AOL announced yesterday that Microsoft has paid US$1.056 billion in cash for 800 of its patents, related patent applications, and a license that covers the 300 patents that AOL retains. In turn, AOL will license the patents being sold to Microsoft. While AOL’s stock price spiked as much as 45% upon the news, there was a lot of speculation about what the IP grab means to Microsoft.
“It is truly a staggering amount of money,” said Jon Hyland, shareholder at Munsch Hardt Kopf & Harr, a Texas-based law firm with several practice areas, including intellectual property. “That’s an average of about $1.4 million per patent,” he added.
A quick search of the U.S. Patent and Trade Office application database shows 303 AOL patent applications, although, for technical reasons, the number may not be correct. Assuming the number is correct and Microsoft is acquiring the rights to all 303 patents pending, then 800 granted patents plus 303 patent applications translates to just under $1 million per patent. Only AOL, Microsoft and insiders know exactly how many patents and patent applications are included in the deal.
To compare, a consortium including Apple, EMC, Ericsson, Microsoft, Research in Motion and Sony paid $4.5 billion for 6,000 Nortel patents. That’s $750,000 per patent. And Google purportedly initiated that auction with a $900 million bid.
Google, whose patent portfolio historically has been sparse for a company of its size and influence, recently acquired 24,500 patents from Motorola Mobility for $12.5 billion. Seventeen thousand of those patents were granted, and 7,500 were pending at the time of the announcement. That’s $510,000 per patent, granted or pending.
While a billion dollars may be nothing to Microsoft and the patents may be more than worth it, it would nevertheless take a lot of licenses to achieve breakeven ROI. As an example, the 11 licensing agreements with Android smartphone manufacturers are worth about $621.6 million for fiscal year 2012. Over the long term, however, the AOL patent acquisition will likely prove to be both profitable and wise.
According to AOL, the acquired patents cover advertising, search, content generation and management, social networking, mapping, multimedia and streaming, and security.
A number of high-stakes players, including Amazon, eBay, Facebook and Google, participated in the auction. The patent rights purportedly span current and former AOL businesses, including Netscape, ICQ, MapQuest, CompuServe, Advertising.com and others.
The patent portfolio acquisition strengthens Microsoft’s competitive position in relation to Google and others, which includes generating licensing fees from new and perhaps existing licensees.
“Microsoft isn’t going to shell out $1 billion without doing a lot of investigating,” said Hyland. “There are a lot of different technologies involved here, which suggests Microsoft is looking at the acquisition as a complement to its current licensing program. With the AOL patents, there are more companies from which they can drive revenue.”
That’s consistent with what was said by Brad Smith, Microsoft’s general counsel and executive vice president of legal and corporate affairs.
“This is a valuable portfolio that we have been following for years and analyzing in detail for several months,” he said. “AOL ran a competitive auction, and by participating, Microsoft was able to achieve our two primary goals: obtaining a durable license to the full AOL portfolio, and ownership of certain patents that complement our existing portfolio.”
The AOL patents may also fuel additional revenue streams from existing licensees, depending on how its licensing agreements are written. If the licensing agreements are inclusive of portfolio licenses, then the new patents may be included, but if they are written more narrowly, Microsoft would be in a position to demand additional licensing fees from the likes of LG, Samsung and others, Hyland said.
The transaction is expected to be completed by the end of 2012, assuming there are no regulatory obstacles.