This story was written by Keith Dawson for UBM DeusM’s community Web site Business Agility, sponsored by IBM. It is archived here for informational purposes only because the Business Agility site is no more. This material is Copyright 2012 by UBM DeusM.

Why Microsoft Bought 800 of AOL's Patents

The two tech giants demonstrate their agility by crafting a deal that is hugely advantageous to both.

Microsoft will buy more than 800 of AOL's patents for $1.056 billion. AOL's stock took a big bump upward, and Microsoft armed itself for twenty-first-century battle with Google.

When the deal was announced after the close of trading on Monday, AOL's stock leapt vertically by over 44 percent, and it's still trading in that elevated range. Last fall AOL organized an auction for the bulk of its patent portfolio and a number of tech companies participated in the bidding, including eBay, Amazon, Google, and Facebook, according to Reuters. Microsoft was selected as the final buyer a week ago.

AOL will retain a license to the patents being transferred, and in addition Microsoft will gain a non-exclusive license to AOL's remaining 300+ patents in the areas of advertising, search, and social media.

The deal is a big win for AOL, which is engaged in a proxy battle with an activist shareholder, Starboard Value LP. AOL announced that it will return the bulk of its billion-dollar windfall to shareholders. This announcement may have taken some of the wind out of Starboard's attempt to replace five of the company's directors with its own slate, though Starboard said in a statement that it didn't matter, AOL's management still needs to be shaken up.

The fact that AOL got so much for its intellectual property -- about $1.3 million per issued patent -- speaks highly of the agility of someone on their side of the table. Either AOL's lawyers or their investment bankers (which were Evercore Partners and Goldman Sachs, according to played the auction just right. In the months leading up to the auction's climax, analysts had been assuming a portfolio value of only a few hundred million dollars, Reuters reports.

Before this purchase, Microsoft held more than 13,000 patents, according to the End Software Patents wiki and Computerworld. (Note that up until 1990, a year in which the company had revenues of $1.2 billion per year, it held a mere 5 patents.) In recent years Microsoft has been either first in the number of software patents granted per year, or second behind IBM (sponsor of Business Agility).

What's in it for Microsoft
No one outside of the deal knows for certain exactly what patents Microsoft won, and the company is not saying. Reuters quotes unnamed sources saying that they relate to advertising, search, e-commerce, and mobile. Recently the intellectual property consultancy Envision IP examined 700 of the patents granted to AOL and analyzed and characterized the portfolio. Over half of the patents fall into the areas of online communication, browser and interface technology, search engine technology, or multimedia. A few percent are characterized as location-based services.

ZDNet's Larry Dignan speculates that what Microsoft was after was the 239 patents granted to MapQuest, which AOL acquired in 1999. Google Maps has been losing ground recently as Wikipedia, Foursquare, and Apple have jumped to rival OpenStreetMap. Now, AOL's MapQuest is a backer of OpenStreetMap. With MapQuest's patents in hand, Microsoft is in a strong position to slow the progress of Google Maps even further, perhaps boosting the fortunes of its own Bing Maps.

It's a plausible scenario. But one that rings truer to me is the theory advanced by ZDNet's Steven J. Vaughan-Nichols: that what Microsoft had in the crosshairs was in fact the patents that Netscape brought to AOL when it was acquired in 1998. (In fact the fine print of the agreement seems to indicate that Microsoft bought the Netscape subsidiary itself, as well as its patents -- an ironic end to the browser and antitrust wars of the 1990s.)

Netscape patented SSL, the encryption scheme on which all of Internet commerce rests. They patented Javascript. They patented cookies.

With these patents in the quiver Microsoft could, if it were so inclined, halt Google's Chrome browser in its tracks. This is the browser that is on the march to overtake Microsoft's Internet Explorer in popularity.

Wouldn't that be worth a billion to Microsoft? You bet it would. Now that's agility.