Analysis: Technology patent wars

By Stuart Sumner
13 Apr 2012 View Comments

Microsoft is to spend $1bn (£600m) purchasing 800 patents from AOL, which equates to roughly $1.3m (£800,000) per patent.

These patents mostly relate to search, email, instant messaging and online advertisements – cornerstones of the internet economy – leaving AOL with a remaining portfolio of around 300 patents.

Further reading

Technology companies have increasingly been investing in patents in recent years. Google acquired a raft of patents last year when it bought Motorola Mobility for £7.7bn, securing the firm's 17,000 patents as part of the deal.

At about the same time, Microsoft teamed up with Apple and BlackBerry manufacturer RIM, among others, to acquire Nortel's 6,000 patents for £2.8bn.

Firms hope to see a swift but lasting return on these investments as smartphone makers, among others, will be forced to pay them licence fees to use the technologies as mobile access to internet services becomes the norm.

But the real value of these patents will be seen in courtrooms and boardrooms at law firms over the next few years. Carter Lusher, research fellow with analyst firm Ovum, explained that acquiring intellectual property in this way confers both offensive and defensive benefits.

The offensive patent

"Microsoft went after HTC over patent infringement and is now getting $5 (£3) for each Android handset that HTC sells," said Lusher.

But the true value of these patent deals should not be seen in financial terms – Lusher said income from such settlements equate to a "rounding error" in Microsoft's total revenues – but in the message they send to Microsoft's competitors.

"You'd better not rip off our technology and then undercut our partners selling Windows phones because we will come after you with a very big hammer," is how Lusher described this message.

"This is a similar motivation behind Apple's patent lawsuits against Android phone and tablet makers and why Apple teamed with Microsoft to buy Nortel's patents last summer," he added.

"Apple is trying to prevent Android competitors from what it considers to be the stealing of its intellectual property that then is being used against Apple in the marketplace."

The patent as an defensive tool

And these patents can also help defend their owners from future legal attack.

"On the other hand, Microsoft itself has been, is currently, and will in the future be sued by another vendor over alleged patent infringement," explained Lusher.

"So having a large, diverse and strong portfolio of patents is critical for technology vendors to own for legal purposes."

Microsoft itself refused to comment on the specific benefits of the AOL deal besides this statement from Brad Smith, general counsel and executive vice-president, legal and corporate affairs, Microsoft.

"This is a valuable portfolio that we have been following for years and analysing in detail for several months," he said.

"Microsoft was able to achieve our two primary goals: obtaining a durable licence to the full AOL portfolio and ownership of certain patents that complement our existing portfolio."

The transaction will be completed by the end of the year, subject to regulatory approvals.

Stifling innovation, or encouraging it?

But while this trend of exhaustively chasing down patents can be good for the bottom line, it could slow down technological advancement. Lusher described it as a tax on innovation.

"None of these patent buys will be used for economically productive purposes like creating great new products. This incessant spending of money and executive bandwidth on patent legal wars is a waste that drains resources from doing real R&D that yields real innovation and products that organisations and individuals can use," he said.

Innovation today often comes through mergers and acquisitions, for example's purchase of Rypple last December.

"That tiny acquisition was not about the talent management applications, but about Salesforce getting its hands on technology and expertise on gamification that it can add to its platform and other applications," said Lusher.

However, some legal experts disagree, and suggest that the current patent system actually rewards firms for coming up with their own inventions.

"Not innovating and simply doing what has been done before is more likely to lead to issues [as patent owners sue for infringement]," argued John Tothill, partner at patent and trademark attorneys Dehns.

"Innovating and developing new products is a way to avoid these issues. If one innovates, one can obtain one's own patents, which can then be used for both defensive and offensive purposes.

"The current smartphone patent disputes suggest innovation, and the patents that go with that are critical in today's smartphone arena. That should only encourage technology start-ups and other companies to innovate and acquire their own patents."

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