor AOL built huge patent portfolios for the primary purpose of being able to sell the portfolio off for large sums either to fend off bankruptcy or as part of the disposal of assets in the bankruptcy itself (see this Kat's earlier comments in this regard, "Kodak's IP Golem" here.) These auctions/sales are all about raising cash, here and now, primarily either for the benefit of creditors or investors. In each of these instances, we seem to have a situation where the patent carcass is worth more dead (or nearly so) than as an ongoing concern. Presumably, each of these patent portfolios was built under some corporate vision in order to enable the company to extract value from the inventions, And yet, in each of these situations, the value of the patents seems to have been unlocked only as part of the company's ultimate business failure. The upshot is that from the acquiree's vantage point, the transaction was likely not part of its patent strategy; cashing-in under duress has no connection with the presumed reasons for which the patent portfolio was constructed. How very bizarre.

I have no doubt that Nortel, Motorola and AOL are all pleased to be the recipients of these large sums. But someone has to be writing the chequw. What is driving the acquirers to lay out such large amounts of money? Surely it is not that because they believe that they can do a better job of directly monetizing these inventions in their business than did the original owner of the patents. The explanation that is usually given is that these are "defensive" acquisitions, usually by a relatively patent-poor high tech giant (Microsoft might be the exception here), the better to engage in patent wars with competitors. While buying patents for defensive purposes is hardly a new strategy, the quantitative scope of these recent acquisitions is, on the whole, unprecedented.

What we seem to be observing is an increasing number of full-fledged patent strategies being maintained by companies other than the original owner. This poses both a research and a pedagogical challenge. From the research perspective, it will be interesting to study the considerations that enable the acquirer to value a huge patent portfolio based primarily on the "defensive" worth of the patents, ex ante, and to evaluate whether the acquisition was worthwhile, post ante. Will we conclude that these acquisitions were a reasonable business risk or simply the patent version of the "dot.com" bubble from a decade ago? From the pedagogical point of view, these developments underscore the fact that there are now new and substantial corporate actors that must be taken into account in any consideration of patent strategy, actors whose considerations are quite different from those that presumably drive a company in its formulating and implementing a patent strategy (I am not talking about mass patent aggregators, such as Intellectual Ventures. For a superb discussion of patent aggregrators, see Tom Ewing & Robin Feldman,"The Giants Among Us" here.) Virtually no materials or even pedagogical guides exist for this. For this Kat, the challenge of considering patent strategy in these changing circumstances is "Fear and Trembling: part II."

16 comments:

Anonymous said...

Nice post. Happy to help with the syllabus if useful. Definitely a lot to explore.

Best,
Erin-Michael

emg@mdb.com

Gentoo said...

I'm slightly unclear if this Kat is indulging in faux naivety.

Proprietary software is going through the Gandhi:

first they ignored F/OSS
then they laughed at it
now they're fighting it

http://news.cnet.com/8301-13505_3-10172575-16.html

http://money.cnn.com/magazines/fortune/fortune_archive/2007/05/28/100033867/

http://androidcommunity.com/barnes-noble-reveals-microsofts-android-patents-in-detail-20111114/

http://www.theregister.co.uk/2011/02/11/mpeg_la_calls_for_patents_related_to_google_open_source_codec/

http://en.swpat.org/wiki/Oracle_v._Google_%282010,_USA%29

This is nothing more than an attempt by those using a fossilising business model to resist Schumpetarian destructive innovation.

F/OSS is esssentially a customer driven model (where most software is actually developed anyway)

If your business is selling software to people (rather than selling support services) you have a problem.

Let's not forget SCO v Everyone + Their Dog on the Linux Kernel infriniging the copyrights they, er, didn't actually own and the decision by two companies selling software to each invest $20 million in SCO (early 2003)

As has been reported here, the _table stake_ for defending a patent suit is about $4m - a major barrier to overturning the business processes of the USPTO - but occasionally there's a ray of sunshine

http://www.wired.com/wiredenterprise/2012/03/ms-patent

Andy J said...

