Facebook's next patent push: The top suspect
Facebook is on a mission to arm itself with a powerful arsenal of patents, and it's surprising where the next set of patents may come from.
When Yahoo filed its sweeping patent, claiming that Facebook essentially built its social network on the back of Yahoo's intellectual property, Mark Zuckerberg took little time to take up arms.
In just over a month, Facebook has snapped up more than 1,400 patents -- 750 from IBM in March, and on Monday,. It's all a swift attempt to bolster its position against Yahoo and to amass a war chest to scare off others looking to sue a company whose pockets will grow ever deeper once it goes public.
And based on a statement from Facebook's general counsel after this week's patent deal with Microsoft -- saying it was part of "our ongoing process of building an intellectual property portfolio" -- Facebook is far from done.
So the question now: Whose patents will Facebook try to buy next?
I asked Erin-Michael Gill just that. He's the chief intellectual property officer for MDB Capital, an investment bank that specializes in analyzing and valuing the IP of both public and private companies. Gill has a strong track record. After he assessed Yahoo's patent portfolio last fall for hedge fund manager Daniel Loeb, who was building a stake in Yahoo, Gill predicted that Yahoo would end up suing Facebook over patent infringement.
Now Gill is concluding that the next deal Facebook is likely to try strike could well be with Sony, which is one of the 10 largest patent holders in the world and, given its current problems, might be eager to sell.
First, let's look at Facebook's patent strategy, which has shifted with lightening speed. The company has been hit with scores of small patent suits over the past several years and, fully aware of the importance of patents for any successful tech company, quietly began building a small patent portfolio through acquisitions.
It picked up some key patents along the way, such as a broad one that it bought from Hewlett-Packard in 2010 that covers an "apparatus and method for communication between multiple browsers." But it took the -- launched as Facebook nears its IPO -- to trigger its major shopping spree, not to mention its against Yahoo.
Both of Facebook's big patent purchases, according to Gill, were done in part because some of the patents touch on areas of Yahoo's operations and products. That's especially true of this week's purchase. Those are patents that Microsoft, just two weeks earlier, bought from AOL and, as such, date back to some early innovations. (According to Bloomberg, the original Microsoft-AOL deal was actually done with the intent of then selling off some of the patents to Facebook.)
In fact, the AOL patents hit Yahoo -- as well as Facebook and Microsoft nemesis Google, for that matter -- front and center, reportedly covering aspects of e-mail, instant messaging, Web browsing, search, and Internet advertising. No wonder Facebook paid $550 million -- almost seven times more than it did for the bigger batch of IBM patents, for which it ponied up -- according to its latest S-1 filed with the Securities and Exchange Commission.
"Facebook needs to solve their Yahoo problem," said Gill, "which is why it's acquiring assets applicable to Yahoo."
So when I asked Gill whose patents Facebook might go after, he started by pinpointing which companies hold patents that Yahoo cites the most often in its own patents, something that patent applicants are required to do when there are similarities to existing patents.
While the list includes several would-be sellers, his data and reasoning kept pointing to Sony. Gill found that more than 10 percent of Yahoo's patent portfolio explicitly cites one or more of Sony patents, indicating that Sony has plenty of patents that would be important to Yahoo -- and, hence, desirable for Facebook.
Below is a snapshot of the top 10 like companies that cite Yahoo patents most (it includes Yahoo because some Yahoo patents cite other Yahoo patents). Scratch out companies that Facebook has already done deals with, and those are less inclined to sell big portfolios to Facebook, such as Google or Oracle, and Gill quickly lands on Sony (although Facebook could pick up some more from Hewlett-Packard).
Gill scanned through a number of Sony patents and found plenty would appeal to Facebook, especially as its business evolves. There's one, for instance, that was granted in 1999, and covers a "method for displaying on a screen or computer system images representing search results." In short, it's a powerful patent that pertains to optimizing search results. And he found another, granted in 2003, that covers systems for displaying interactive video -- also what Gill interprets as a potent patent.
Best of all, Sony is a mess. Earlier this month, Sony doubled its projected loss for the past financial year to $6.4 billion, its worst loss ever. The company, a shadow of its former self, is in the midst of massive upheaval, which is exactly the time it looks to sell assets to raise cash. Of course, even if Facebook does try to go this route, Sony could rebuff the offer or chose to do something entirely different with its rich patent trove.
A Sony spokeswoman declined to comment.
A Facebook spokesman also wouldn't comment about its patent strategy, and instead pointed to the statement from its general counsel, Ted Ullyot, suggesting that Facebook is going to keep on building out its patent portfolio.
The most strategic portfolio Facebook could buy, of course, would be Yahoo's -- and that's a scenario. So far, though, Zuckerberg has been doing the next best thing -- buying up portfolios that touch Yahoo's patents; in effect, circling its prey.
He's certainly got. Plenty of prominent tech players have expressed outrage at the litigious Yahoo, and are instead rooting for the brash 27-year-old Zuck, who, for his part, seems determined not to let Yahoo shake him down.
And why not? A blockbuster IPO from Facebook could lift plenty of boats.