Multi-Billion-Dollar Monday for Tech Giants

CYBERSPACE—A couple of billion-dollar deals announced Monday help illuminate the underlying strategies of some of the largest technology companies in the world as they maneuver into positions of perceived advantage against equally humongous competitors.

The most publicized deal of the deal of the day is the announcement by Facebook that it has purchased the very popular photo-sharing mobile app Instagram in a cash and stock deal worth $1 billion. This morning, Facebook CEO Mark Zuckerberg posted up to make sure everyone knows not to expect too many of these deals—"We don't plan on doing many more of these, if any at all"—but perhaps more importantly to explain the rationale behind it.

"For years, we've focused on building the best experience for sharing photos with your friends and family," he wrote. "Now, we'll be able to work even more closely with the Instagram team to also offer the best experiences for sharing beautiful mobile photos with people based on your interests.

"That's why we're committed to building and growing Instagram independently. Millions of people around the world love the Instagram app and the brand associated with it, and our goal is to help spread this app and brand to even more people.

"We think the fact that Instagram is connected to other services beyond Facebook is an important part of the experience. We plan on keeping features like the ability to post to other social networks, the ability to not share your Instagrams on Facebook if you want, and the ability to have followers and follow people separately from your friends on Facebook."

Like on Skype, for instance?

As's Austin Carr noted last summer, the long-term alliance between Facebook and Microsoft, which acquired Skype in 2011, is a relationship that is ignored at one's peril, especially if that one is Google. Commenting on a remark by Google executive chairman Eric Schmidt that was wholly (and literally) dismissive of Microsoft's significance in the pantheon of tech leaders, Carr wrote, "Given Facebook and Microsoft's widening footprint in industries Google lusts after, it's perhaps no surprise Schmidt would like to pretend the latter company does not exist. ... With Bing's leverage of Facebook social data, Microsoft now has a leg-up against Google in search. Facing the Skype-Facebook partnership, Google is launching Google+ at a significant disadvantage. And with Windows Phone 7, with whatever Facebook decides to contribute to its social elements, there will be even more competition for Google's Android platform."

Well, we now know one element Facebook wants to contribute to its social elements, but of perhaps equal significance was the other, less publicized, billion-dollar deal announced today: namely, the sale by AOL to Microsoft of 800 of its patents.

In an 8K filing today, AOL announced that the deal gives "Microsoft a non-exclusive license to its retained patent portfolio, for aggregate proceeds of $1.056 billion in cash. The transaction is structured as a purchase of all of the outstanding shares of a wholly-owned non-operating subsidiary of the Company and the direct acquisition of those patents in the portfolio not held by the subsidiary."

The deal is complicated and includes having to get "third-party consents and approvals required to consummate the purchase agreement," as well as a termination fee of just over 200 grand that Microsoft will have to pay if it fails to meet certain covenants and timelines, but assuming it goes through the question on some people's minds is what's in it for Microsoft.

According to PCWorld's Tony Bradley, the answer likely has everything to do with strategic positioning with Facebook against Google. "Odds are fair that there are some specific patents Microsoft is targeting, and that it has a strategic reason for wanting those patents," he writes. "It’s possible that the interest in AOL’s patent portfolio has to do with Microsoft’s rivalry with Google, or perhaps Microsoft’s alliance with Facebook."

According to an analyst cited in the article, AOL "likely holds a number of core patents from the granddaddy of all online social companies—CompuServe. The patents acquired by Microsoft could be used to support Facebook in the ongoing patent war with Yahoo. It’s also possible that some of the 800 patents could prove useful against Microsoft’s primary rival—Google," which the analyst characterized as "particularly inept when it comes to patents..."

The not-so-good news here, according to Bradley, is the legal mechanism Microsoft will use to put those patents to use—the dreaded patent litigation, which, when abused by so-called patent trolls, can cause serious damage to both startups and established businesses, as the adult online industry well remembers

Unfortunately, it's no longer just patent firms (or farms) like Acacia and Lodsys that are engaged in proactive patent litigation anymore, adds Bradley. "The use of patent litigation as a means of competing with rivals is unfortunate, but it’s the reality of the tech world today. Until or unless something is done to change the nature of tech patents, or reverse the tide of patent infringement litigation, companies like Microsoft will continue to arm themselves with the largest patent portfolio possible."

They pretty much have to. After all, he concludes, "It's the Silicon Valley equivalent of the nuclear arms race and mutually assured destruction."