Neil,
I sense this was a rhetorical question in order to make an interesting point.
But I'll take the bait: I suspect that all large companies which have extensive patent portfolios will have a few turkeys amongst the eagles, but it probably made sense at the time to take out a patent just in case (or to prevent a rival from doing so), hence years down the line some of the portfolios now look pretty bloated and worthless in purely economic terms. And as for other big companies acquiring these turkeys, surely it's because they are rich enough to do it (cf Charles Saatchi's 'investments' in some pretty dubious modern art). It's not the normal rules of the market place at work here. Another example is the recent acquisition of Instagram by Facebook for $1Bn: the price defies all economic sense, but Facebook can afford it and it prevents someone else (eg Google) from getting their hands on the company.

Anonymous said...

I wonder if Andy J's last point might not actually be the key here.

Might the true value to MS in fact not be in how MS might assert these patents against others; but rather in how much it is worth to MS to keep these patents out of the hands of a non-practising entity, so that the patents cannot be used against MS?

(Though in the past, if I recall correctly, MS has previously gone about this through multi-company consortia set up to buy up this toxic waste and render it beyond use).

$1bn should perhaps be presented not as the "worth" of these things, but rather as one company's estimate of the minimum potential for harm of this junk, which we would generally be better off if it had never been issued.

Mark Summerfield said...

I am coming to the view that these billion-dollar IP plays are simply irrational. Companies paying unjustifiably huge prices simply because they can, and primarily to prevent their rivals from getting their hands on the assets, is not a sustainable practice when there is no comparable return on the investment.

The thing about bubbles is that they all eventually burst. It is quite possible that this will end in tears, probably the first time someone who has paid $x-billion for a patent porfolio gets into financial strife, tries to sell the portfolio on to regain liquidity, and finds that the bottom has fallen out of the market and there are no takers at anything like the original acquisition price.

Unlike Mark Zuckerberg, I am old enough to have been directly impacted by the dot-com crash, and the follow-up telecoms crash, so I sincerely hope that I am wrong. But if I were you, I would be preparing to teach a course on 'the great IP assets boom and bust of the early 2010s', rather than trying to provide students with a rational explanation for these big deals.

More of my thoughts on the AOL and Instagram deals can be found on my blog (Instagram, AOL … Are We Headed for an Intangible Meltdown?).

miw said...

The rapid growth in the value of ICT patents merely reflects the similar growth of ICT companies. The growth in company value is so fast that there is not enough time to establish a decent patent portfolio. Hence, these companies are vulnerable to patent litigation which poses a significant business risk that can only be remedied by acquiring patent assets. More established companies in competition with these new entrants, have a stronger patent portfolio, but may decide to prevent the new entrants to easily acquire a patent portfolio. All of this results in a rapid growth in patent value.

Anonymous said...

Gentoo, to paraphrase Carly Simon, "you are so vain, you think these patents are about you".

Those companies aren't fighting FOSS. They are fighting each other. This kind of patent escalation in a rapidly growing and competitive technology is nothing new: according to the book "Empires of Light", at the height of the disputes between Edison/General Electric and Westinghouse at the end of the XIX century, there were more than 300 patent lawsuits between them.

Almost Emeritus said...

How things change: I have a copy of the balance sheet of the General Electric Company (UK) for 1916. The company was worth about £2m. The value of patents, trade marks, and know-how was a nominal one guinea.

Anonymous said...

Would it be be wild speculation of me to suggest that these companies may actually believe there is some value on these patent portfolios? Sold as job lots there will undoubtedly be much junk, but possibly any gems that they wish to get their hands on.

I doubt anyone throws a billion dollars down the drain just because they have the money burning a hole in their pocket.

Anonymous said...

Not wild speculation at all, although I would have thought it would cost substantially less than a billion dollars to sift through that junk and find the gems.

