Show me the money!
Nothing is ever exactly as it seems in the business of technology and that certainly applies to AOL’s recent patent auction, won by Microsoft with a bid of $1.056 billion. This event wasn’t really an auction and had little to do with patents, yet it probably marks the peak of the current patent bubble.
On the face of it, AOL selling its 800 patents to Microsoft was about raising cash for the troubled online company, allowing it to pass some of that money on to disgruntled shareholders in the form of a one-time dividend or share buy-back. And the patents were substantial, since they included not just AOL’s own productivity but also that of Netscape, Mirabilis (ICQ), and any other AOL acquisitions over the years. Bidders were Facebook, Goldman Sachs, and Microsoft. But that’s where the obvious part comes to an end.
The reason there was an auction at all was probably because of AOL’s concern about adversarial shareholders. Had AOL simply sold the patents to Microsoft in a private transaction the company might have been at risk for shareholder lawsuits claiming the price was too low. A public auction was the best defense against such lawsuits.
Only the auction wasn’t real. No company but Microsoft was ever going to buy those patents.
Facebook is friends with Microsoft, one of its larger investors. Goldman Sachs isn’t normally in the business of buying patents, but as Microsoft’s longtime investment banker and the company that took Microsoft public, they stepped-in as a favor to Redmond, making sure there were at least three bidders so the event at least appeared to be a legitimate auction.
The auction started on March 22nd and ended on April 8th, which was probably the shortest such auction in history. Normally the sale of hundreds of patents would have required months of due-diligence from bidders, not two weeks.
As patent theater it played well, too. Facebook bought 800 IBM patents (notice the identical number) instead for an undisclosed but presumably huge sum, Goldman was simply out-bid, and Microsoft walked with the patent portfolio, presumably to bolster it for the coming battle with Google — a battle I’m not even sure is coming, by the way.
But Facebook’s IBM patent purchase was tiny in comparison with a price tag of no more than $70 million and probably a lot less. When Big Blue sells excess patents by the pound, which it does regularly, the going price tends to be $20,000 for little patents and $100,000 for big ones. You do the math.
Facebook’s patent guy used to work for AOL and knew what he was passing-up. Maybe Microsoft will cross-license with Facebook, making the loss immaterial. And speaking of immaterial, if you think the IBM patents went for more than $70 million, how was Facebook able to avoid reporting the transaction details as the SEC requires if they are material to the company’s results?
So why the drama when Microsoft could have just bought the damned patents? Part of that is covered by AOL’s needs as described, above. The rest is Microsoft’s need to make the transaction one that would be viewed as an asset purchase, adding to the company’s balance sheet, rather than a penalty, detracting from Microsoft earnings.
It’s all about accounting.
Remember AOL was one of the companies that successfully sued Microsoft for anti-trust, both in its own name and that of its Netscape acquisition. Microsoft paid AOL $750 million back in 2003. Think of this $1 billion payment as the final installment of Microsoft’s settlement with AOL.
The 2003 settlement with AOL didn’t cover patent infringement. Even back then Time Warner lawyers felt that there was another $500 million to be recovered from Microsoft for patent infringement. Yet for some reason they never went back for the money.
So Microsoft has had that potential litigation hanging over its corporate head for almost a decade. Not only was there infringement, but that infringement could be easily documented as willful with a decade of litigation leaving a clear paper trail of causation. Microsoft couldn’t claim they were unaware of the AOL patents. And since they were aware they could be subject to treble damages. That’s a potential $1.5 billion hit to earnings.
Much better to cut the present deal, paying just over $1 billion as an asset purchase.
The price was high, but not as high as it might have been for Microsoft, and from an accounting perspective it was ideal.
But as a pure patent sale, the price was probably too high, which is why I say it marks the peak of the patent bubble. Big companies have been bulking-up their patent portfolios of late and my sense is that process is pretty much complete. Apple, Google and Microsoft might enter into a huge legal battle now but I don’t see it happening.
Just like in the Cold War, mutually assured destruction will probably keep them safe.
Interesting! That just goes to show you if you drag anything out long enough, the dust will setle. The japanese do it all the time.
Yay! I’m the first comment! Woohoo!
Insight like this is why I keep returning to Cringely. Thanks.
so what were the patents? a blanket claim on “You’ve Got….” perhaps?
