AOL Patents: What's in it for Microsoft?

AOL announced that it has closed a deal to sell more than 800 patents to Microsoft. The deal is just north of a billion dollars, and it's easy to see why AOL might want to cash in on the intellectual property. What is less clear is why Microsoft is interested in the patent portfolio, or what Microsoft gains from the deal.

AOL is a mere shadow of its former self. It was once a dominant and iconic player as an online service--before the Internet itself made online services obsolete. AOL has reinvented itself and managed to stick around this long, though, but it can use the influx of cash and the boost to its stock price.

From the Microsoft side of the equation, the benefits aren't as obvious. In this era of patent litigation against competitors as a standard business practice, the 800 plus patents Microsoft is acquiring, and the licensing that Microsoft has to the remainder of the AOL portfolio as a function of this deal certainly have value.

However, it's unlikely that Microsoft invested a billion just for the sake of bolstering its already massive patent portfolio. Odds are fair that there are some specific patents Microsoft is targeting, and that it has a strategic reason for wanting those patents. It's possible that the interest in AOL's patent portfolio has to do with Microsoft's rivalry with Google, or perhaps Microsoft's alliance with Facebook.

Rob Enderle, principal analyst with the Enderle Group, points out that AOL was in the social networking space before Yahoo, and AOL likely holds a number of core patents from the granddaddy of all online social companies--CompuServe. The patents acquired by Microsoft could be used to support Facebook in the ongoing patent war with Yahoo.

It's also possible that some of the 800 patents could prove useful against Microsoft's primary rival - Google. Enderle says, "Google has proven particularly inept when it comes to patents suggesting a deep vulnerability so I expect that will be Microsoft's primary short term use."

The use of patent litigation as a means of competing with rivals is unfortunate, but it's the reality of the tech world today. Until or unless something is done to change the nature of tech patents, or reverse the tide of patent infringement litigation, companies like Microsoft will continue to arm themselves with the largest patent portfolio possible.

It's the Silicon Valley equivalent of the nuclear arms race and mutually assured destruction.