April 11, 2012 at 7:53 AM ET
Microsoft's $1.1 billion purchase of more than 800 patents from AOL is not about innovation. It's about a patent war.
"Everybody's trying to make sure their patent war chest is bigger than everybody else's," said R "Ray" Wang, CEO of Constellation Research.
Microsoft is hardly the only company arming itself for the growing battle over technology patents.
Last year Google dropped $12.5 billion on Motorola's core telephone handset business, a purchase many speculated was driven in part by a desire to acquire the handset manufacturer's patent portfolio.
When telecom giant Nortel went bankrupt, a bidding war erupted for the company's rich portfolio of thousands of patents, which eventually attracted $4.5 billion from a consortium of tech giants include Apple, Microsoft and Research in Motion. Analysts speculate that bankrupt imaging company Kodak and troubled BlackBerry manufacturer Research in Motion also could generate cash by selling off patents.
Tech companies are arming themselves against each other as litigation becomes the norm rather than the exception. "The number of lawsuits has tripled what it was in the early 90s," said James Bessen, a lecturer at Boston University School of Law. Legal imbroglios like the standoff between Facebook and Yahoo!, in which Facebook countersued Yahoo! after being sued itself, are becoming more common.
Today's technology giants also are protecting themselves against so-called "patent trolls," companies that exist for no other purpose than to snap up patents specifically to file lawsuits against tech companies that may be infringing on them.
In an extensive report last year on the topic, the Federal Trade Commission said such trolling "can distort competition in technology markets, raise prices and decrease incentives to innovate."
The technology sector is a particular target, the agency said.
The practice might be exploitative, but experts say the tech industry brought this problem on itself. In the late 1990s, tech companies became more aggressive about demanding licensing fees from competitors. Eventually, the demands migrated from the negotiating table to the courtroom.
The opening for patent trolls was created by the growing willingness of tech companies to go after each other through litigation.
"It's an opportunity for trolls to extract money, ... for competitors to leverage an edge, it's an opportunity for companies going in decline to cash in," Bessen said. "There's an opening for opportunists of various flavors."
In a research paper, Bessen calculated that patent trolling cost defendants $500 billion in lost wealth over a 20-year period, and the cost is escalating, he said. "It's been running about $80 billion a year for the last four years."
While patent trolls generally just want a payout, technology companies that sue rivals for infringement usually want to squash a competing product, which has a stifling effect on companies that want to create newer and better technology.
Microsoft's competitors should be worried. "The patents that come from AOL are related to search, related to web, related to these core technologies that are foundations," Wang said. "There are some patents in AOL about communities and networking that Facebook should be worried about."
"Microsoft has been one of the most aggressive players in the software arena with patents," which are an increasingly important revenue stream for the company, he said.
Bessen expressed concern that the high price Microsoft paid could push it to slap patent lawsuits on smaller companies as a way to justify the investment.
"There's going to be a limit to how much Microsoft can go after Google and Apple," he said. "When that limit has been reached, they're going to have to go downmarket."
Without the resources to mount a defense in court, start-ups could be hamstrung by patent litigation. "Clearly if they're spending a billion dollars, they're going to want to earn more than that — and somebody else is going to be paying for that," Bessen said.