“A Method and Implementations Pertaining To Refusal to Terminate a Paid Membership?”
“Generation of Multiple Unique Appearances of Physical Media from Seemingly Nowhere?”
Well done! It took only one unsolicited AOL CD to show me you don’t try to snap one in half without sending shrapnel everywhere.
I hope Bob’s right that this marks the end of a patent bubble.
It seems to me the current patent system has evolved to quash innovation. Could a small company produce a smartphone now from independent components? Seems like there are so many mobile patents, if the venture made any money they’d be killed in court.
As an American, I’m ashamed of our patent system. I think it’s all a big lie.
How old are these patents? I bet they’re getting close to expiration, which would bolster the “accounting trick” angle.
The patent system is a joke these days. Back when it was designed so that folks could license something real like the cotton gin design, to encourage the spread of ideas and protect an actual inventor, I could understand the need.
Today obvious processes like “following another user’s content” and “1-click checkout” being patented, and it’s are ridiculous.. I’m sorry, but things like wrapping all the checkout steps together in the background making it so a user only has to click a button once is NOT an “invention.”
I find your theory really interesting Robert, and well narrated too.
I’ll share this post on my italian blog 😉
[…] di Redmond dei brevetti di AOL. Pubblicato il 12/04/2012 da Davide Costantini Secondo Cringely l’acquisto di brevetti di AOL da parte di Microsoft puzza di operazione orchestrata. Un po’ troppa dietrologia per i miei gusti ma le argomentazione di Robert sono molto […]
Patents are surely innovative for the legal and political systems.
KA CHING!
… and by that you clearly mean the legal and political businesses.
They’ll burn themselves out eventually… and innovation and the country will go along for the ride? 🙁
in the technology business (1st sentence)
I always think of “units sold” when I read such big figures. By that I mean, how many units of such-and-such software or hardware need to be bought by customers to pay for such a big-numbers game? What a pure and simple waste of so many people’s hard-earned. Yes, I understand the legal angle and the desire to remove a swinging pendulum but what a sour image our high-tech industries give 🙁
AOL patents? How to send out a gajillion CDs? How to use dial-up? How to lose money 9 ways from Sunday?
“AOL patent” sounds like an oxymoron. Maybe the whole story is fake. Are we sure the story didn’t start on the Onion? How big a sucker does Microsoft have to be to get gigged by an outfit like AOL?
I’ll have to check the PuffingtonHost to find out the absolute truth about this.
Be seeing you.
The patent system, particularly the American patent system, is pointless and broken.
Anyone, anywhere should be able to exploit any idea, regardless of who had it first, for the greater good. Those who exploit good ideas well will automatically get a reward.
People will always think, innovate and have good ideas for the same reason people climb mountains – because they are there!
The current situation is just another aspect of broken and inappropriate capitalism.
“People will always think, innovate and have good ideas for the same reason people climb mountains – because they are there!” Quite true. But will they work hard at it. When they don’t feel like it. When there are other distractions in life…like the need to make a living.
Only a fool would make such a statement. Inventors, like artists and musicians put their heart and soul into their creations. After they’ve laid the groundwork, mass producing the idea is commodity work… Unless, of course, the invention IS the method of mass production, or any other process. Then, it should be respected and protected as any other creative work. If you take that protection away, people may continue to invent as a hobby, but not serious inventors who make the world a better place.
The Constitution, based on existing South Carolina law, limited patents to 14 years. What makes the world a better place is the sharing of knowledge, not its stockpiling by monopolists for the rest of time. It’s meant to belong to the public, allowing a small space for the inventor to earn his just, commensurate reward. Or are you calling Thomas Jefferson a fool, as well? What a sad indictment of our business culture.
You’re spot on Ming. We’ve enetered the age of digital abundance. The old rules to encourage investment which was capital intensive do not apply to software 99.9% of the time. The old incentives are unnecessary, and the patent system should be changed to exclude software. We convinced our government to do that here in NZ – they – after public consultation, the parties in government supported the exclusion of software from patentability unanimously.
Sadly, the proposed legislation hasn’t been passed into law yet, and the impending “Trans Pacific Partnership Agreement” (an FTA with the US) may overrule that, as the US is trying to use FTAs to inflict its fundamentally broken IP regime on the rest of the world (whose politicians typically don’t understand this stuff at the best of times).
