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."