AOL Has Patents, But Will it Behave Like Yahoo?

After Yahoo (NASDAQ:YHOO) threw in an unpleasant surprise by suing Facebook for patent infringement, a recent report suggests that even AOL (NYSE:AOL) is trying to make it clear that it too has “patent power.” ^[1]  The big question is how would AOL use its patents and for what purpose? So far it sounds like the company is trying to keep this portfolio for strategic purposes, which it could later monetize them a sale similar to Nortel’s $4.5B sale of patents to Apple and Microsoft — or could it look to sue an existing tech giant in the hopes of a settlement or some sort of royalty like Yahoo?

See our complete analysis for AOL’s stock here

Display Ad Growth Would Dominate AOL’s Strategy

The difference between AOL and Yahoo’s strategy also stems from their respective leadership. Yahoo’s new CEO Scott Thompson is clearly much more aggressive in his approach, having announced hefty job cuts in the company. In short, the decision to sue Facebook over its patents was likely an impact of Thompson coming into the fray, as previously the company had a policy of using patents primarily for defensive purposes.

Tim Armstrong, on the other hand, continues to believe in monetization of AOL’s web properties, especially the company’s recent acquisitions like HuffPo. While leadership challenges persist for AOL as well, the display ad revenue growth it has shown in the past few quarters would certainly provide it with some cushion compared to Yahoo. Having said that, AOL’s around 700-800 patents could a last resort for Armstrong if the need arises, given that these patents have the potential of generating up to $1 billion in annual licensing income according to some estimates.

We have a revised price estimate of $16 for AOL stock, which is around 10% below the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. AOL Has Some Pretty Sweet Patents Too, Tim Armstrong Tells Wall Street, AllThingsD, 13th March 2012 [↩]