Rather Than Pay Off Yahoo, Facebook Built A Fortress 1400 Patents Strong

Facebook had a choice to make: With just 56 patents to its name at the start of 2012 it could pay its way out of Yahoo’s infringement lawsuit with gobs of money and remain vulnerable to other patent attacks, or make a long-term investment into an intellectual property portfolio it could protect itself with for years to come. Facebook has wisely taken the second path, upping its patent stockpile to over 1400 with today’s $550 million cash purchase and licensing of 650 AOL patents from Microsoft today. These new patents cover email, instant messaging , web browsing, search, ads, mobile, and ecommerce according to a source with direct knowledge of the purchase.

Surely, Facebook might have gotten better deals on this cache from Microsoft and the package of 75o patents it bought from IBM had it not been so desperate, but better late than never. Now with a healthy patent portfolio that I breakdown below, Facebook may be able to stop scrambling to buy IP, and can fend off the attack of any who would spoil and suck money from its IPO.

Really, Facebook should have predicted a patent lawsuit onslaught and beefed up its defenses a year ago. Riding boldly towards an IPO with such a tiny IP portfolio was brash, and perhaps too trusting. It had bought a few patents here and there from companies like HP, Friendster, BT, and Halliburton, but publicly only held around 60 issued patents as of a few months ago. Maybe it thought other tech giants would have more scruples, but it was essentially piling $100 billion+ in value into a rickety rickshaw rather than an armored car.

Lucky for it, though, Yahoo attacked just a bit too early, announcing it would sue Facebook over ten mostly vague patents around social networking, communication, privacy, and advertising in mid-March. Facebook snapped into action, buying 75o patents from IBM March 22nd. Because these were purchased in a state of emergency, IBM may have been able to command a higher price than it could have in times of peace, but Facebook had its back against the wall and had limited time and options.

Come April, Facebook filed a masterful countersuit against Yahoo with ten patents invented by its employees including Mark Zuckerberg and a former Yahoo employee and that it had bought from academia and entrepreneurs. It was a cunning move that offset Yahoo’s attack while still making Facebook look like the victim.

Regarding Facebook’s Microsoft patent buy, Yahoo gave us the statement:

“Nothing about today’s action changes the fact that Facebook continues to infringe our patents. Companies who purchase patents are often working from a position of weakness and take these actions to strengthen their portfolio. We see today’s announcement as a validation of our case against Facebook.”

Facebook likely had to overpay again, this time sending $550 million in cash to Microsoft for 650 of the 925 patents it bought last week from AOL (who owns TechCrunch) for $1 billion. Microsoft struck a great deal, as it will retain a license to all the patents it sold to Facebook.

The purchases are not likely to change Facebook defensive stance on patents, but its healthy portfolio and tough response to the Yahoo attack should deter future trolls. Facebook’s total portfolio of roughly 1461 patents that we’re aware of now breaks down as such:

56 U.S. issued patents as of December 31, 2011 that it cited in the S-1 from employees and purchases, and 33 foreign patents
503 pending U.S. patent applications and 149 foreign patent applications cited in the S-1
Roughly 5 patents purchased from NYU Professor Alexander S. Tuzhilin and San Jose entrpreneur Chris Cheah
750 patents from IBM
650 patents from Microsoft, formerly owned by AOL
Any patents attained in its recent acquisitions of Instagram and TagTile

At this point, Facebook has likely built its walls high enough and may not make any other massive IP purchases in the near future. Now investors can confidently buy into the social network’s IPO, knowing Facebook has a thick suit of armor and a sword of its own for the next time someone tries to stab it in the back.

[Image Credits: GameJoom, Jeff Scarterfield, Kqube] Updated to indicate what the patents bought from Microsoft cover.