Microsoft deal with AOL part of patent scramble

PETER SVENSSON

AP Tech­nol­ogy Writer

NEW YORK — AOL’s $1 bil­lion deal to sell and license patents to Microsoft is another in a series of “Antiques Road­show” moments in the tech­nol­ogy world. Faded com­pa­nies have been rum­mag­ing through their assets recently, and some of them have found musty old patents that turn out to be worth a great deal.

Patents have become a hot com­mod­ity in recent years. They give the holder the exclu­sive right to use cer­tain tech­nolo­gies or busi­ness processes in the U.S. Com­pa­nies such as Microsoft, Apple, Face­book, Google and oth­ers are col­lect­ing large patent libraries and increas­ingly using them in law­suits — to defend their busi­nesses or to attack rivals.

A valu­able patent is less like a for­got­ten Rem­brandt and more like a rusty-but-serviceable gun.

“Patents have become legal weapons. They’re not rep­re­sent­ing ideas any­more,” says James Bessen, a lec­turer at Boston Uni­ver­sity and the direc­tor of a non­profit that stud­ies patent issues.

Two big deals in the past year have pushed patents into the spotlight.

In July, a con­sor­tium that included Apple Inc. and Microsoft Corp. pledged to pay $4.5 bil­lion for a col­lec­tion of patents from Nor­tel Net­works, a bank­rupt Cana­dian maker of telecom­mu­ni­ca­tions equip­ment. By con­trast, Nortel’s once-prominent wire­less net­works busi­ness fetched just $1.13 bil­lion in 2009.

The con­sor­tium out­bid Google Inc. for the Nor­tel patents. But Google struck back in August, when it sealed a deal to buy cell­phone com­pany Motorola Mobil­ity Hold­ings Inc. for $12.5 bil­lion. Motorola is well past its prime as a cell­phone maker, but as a tech­nol­ogy front-runner for decades, its engi­neers had accu­mu­lated 17,500 patents for the com­pany. The deal with Google has yet to close.

Google wants Motorola’s patents as a defense against law­suits related to its Android oper­at­ing soft­ware for phones and tablets. Motorola, Sam­sung Elec­tron­ics Co. and other phone mak­ers have been rid­ing Apple’s coat­tails with devices that are sim­i­lar to Apple’s iPhone and iPad. Apple is fight­ing back, using patent law in an attempt to delay competitors.

Google sup­plies Motorola and Sam­sung with phone soft­ware, so it doesn’t want to see Apple suc­ceed with its law­suits. It’s buy­ing Motorola so it can use its patents to sue Apple, a threat that could force Apple to the nego­ti­at­ing table or avoid suing Google’s part­ners altogether.

Because of their com­plex­ity, high-tech prod­ucts are par­tic­u­larly sus­cep­ti­ble to patent lit­i­ga­tion. Hun­dreds of thou­sands of patents could apply to a smart­phone, for instance. A com­peti­tor sit­ting on any one of those patents could ask a court to stop sales of the prod­uct. Things rarely get that far, how­ever. Instead, the defen­dant usu­ally ends up pay­ing the patent owner ongo­ing royalties.

These roy­al­ties can add up: Ana­lyst Pierre Fer­ragu at San­ford Bern­stein esti­mates that Tai­wanese smart­phone maker HTC Corp. pays about 10 per­cent of its rev­enue to license patents from other companies.

Christo­pher Mar­lett, the CEO of MDB Cap­i­tal, an invest­ment bank that focuses on intel­lec­tual prop­er­ties includ­ing patents, says he believes the AOL deal was dri­ven by the rivalry between Google and Microsoft. AOL has Internet-related patents, includ­ing some that cover map­ping, given that it owns MapQuest, one of the pio­neers in that area. Google and Microsoft have their own map­ping services.

Much as Google, Microsoft and Apple are doing, Face­book is also buy­ing patents from tech­nol­ogy vet­er­ans to use in tomorrow’s battles.

As a young, suc­cess­ful com­pany with few patents of its own, it needs pro­tec­tion. In March, IBM Corp. sold Face­book 750 patents. The com­pa­nies did not offer details on what the patents cover or the amount of money exchanged.

Which other com­pa­nies are sit­ting on poten­tially valu­able patent portfolios?

East­man Kodak Co. started shop­ping around its digital-imaging patents last sum­mer, but didn’t man­age to make a sale in time to avoid a bank­ruptcy fil­ing. It’s now set to sell the patents under the bank­ruptcy proceedings.

Though best known for film-based pho­tog­ra­phy, Kodak cre­ated some of the first dig­i­tal cam­eras. At a time when cam­eras now go into every phone, Kodak’s patents could be worth $2 bil­lion to $3 bil­lion, accord­ing to var­i­ous esti­mates. Last fall, investors val­ued the entire com­pany at just over $1 bil­lion, includ­ing its debts.

Patents may also rep­re­sent a big part of the value of Research In Motion Ltd., the strug­gling maker of the Black­Berry. The com­pany has seen a steep slide in sales, which has pulled its mar­ket cap­i­tal­iza­tion down to $6.8 bil­lion. Its patents could be worth $2 bil­lion to $4 bil­lion, ana­lysts say.

Yahoo Inc., like AOL an Inter­net pio­neer, has valu­able patents and an ail­ing busi­ness as well. But its straits are not as dire as Kodak’s and RIM’s. Still, Yahoo chose to wield its patents in March, suing Face­book for infringe­ment on 10 patents. As is cus­tom­ary, Face­book retal­i­ated with its own patent suit against Yahoo, shortly after acquir­ing the patents from IBM.

The recent trend doesn’t mean that patents are on an unstop­pable rise in value. Fer­ragu, the San­ford Bern­stein ana­lyst, believes that the smart­phone fight is head­ing for a truce, where a “gentleman’s club” of com­pa­nies fig­ure out the rel­a­tive strengths of their patent port­fo­lios and work out roy­alty rates in accordance.

But patents are likely to keep dri­ving deals.

“Patents are a very impor­tant asset class that have been ignored way too long,” says Alexan­der Poltorak, CEO of patent-management firm Gen­eral Patent Corp. “Patents are the cur­rency of the knowledge-based economy.”

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