Why Microsoft spent $1 billion on AOL's patents

Many assume Google helped drive up the price for AOL's intellectual property. But a source tells CNET that wasn't the case.

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Jay Greene, a CNET senior writer, works from Seattle and focuses on investigations and analysis. He's a former Seattle bureau chief for BusinessWeek and author of the book "Design Is How It Works: How the Smartest Companies Turn Products into Icons" (Penguin/Portfolio).
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Jay Greene
Stephen Shankland
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Microsoft dropped an eye-popping $1 billion on 800 AOL patents today, an astonishing amount likely spent to keep the intellectual property trove away from rival Google.

But according to a source close to the situation, Google didn't even bid on the portfolio.

That makes Microsoft's lavish bid, which averages $1.25 million per patent, all the more astounding. Still, even without Google, there was good reason: according to data crunched by MDB Capital Group, an investment banking firm that focuses on intellectual property, the AOL patents have far more relevance to Microsoft than to any other company.

MDB found that in Microsoft's own patent filings, it cites AOL patents as related intellectual property more often than any other company, even more often than AOL has cited its own patents. Microsoft cited AOL patents 1,331 times, compared to AOL citing its own patents 1,267 times.

The list of companies that cites AOL patents drops precipitously from there. IBM is next with 570 citations, followed by AT&T with 419 citations, and Yahoo with 362 citations. Google is farther down the list at 304 citations.

While it's possible that other companies might have bid against Microsoft, the data from MDB suggests that Microsoft was willing to pay as much as it did because the AOL patents had more strategic importance to it. So Microsoft both wanted the patents, and it wanted to make sure rivals didn't get them.

"Microsoft probably believed that Google would have been interested," said Erin-Michael Gill, MDB's managing director and chief intellectual property officer.

Moreover, the average age of the patents in the AOL portfolio, which also includes some patents that AOL did not sell to Microsoft, is about four years old. That suggests that many of the patents have yet to be licensed to other companies, something that makes that intellectual property more valuable.

"The amount Microsoft paid implies that there are very few encumbrances on the portfolio," Gill said.

That increases the value of the portfolio, giving Microsoft more opportunities to license the patents in order to recoup its investment--and Microsoft has an active, aggressive licensing program. Of course, it also gives Microsoft another weapon in its patent battles over Google's Android and Chrome operating systems. The company has already struck deals with several device makers -- including HTCand LG -- to license its technology to continue to use Android and Chrome and avoid litigation. And its sued companies that haven't agreed to licensing terms, including Barnes & Noble and Motorola.

The new AOL deal should give Microsoft more munitions for their intellectual property battles with Google.

"There is a whole host of products that Microsoft will want to increase their leverage over Google with," Gill said. "This should allow Microsoft to operate as something of a gatekeeper."

Neither Microsoft nor AOL disclosed the specific patents involved in the deal. Last month, though, patent-research firm Envision IP reviewed more than 700 patents assigned to AOL and found, not surprisingly, that a large chunk relate to instant messaging and e-mail technology. Other patents relate to browsers, search engines, and multimedia technology.

AOL picked up several patents through its Netscape acquisition. While it's uncertain if Microsoft acquired any of them, as All Things Digital's Peter Kafka reported today, there are several that would likely be of interest. Among them:

Patent No. 6854085, which covers technology to fill out forms on Web pages automatically.

Patent No. 5657390, for the technology called Secure Sockets Layer (SSL), now called Transport Layer Security (TLS), which sets up an encrypted communication channel between browsers and the Web servers they connect to. At the time Netscape got the SSL patent, it said, "It's not an income source that's necessary to exploit."

Patent No. 7478142, a technique for packaging applications that are delivered over a network and run inside a Web browser.

Patent No 5774670, which governs how Web servers and browsers can cooperate to preserve "state" information -- essentially, the condition a computing device is in at a particular moment. The technology can be used, for example, to put several items in an e-commerce shopping cart. "When the customer wants to purchase the products in the virtual shopping basket, the browser sends the corresponding state information to a specified check-out Web page for processing," the patent said.

• Closely related is the broader Patent No. 5826242, which concerns the use of ability of a Web browser communicate about state with a Web server using HTTP, the Hypertext Transfer Protocol on which the Web is built.

Patent No. 6069633, governing various ways to improve a "sprite engine" -- display technology that handles drawing moving or changing graphic elements such as video game characters.

Patent No. 6076104, which explains a technique to make certain parts of a video connect to a Web address when clicked. It's analogous to image maps, widely used today to use a part of an image to link to a Web address. The inventor is former Netscape executive Mike McCue, currently founder and chief executive of Flipboard.

Patent No. 7525951 and 6839737, which govern integration of instant-messaging software with e-mail software so that people can see when their contacts are available for online chat. (Separately, AOL was awarded a patent for instant messaging.)

Patent No. 7685431, which covers a technique to show how hard it is to crack a proposed password a person types it into a field.

Patent No. 6175853, which governs technology that lets collaborating people share to a resource only can be accessed when technologically unlocked. The patent's technique governs decentralized access-control methods that a group can use rather than relying on a central locking mechanism that determines whether the resource is available.

Patent No. 6181322 describes technology let people click a mouse with their palms rather than their fingers to avoid repetitive stress injury.