Tech patents soar in value

The technology patent arms race is heating up—again.

Microsoft Corp.'s agreement to spend nearly $1.1 billion buying and licensing about 1,100 patents covering some of the Internet's basic plumbing from AOL Inc. spotlights the ongoing boom in spending among tech titans for what amounts to the Internet era's nuclear deterrence.

"This has been a gradual evolution of patents from simple legal assets to strategic financial assets," said Mark Radcliffe, a partner at law firm DLA Piper who specializes in intellectual property.

Companies including Google Inc., Apple Inc., Facebook Inc. and Microsoft have been jockeying to gain legal leverage as they fight for bigger shares of mobile and Internet markets. Other firms, such as TiVo Inc. and Eastman Kodak Co., which is operating under bankruptcy-court protection, have sought to cash in on the patent race.

Monday's deal highlights the escalating prices for intellectual property that can span several businesses. Microsoft agreed to pay far more than the roughly $300 million value some analysts had placed on AOL's patent trove, which touches on widely used technologies in areas such as email, Web-search rankings, Web browsers, instant messaging and video conferencing.

The deal was motivated primarily by a desire to keep the AOL patents out of the hands of Microsoft rivals, which might use them to push patent claims against the company, said a person familiar with the matter. The Redmond, Wash., software developer is considering reselling at least some AOL patents it acquired. AOL and Microsoft also have been on friendly terms concerning patents in the past.

"AOL was basically at the top of our list of patent portfolios we had to be thoughtful about from a defensive perspective," Microsoft General Counsel Brad Smith said in an interview. Mr. Smith said Microsoft doesn't plan to open a new front of patent litigation, as Microsoft has done with patents it feels are being infringed by Android devices.

Alexander Poltorak, chief executive of patent brokerage and enforcement firm General Patent Corp., said he believes that Microsoft is paying an "exorbitant" price, at more than $1 million for each AOL patent licensed or purchased. For comparison, last year's landmark $4.5 billion sale of Nortel Networks Corp. patents worked out to roughly $750,000 a patent.

Mr. Poltorak said that even good-quality patents purchased as part of such a large portfolio, rather than "cherry picked" on an individual basis, usually have a market value of between $100,000 and $200,000 apiece. On average, he added, only about 5% of any large company's portfolio consists of patents that are "worthwhile," or readily enforceable in court.

The patent deal includes a twist: Microsoft is acquiring some former assets of Netscape, the pioneering Web browser maker that was purchased by AOL and was once Microsoft's archenemy on the Internet. Microsoft's actions against Netscape were a significant factor behind the U.S. government's 1998 antitrust lawsuit against Microsoft that was settled in exchange for government oversight over the company's activities.

Patent experts said Microsoft likely is paying dearly to keep the patents away from rivals. The AOL portfolio includes intellectual property related to mobile technology, which could impact Google's Android operating system or Apple's iPhone.

Microsoft, meanwhile, has focused largely on winning royalties from companies that it believes use its patents. It identified several hundred of AOL's patents underpinning such software as Microsoft Windows, Internet Explorer, email technologies and the Skype digital-calling services, according to a person familiar with the matter.

Other bidders likely drove up the value of the deal, according to people familiar with the matter. Google and Facebook each took at least preliminary looks at AOL's collection of patents, according to people familiar with the matter.

During the auction, AOL tried to capitalize on the value of the patents as "defensive weapons," according to a person familiar with the matter.

Many of the recent patent-portfolio acquisitions have been seen as ways to acquire an arsenal for waging countersuits, including Google's $12.5 billion deal last year to acquire Motorola Mobility Holdings Inc. MMI -0.46%Facebook, which has been sued for patent infringement by Yahoo Inc., recently acquired patents from International Business Machines Corp. and has filed a countersuit against Yahoo.

Microsoft has cited a desire to strike more patent deals like the one reached last fall with Samsung Electronics Co. Under that arrangement, Microsoft will receive royalties for some of Samsung's Android-powered mobile phones and tablet computers. In the absence of amicable licensing deals, Microsoft hasn't been shy in escalating its patent strategy.

After Microsoft failed to win patent licenses for Barnes & Noble Inc.'s BKS -1.59%Nook electronic reader powered by Android, Microsoft last year sued the book retailer for alleged violation of software patents. Microsoft in February also complained to European regulators that Google and its soon-to-be unit Motorola Mobility are unfairly wielding an important class of patents against rivals.

(Published by WSJ - April 9, 2012)