My take on this (for what its worth), is that this is a reflection of a growing divide between patent quality and patent numbers. Why bother skewering your opponents with an elegantly turned claim, when you can simply drown them in a sea of legalistic ordure? In which case, he who flings the most ordure wins, or less colourfully, quantity counts for far more than quality.

MaxDrei said...

Compare in force patent rights to nuclear warheads. If you want to deter attacks, what matters is not whether the ones you have are or are not in working order. What counts is whether the other side thinks you might have one, just one, that would work, if called upon to do so. The better hidden it is from prying eyes, the stronger the deterrent. The bigger the pile of ordure, the harder it is to ascertain whether, somewhere within it is just one warhead that would work.

Hence the race, vital to survival, to make the biggest pile of ordure.

Anonymous said...

But you can't just launch US patent X at company Y unless there is some relationship between the claims and their actions, so every case must be judged on its merits. There is no equivalent of a nuclear arsenal deterrent, either sole missile or masse horde.

Even as a group of patents to provide quid pro quo licences it would still be a bit of a random purchase. No amount of attorneys are going to be able to sift through that lot just to find something to attack an aggressor with in return. The same can be said for sifting out the gems in advance of a purchase, so you may just as well buy the whole lot just as in any standard house clearance.

I must come to the conclusion that there are patents in the portfolio that the purchasers really wanted to get their hands on and the price paid was justified. In addition to these gems there are likely to be groups of patents covering technologies of percieved current or future interest that would also be considered worth owning, at least in the short term. The remainder of the junk will probably be dumped if they get round to a protfolio review (normally done when budgets start to shrink).

Anonymous said...

@anon 9:04

This is of couse nothing new.

Remember the oft-told tale of what happened when IBM came to shake down Sun in the 1980s.
http://www.forbes.com/asap/2002/0624/044.html

As the Big Blue crew looked on (without a flicker of emotion), my colleagues--all of whom had both engineering and law degrees--took to the whiteboard with markers, methodically illustrating, dissecting, and demolishing IBM's claims... Confidently, we proclaimed our conclusion: Only one of the seven IBM patents would be deemed valid by a court, and no rational court would find that Sun's technology infringed even that one.

An awkward silence ensued. The blue suits did not even confer among themselves. They just sat there, stonelike. Finally, the chief suit responded. "OK," he said, "maybe you don't infringe these seven patents. But we have 10,000 U.S. patents. Do you really want us to go back to Armonk [IBM headquarters in New York] and find seven patents you do infringe? Or do you want to make this easy and just pay us $20 million?"

After a modest bit of negotiation, Sun cut IBM a check, and the blue suits went to the next company on their hit list.

Sometimes it only matters how high the pile of chips is on each side of the table, not how many are any good.

Anonymous said...

I have my doubts over the truth of that story. Analysis of 10000 patents is plausible, but analysis of 10000 patents and comparing each and every one of them with each and every action of Sun is a little implausible. Bear in mind that the analysis of all of Sun's actions themselves without comparison with any patents would be an overly arduous task.

Still, it is a great story for scare-mongering about bullying patent owners. I suppose we need to ignore the anti-competitive nature of IBM's alleged actions, which I guess would provide prima facie evidence of abuse of a dominant position.

Remember the possibly-not-so-often told tale of the European company that threatened to put its competitor out of business by slashing its prices, only to be found guilty of abuse by the EU?

Gold Digger said...

I guess that many of these patent families are likely some of the first to appear before the various thickets appeared. Therefore, there is likely language that could be interpreted to cover a competitors activities.

However, the real gold nuggets are those families still pending where it may be possible to 'mine out' and craft new useful claims.

Patent mining can be a useful strategy both against competitors and to provide protection for your product where you might have an otherwise later filing date.

Anonymous said...

Gold Digger can you explain. How does one go perform a "mine out" of new and useful claims from stuff that is still pending at the PTO? Does it involve filing continuation applications? Is this why Americans like to have something pending at the EPO, even up until near the end of the 20 year patent term?

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