I’m wondering how long it will be before all the entrepreneurs and wealth-creators leave the US for countries without software patents …
… perhaps some already have !
We’ve already had some enquiries from US and Canadian companies wanting to move to NZ just on the strength of our pending (not yet enacted) anti-software patent legislation.
So who’s gonna buy Kodak’s?
Somebody will certainly buy KODAK’s patents, but my point here is they’ll be unlikely to go for $1.3 million each like these AOL patents.
I’m sure that there’s a lot of truth in your our explanation for why Microsoft would overpay AOL but another reason could be that Microsoft is part of a cartel for price-fixing patents. They could be overpaying to give the impression that their patents in general are worth far more than they really are. This helps them to keep the cost of a patent portfolio very high and helps them to charge excessive licensing fees.
Most of the patents for so-called inventions are held by a small number of huge companies that can afford huge legal departments and legal bills. Usually the easiest way for them to set artificially high prices is in cross licensing, when two companies agree to set excessive values for one another’s patents, which mostly cancel out.
These companies are constantly sueing each other but they have a symbiotic relationship because this behaviour scares off smaller competitors and also helps to keep each others patent values and licence fees very high.
I don’t completely disagree with you here but I feel the need to point out that Microsoft generally doesn’t charge for licensing its patents with Android phones being the significant exception. Big companies generally cross-license their patents as a means of both avoiding litigation and barring smaller companies from entering their business. Microsoft is taxing Android simply because they can’t compete with it.
Bob,
This one was really good. I like how you tied that together and I hope you continue that…. Kudos
Dear Robert,
Just want to tell you some ugly truth about patents in America and so called “patent bubble” you mentioned
Back in 2011 I received a letter from ICAP Patent Auction offering me to list my own patent (not assigned to any company) for their Fall Auction with no limit on reserve price and no listing fee due from me.
I listed it for some low six figures (it is a tech patent on some fundamental technique and it was published and cited many times and even made it to some textbook in the field – alas – it’s impossible for me to detect infringement, requires reverse-engineering, that’s why patent auction and not a contigency law firm…)
Guess what, out of 190 lots, 29 open outcry lots among them (mine was one of those better lots ICAP deemed most likely to sell ) ICAP managed to sell 4 or 5 lots for less than 100K each (one lot was sold for 1.5 mil but it did not look like an auction buy to me…)
My patent attracted 0 bids, that’s right, zero, zilch
WTF ??????
Do you honestly think that ICAP Patent Auction did not know how to evaluate those patents from small companies and independent inventrs like myself, or there are two kinds of patents in America: PATENTS owned by IBM, MShit and the rest of those corporate monstrosities and patents owned by us, the people ?
I feel disgusted every time I read about “patent bubble”
I studied many many patents from IBM, MShit, Google, Motorola etc. (in voice recognition and wireless space) and they are nothing but total junk
I would be ashamed to put my name on any of them
They are not even worthy of conference publication, much less of textbook material
Please enlighten us, poor little bastards with patents in our closets
I think I have an inkling about this. Let’s say you thought up a great new technology, and you went to the trouble and expense to get it patented, and it’s so revolutionary that you expect piles of people to line up to use it, or to pay you for the privilege of using it.
But instead, you find nobody wants it, nobody knows about it, and anybody who finds out about your idea with the means to exploit it goes ahead and infringes the hell out of it.
The courts give you the opportunity to start a legal battle, that you theoretically could eventually win; but you’ll probably become bankrupted if you try. So your “patent protection” is precisely nothing.
And THAT’s why big company idiot patents are worth money, and why your super-awesome world changing patent may as well be written on toilet paper.
The lesson is, take your world changing idea and go change the world with it, and do it better than all the other infringers, and partner as fast as you can with investors who have the money to help finance the protection of your technology.
Yes, it’s a racket – but that’s the way the game is structured.
Sorry Robert, but you don’t get it…
In high-tech each and every product or technology is covered by hundreds if not thousands of patents
Mine does not cover a technology or product, just a very little piece of it, say less than 1 % of code if implemented in software or even less if implemented in silicon hardware
And it’s over 30 pages long when printed: modern technology is complex after all..
