IP war: Facebook grabs Microsoft patents as profits slip

The IT industry's arms race for intellectual property (IP) entered a stunning new phase last night, as Facebook acquired 650 patents from Microsoft, together with the licence to a further 275. The deal is valued at $550m (£341m).

Facebook's purchase covers a bulk of the $1bn IP portfolio that Microsoft bought from AOL just a fortnight ago, which covers aspects of a range of e-business functions, including email, messaging and online advertising.

At this stage it is unknown precisely what Facebook has bought, or what Microsoft has retained. What is clear, however, is that Facebook is stockpiling IP, discriminately or otherwise: it recently bought 750 patents from IBM, for example, which has the largest IP treasure chest in the industry.

"This is another significant step in our ongoing process of building an intellectual property portfolio to protect Facebook’s interests over the long term," said Ted Ullyot, general counsel of Facebook.

Microsoft retains patents that are of strategic significance to its own position and future revenue streams.

"Today’s agreement with Facebook enables us to recoup over half of our costs while achieving our goals from the AOL auction," said Brad Smith, executive vice president and general counsel at Microsoft.

The logic of Microsoft selling the majority of its newly acquired portfolio at a potential loss becomes more apparent when you consider the politics at play. If IP is the new arms race, then Microsoft has effectively signed a non-aggression pact with one of Silicon Valley's emerging superpowers.

IP equals revenues – unique, or a slice of someone else's. Failing that, it means payouts in successful litigation. 

With Facebook engaged in a bitter standoff against Yahoo (a fight it may now take to its opponent), Oracle battling Google in the US, Apple fighting Samsung worldwide, and firefights breaking out between other players, the IT industry seems engaged in all-out IP warfare. And that risks the user becoming collateral damage.

Facebook's $1bn (£631m) purchase of photo-sharing app Instagram a fortnight ago was designed partly as a show of purchasing firepower, given that the previous valuation was "just" $500m. Pre-IPO, Facebook can now show the market that it is a fully fledged tech titan – one with a four-figure patents portfolio to go with its 900 million claimed users.

But not everything is going smoothly for Mark Zuckerberg. Away from the megabucks deals and its forthcoming IPO, Facebook has just announced a 12 per cent year-on-year dip in Q1 profits to $205m (£143m), on the back of increased operating expenses. 

This means that Facebook – which has valued itself at $77bn – is generating less than 23 cents quarterly profit from each of its 900 million users. That's less than one dollar a year. $1bn baby Instagram, meanwhile, barely has a revenue stream; such is the superheated value of a good idea.

Perhaps, then, a solid long-term revenue stream is what Facebook has paid $550m for.