Monday, April 9, 2012

Let’s Spend a Billion Dollars…



              Two huge, billion dollar pieces of tech news today; both with giant implications for all parties involved. First off was Microsoft’s acquisition of some 800 patents from AOL for just over one billion dollars. Second was Facebook’s acquisition of popular photo sharing app Instagram for one billion dollars as well. Much like the Hollywood red carpet “Who Wore It Best”, let’s play a game of “Who Spent It Best”


Microsoft

Right now, the jury is still out on what exactly Microsoft got in its package of 800 or so patents from AOL. It appears likely that AOL sold patents that are no longer useful to their core business of display advertizing and content. These patents are related to social networking communications (from AIM), mapping technology (from AOL’s ownership of Mapquest), streaming technology and other miscellaneous patents. However, these appear to be incredibly helpful to Facebook in its patent lawsuit against Yahoo, since Microsoft owns a small part of Facebook and will be willing to defend Facebook in this and many lawsuits that are sure to follow. Perhaps secondarily, these patents will help Bing mount a greater challenge to Google’s dominance of the search market, namely in maps. With Google Maps beginning to charge high volume users for the use of the service, there is a void that has been filled in the most part by OpenStreetMap. With mapping patents in hand, Bing can be a refuge to companies who have been displaced by the rule changes from Google and make its maps more prevalent. With the increased number of patent lawsuits occurring in tech today, having multiple patents is becoming a necessity rather than a luxury. While the price may seem large, it breaks down to an average of 1.25 million dollars a patent, which is a small price to pay when the Oracle/Google lawsuit and the Yahoo/Facebook lawsuit are seeking damages of amounts in the billions of dollars.

Facebook

Perhaps the one glaring weakness in Facebook’s mobile offering was the photo taking and sharing mechanism. By purchasing one of their greatest mobile photo competitors, Facebook is able to kill a few birds with one stone. Firstly, Facebook gets an incredibly innovative app and a huge user base to boot with over 30 million registered users (and continuing to grow thanks to the release on Android phones last week). While acquiring an app of this sort would be a huge asset to any company, it takes Instagram out of direct competition with them. Secondly, Facebook gains a creative team of new developers who are able to help enhance the Facebook photography experience. Thirdly, while Mark Zuckerberg promised that Instagram will be run independently from Facebook, he made no mention of the massive amounts of data that Facebook now gains the rights to everything from locations of where the picture was taken to the actual photos themselves. If this acquisition gets more people to share and display their Instagram photos on Facebook, Facebook gets more photos to be displayed and as such gets more places to put their ad inventory. One of the biggest issues in this acquisition is the fact that Instagram has no revenue whatsoever to its name. While Facebook is already profitable, throwing a billion dollars at a company is a huge risk when it has revenue at all.

Winner, Winner, Chicken Dinner

                While both acquisitions are great for their acquiring company, the bigger winner in today’s spending spree appears to be Microsoft. It gets a whole bundle of patents that are bound to come in handy at some point in the future both offensively and defensively. While Facebook’s purchase of Instagram comes with great engineers to help retool the Facebook photo experience, leaving Instagram as a standalone app, poses the problem of cannibalization of Facebook’s photo options. All things being considered equal though, the biggest winners are Instagram and AOL in these sales.

                Instagram was an app that had no way to generate revenue at the moment and was trying to build up traction by increasing its user base. It was last valued at $500 million, a huge amount for a company with no revenues, or actions to begin to generate revenues. With the sale to Facebook, investors in Instagram get a huge profit on their initial investment and Instagram ends up attached to a company who is willing to put long term goals over short term profits.

The biggest winner of the day has to be AOL by a wide margin. Not only did it get much more for its patents than it was supposed to have gotten, it gets to keep them as well. When AOL began the shopping of the portfolio, analysts suggested that the value was much less than the $1 billion that AOL was suggesting it was worth, with some estimates of a quarter of a billion. By selling these patents that are no longer core to their business, AOL is able to free up value and gain much needed cash. AOL also signed an agreement with Microsoft that allowed them to continue to use the patents that Microsoft had purchased for defensive purposes, much like getting to continue driving in a car that you sold to someone else. Finally, this move is tax neutral, meaning that AOL gets to keep all of the money as profit, since they were able to sell some assets at a big enough loss to offset the income from the sale of the patents.
                

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