AOL's patent sale to Microsoft: stripped clean, or savvy move?

AOL strikes a deal with Microsoft to sell and license hundreds of patents. The move gives AOL a massive injection of cash. Now what, Tim Armstrong?
Written by Andrew Nusca, Contributor

I'm terribly divided over the news this morning that AOL will sell more than 800 patents and patent applications to Microsoft, the tech giant.

Is it AOL dismantling the ship for parts, or a savvy move to consolidate and refocus?

At first glance, the move appears to be a smart one. Avoiding the patent litigation that has ensnared Yahoo and Facebook -- with tech patents so willfully vague, it's a wonder each of us hasn't been sued yet -- AOL completes a tidy deal with Microsoft that gives the beleaguered company a bunch of cash to spend, a reason not to go to court, and a way to sell what it might have thrown out the window anyway. In return, Microsoft gets more intellectual property ammunition in its continually escalating war with Google et al, and each company receives access to some of each other's patents.

(The patents in question span advertising, search, content generation/management, social networking, mapping, multimedia streaming, and security. Quite a cache of digital arms.)

On the other hand, I can't help but wonder if AOL has started to sell the deck chairs on a sinking ship. Layoffs, asset sales, et cetera -- these are one-time deals. Sell too much, and there's nothing left from which to profit.

To be fair, part of this transaction is definitely a win-win: AOL's decision to grant Microsoft a non-exclusive license to its retained patent portfolio for $1.056 billion in cash is good news for both companies. The move keeps the ball in AOL's court, so to speak, and allows it to make money off its assets continually. Licensing is a wonderful, lucrative business. Just ask Paul McCartney.

But it's the sale of those other patents that leaves me, and any shareholders who might be in it for the long haul, wary. To me, AOL's decision to sell this part of the portfolio shows a lack of confidence in its ability to execute in these areas. On one hand, this could be good: AOL has taken a pounding in the market over the years, and could certainly stand to consolidate and focus around a clear strategy, jettisoning any baggage that's out of scope. (And better still, making money in the process.)

On the other hand, AOL clearly still sees value in these foundational-to-the-Internet patents: the company probably could have negotiated for more money from Microsoft had it not also asked for a license to the patents it was selling. Patents are like beachfront property in East Hampton. -- CEO Tim Armstrong

Why wasn't AOL able to take advantage of this rich trove of patents itself -- through partnerships, licensing or any kind of deal that would extend the revenues beyond a single transaction? IBM was able to sell a thousand patents to Google last year without putting itself in "an appreciably weaker position," Florian Mueller wrote at the time. I'm not so sure AOL's in the same spot, even though it doesn't seem to have been using them anyway.

Shareholder Starboard Value wrote the following to AOL's board in February:

Since our initial public involvement in AOL, we have been approached by multiple parties specializing in intellectual property valuation and monetization, some of whom believe that (i) a significant number of large internet-related technology companies may be infringing on these patents, and (ii) AOL’s patent portfolio could produce in excess of $1 billion of licensing income if appropriately harvested and monetized.

Or as CEO Tim Armstrong characterized them last month: the patents are like "beachfront property in East Hampton." Some action is better than no action, yes, but you can make a lot more money over the long term renting out than selling, provided the market's not booming and you're not trying to ditch the summer house for good.

For now, we don't know the complete details; it's hard to say what's been sold and what hasn't. (If you're privy to that information, drop us a line). I could also be entirely wrong in estimating the potential for AOL to capitalize on these patents itself. Either way, it's clear that this is only an injection of funds for AOL, and not a turnkey strategy to succeed.

So: now what, Tim?

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