Arms Race for Patents
Patent litigations between competing high tech companies have become standard business practice. In recent years, patents have increasingly gained importance in the high-tech industry as tech giants such as Google, Microsoft, Apple, Facebook and others have sought to stockpile patents in order to sue their competitors and to ward off lawsuits. Companies are willing to dish out a tremendous amount of cash for the greatest arsenal of patents for their large portfolios.
Ironically, high tech companies are looking through portfolios of antiquated tech companies in order to find patents that will position them in the forefront of the technological world. One example is Microsoft, which recently purchased 800 AOL patents and negotiated licensing agreements on approximately 300 more.
This $1.06 billion dollar deal between Microsoft and AOL has obvious benefits for AOL, an online service that has spent the past decade attempting to reinvent its obsolete services. The influx of cash and boost of stock prices has already paid off for AOL. As a result of the transaction, AOL shares have risen to their highest level in the past year. Its stock rose $7.83 (43%), to $26.25 in midday trading. This transaction was paramount to AOL’s stockholders, including its largest shareholders, who have been asking for more return on their investment. The loss of patents will probably not hurt AOL in the future because the company has made a clear shift in their focus towards media; they have recently acquired The Huffington Post and TechCrunch.
A Microsoft patent application.
However, at first glance the benefits for Microsoft are not as apparent. The patents they acquired in the transaction appear to have little value. Among the patents that Microsoft bought are patents related to the antiquated browser from the 1990s, Netscape. AOL purchased Netscape in 1999 for 4.2 billion in stock. However, to AOL’s dismay, the browser was short-lived. The obvious question here is then why did Microsoft want this archaic piece of technology? Additionally, why did Microsoft want some of the other patents in the purchased bundle including Secure Socket Layers (SSL), cookies, and Javascript.
The best answer is that those technologies are at the core of the way the Web works. While the particular product may not in itself be a goldmine, the patents purchased relate to particular functions of the web.
High tech products are particularly vulnerable to patent litigation because of their complexity. For example, one smart phone could have hundreds of thousands of patents. Consequently, Microsoft, like its competitors, may have attempted to accumulate as many of these patents as possible in order to prevent litigation.
However, given the current hostilities between the big tech companies, Microsoft may have had additional incentives for these patents. Some argue that the sole purpose for Microsoft’s billion-dollar purchase was to attack Google. Currently, Microsoft and Google are litigating over patent infringements related to Android.
Microsoft has already had run-ins with Android. Threats of recent litigation have even resulted in getting licensing fees from many Android device makers. Just to convey the magnitude of these litigations, it is notable to point out that last year, Microsoft was making more from its suits over patents concerning Android than from Windows Phone 7, their own product. In fact, HTC Corp., makers of Android-compatible cell phones, paid about $5 for every devise sold that uses Android.
David Drummond, Google’s Senior Vice President and Chief Legal Officer, has acknowledged that the other tech giants are acquiring arsenal in the form of patents to bring down Google. In a recent blog, he wrote that there is “a hostile, organized campaign against Android by Microsoft, Oracle, Apple and other companies, waged through bogus patents.” Additionally, Christopher Martlett, the CEO of MDB Capital, an investment bank that focuses on intellectual property, says he “believes the AOL deal was driven by the rivalry between Google and Microsoft.” Rob Enderle, a principal analyst with the Enderle Group, agreed with Martlett that competing with Google could have been the primary reason for the transaction when he said, “Google has proven particularly inept when it comes to patents suggesting a deep vulnerability so I expect that will be Microsoft’s primary short term use.”
Google may have a target on its back due to its noteworthy acquisition of 17,000 patents when it bought Motorola Mobility for $12.5 billion last August. In a race for patents, the rest of the tech community certainly could not ignore this very large trove of potential gems.
The director of the United States Patent and Trademark Office, David J. Kappos, noted that patent wars are not new phenomena. In fact, there have been heated patent battles throughout industrial history with regard to steam engines, automobiles, and airplanes. However, he indicated that he believes that the current tech patent battle is different when he said, “[T]hose wars played themselves out in slow motion compared to what we’re seeing now . . . What’s different is the pace of technological change and market development. So the stakes are a lot higher, a lot faster.”
Most likely patent wars will continue and companies like Microsoft will continue to arm themselves with the greatest amount of patents in their portfolios. It is possible, however, that companies may determine that a truce may behoove them and resort to working out patent issues through negotiation of royalty rates.