To get an idea I suggest downloading and reading (just joking here – almost nobody can “read” it, much less understand it..) source code for the wideband speech codec for Skype called Silk or something,
as just one particular example of modern technology
And this is just a little speech codec, probably less than 1 % of the entire code base
How can I possibly build a consumer product if I need at least 100 (more like 1000) other techniques to use ?
I’m just a little guy
Bottom line: patent system might work well for big corporations helping them to scare away smaller competitors, but it just doesn’t work for everyone else.
So I’m all for abolishing patent system
I’ll gladly sacrifice my own patent
From now on – trade secrets rule !!!
The Only problem with trade secrets for society at large is that society does not get the benefit of a public disclosure
In other words, inventors take their valuable trade secrets to grave and progress is slowed down sigificantly (just like in middle ages)
But who cares ? Not the present politicians for sure… Jefferson must be turning over in his grave
And I’m done with patents. I’ve got bills to pay and kids to raise
I’m sorry about your experience, but that kind of proves the point: patents provide a legalized means of obtaining a business monopoly, and that’s it. People who aren’t business-people, or who aren’t prepared to exploit the monopoly power of a patent, really don’t have any “business” patenting anything.
Actually, you know what – angry dude I have an idea that you could try. What you could do is you could find someone who is infringing your patented technology, and you could write them a “cease and desist” order, that demands licensing fees from them in order that they can continue using your technology, and warns that you may be forced to pursue legal action if they don’t pay. Take a half hour of time, write up the letter, mail it out and see what happens.
That’s what a genuine business person does. He sets up a candy store, a kid walks in and grabs a handful of candy, and as the customer is walking out the business person says “either pay me some money before you leave with that candy or I may be forced to report you to the police”. 99 times out of a hundred they’ll pay you the money, and that’s what business is. That’s pretty much how easy it is to be a business person.
Ha-Ha-Ha
YOu obviously are very far from anything patent-related
Patent “business” is not for the faint of a pocketbook to begin with…
Those potential infringers are not “kids” – they are huge corporate monstrosities
They make sure to hide infringement deep enough so it is prohibitively expensive to uncover,
even in case of software-implemented technology, not even talking about FPGAa or ASICs
Writing cease-and-desist letter to a big company will automatically bring you a declaratory judgement lawsuit,
in a remote jurisdiction – they know how to bankrupt us, little guys
SO all I can do for now is whine in this and other blogs
And you are right, unless you are a shrewd (and cut-throat) business person with a clear plan on how to extract money from the industry,
you have no business patenting anything
I should have known better…
There is nothing about microsoft that makes it singled out as an infringer. One of the AOL patents for instance covers ssl. Everyone is using ssl. Not just microsoft.
Another problem with the article are is that it ignores the doctrine of latches. If someone is infringing on a patent since 2003 and you know it and don’t do anything, the infringer is off the hook. http://en.wikipedia.org/wiki/Doctrine_of_laches The willfull 3x stuff is therefore now wrong. Res judicata is another doctrine it ignores. (The 2003 settlement would have had a clause precluding future litigation over that issue.) Lastly there is no mention of any specific patents that are being infringed. Very weak to not mention any specifics.
The only problem with your analysis is that if AOL sat on it too long they would not have been able to sue Microsoft over the patents.
Remember, lack of enforcement means loss of the patent right – once you know party is infringing you have a limited time to notify them before enforcement damages (willful or not) are expunged.
So, Microsoft may not be able to enforce them either.
Meaning, Microsoft may have transferred money to AOL without getting anything real in return, aside from perhaps peace of mind which the lawyers probably already had – especially if it had been sitting for a decade already (they were probably well in the clear).
Of course, it may just be more cannon fodder for FUD – for the Microsoft-Mosaid-Nokia deal, for Google, and others – to try to get everyone to pay-up for something that is ultimately worthless.
Vegan Christian…
[…]I, Cringely » Blog Archive Microsoft AOL Patent Theater – I, Cringely – Cringely on technology[…]…
“Maybe Microsoft will cross-license with Facebook, making the loss immaterial.” Right on the money. https://www.washingtonpost.com/business/technology/facebook-microsoft-strike-a-patent-deal/2012/04/23/gIQAJSfKcT_story.html
VB.Net, C#, C++…
[…]I, Cringely » Blog Archive Microsoft AOL Patent Theater – I, Cringely – Cringely on technology[…]…
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