Microsoft’s Patent Grab Defends Technology Moat And Licensing Revenues

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AOL (NYSE:AOL) resorted to sale of a major portion of its patent portfolio to assuage shareholders and raise some cash by running a competitive auction, which was won by Microsoft (NASDAQ:MSFT). Microsoft is paying close to $1.05 billion for around 800 patents and has a history of generating revenue by licensing its patents and currently generates a significant amount of revenue from Google (NASDAQ:GOOG) Android device manufacturers. [1] It has invested in patents before and according to experts, AOL’s patent portfolio was more valuable to Microsoft than to any other company, which explains why Microsoft would bid aggressively to ensure they don’t fall in the hands of competitors.

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While the exact details of the patents acquired by Microsoft haven’t been revealed yet, they are likely to be related to online content and Internet standards and technology, given that AOL was one of the pioneers of the Internet.

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Another theory suggests that patent acquisition could be related to online maps, a market which is currently dominated by Google. [2] Microsoft could leverage some of the patents to bolster the market share of Bing Maps and improve its offering. OpenStreetMap, which is backed by MapQuest, is an open alternative to Google Maps. MapQuest was acquired by AOL in 1999, and has a lot of patents related to online mapping services. Recently, many services like Wikipedia, Foursquare and Apple started using OpenStreetMap instead of Google Maps for their mapping services and mobile location-based apps.

With this move, Microsoft may be able to compete with Google Maps, and somehow monetize Bing Maps using local ads. On the face of it, it looks like yet another major investment in Microsoft’s Online Services business, which accounts for less than 1% of its total value. However, the acquired patents could also enable it to generate additional patent licensing revenue.

We currently have a $38 Trefis price estimate for Microsoft, which stands nearly 20% above its market price.

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  1. Why Microsoft spent $1 billion on AOL’s patents, CNET []
  2. Microsoft’s purchase of AOL patents may be about a Google map war, ZDNet []