Ever wondered what happens in the IP situation room at Facebook, Inc?

Me neither, until I discovered just how many patents Facebook owns.

As Facebook prepared for its initial public offering on 18 May 2012, there must have been a moment when its management and attorneys realised they needed to roll up their sleeves and get very, very serious about patents.

As it happened, Facebook went from just under 60 patents, to over 1400 patents following a midnight shopping spree on the eve of its IPO. The IPO was one of the biggest in technology, and certainly the biggest in Internet history, resulting in a peak market capitalization of over $104B.

The Facebook buying spree was ostensibly precipitated by a nuisance suit from Yahoo. I suspect however that Facebook was not especially spooked by Yahoo – whose patent position is relatively modest.

Curiously, Facebook went to IPO having barely tagged any IP. Was this brash naivety, or an anarchic disregard for IP born of its hacker roots, or simple hubris? The move was in any case foolishness on the part of Facebook management. Then again, not many companies are worth $90B only seven years after being founded – so it is perhaps understandable that Facebook would back itself whatever received wisdom and common sense might suggest.

No internet company raises $16B, however, without inviting the attention of so-called patent ‘trolls’, corporate competitors with deep and broad patent portfolios, and any number of other adverse parties seeking to profit from the money soon to be changing hands.

Washington economist Jim Farmer published an excellent piece in the July/August 2011 issue of Intellectual Property Magazine dealing with Facebook’s IP forays to date.

This of course was in the wake of The Social Network, a film which portrays Facebook founder Mark Zuckerberg, and the early days of Facebook, and which provides some context as regards the origins and culture of early Facebook.

Jim Farmer’s work first piqued my own interest in Facebook’s IP play, but it is events leading up to and subsequent to the Facebook IPO that are particularly interesting from an IP perspective.

Facebook’s patent wall

Facebook acquired over two dozen tech companies pre-IPO, and almost as many since. Not all these deals are about acquiring patents, or indeed even technology or know-how. According to Facebook, the prevailing motivation is acquiring talented engineers to drive innovation in their own platform.

As an example, last month, Facebook spent $19B on acquiring Whatsapp ($4B cash, $12B shares, $3B options). Whatsapp is a free messaging service founded in 2009. No patents came with the acquisition. Whatsapp has one published patent application, and but three unpublished patent applications.

Facebook’s big patent deals where struck in the seconds to midnight on the eve of its IPO. Facebook ramped up its patent portfolio by more than 20x, in two key deals.

Facebook purchased 750 patents from IBM, and acquired rights to another 650 patents via Microsoft (originating from AOL).

April 2012: AOL via Microsoft, 650 patents - $550M March 2012: IBM, 750 patents - undisclosed, rumoured $83M May 2010: Friendster, 19 patents - $40M

Facebook’s watershed patent acquisition was almost two years earlier, and involved buying out the patent portfolio of Friendster in May 2010. Facebook acquired 18 patents in the $40 million deal, and Friendster vacated the market, at least in the United States.

Friendster was before MySpace and Facebook, and was going off the boil by 2009. Friendster was taken up by a Malaysian media company, and shifted to an Asian-centric membership. Operating outside of the United States meant Friendster could dispense with the United States patents it held.

The Friendster deal was of course well and truly dwarfed however by what happened later, in the lead up to the IPO. As a snapshot of its current status, Facebook is presently recorded as the assignee of 2338 patents and published patent applications in the United States.

Yahoo defriends Facebook, gets poked

Yahoo announced in March 2012 that it would sue Facebook over ten patents relating to social networking, communications, privacy and advertising. Facebook promptly responded by buying the above-mentioned 750 patents from IBM, later that very same month. I am inclined to think that wartime black market prices would prevail in the circumstances. While the size of the transaction remains undisclosed, the rumoured amount was $83M, based upon information from corporate records filed by Facebook at the SEC.

And then Facebook acquired 650 of 925 patents Microsoft had very recently bought from AOL. Microsoft paid $1B for the AOL patents, and received $550M for renting out about two in three of these patents. Microsoft retains the option to use all the patents licensed to Facebook.

While Facebook could have bought off the Yahoo suit at a price, doing so would have invited any other competitors to assert their patents against Facebook, with a view to receiving a pile of Facebook cash in return.

Following its buying binge, Facebook has built some very high walls for any prospective patent litigant to scale. Presumably, Facebook has at least for the time being insulated itself in large measure from well-funded hostile suits from other internet giants.

Open innovation or patent franchising?

While Facebook has built a patent fortress with over 2000 patent assets, only a relatively minor proportion of those patent assets were developed ‘in-house’.

This is partly symptomatic of Facebook’s reluctance to invest in developing its own patent portfolio during the first 8 years of its existence. The IBM and AOL deals have however provided Facebook with IP that predates Facebook’s own operations, and certainly before the explosion of social networking generally.

As a consequence, these older patent assets may have less life in them, but represent key value, as their validity is likely to be harder to undermine should they ever be asserted.

Broadly speaking, the IBM patent assets are in the networking and software space, while the AOL patents relate to certain aspects of user experience such as instant messaging, searching, advertising, and mobile and e-commerce.

The AOL patents in some respects represent areas in which Facebook perhaps never really anticipated it would be operating. This follows as a consequence of the evolution of Facebook from a relatively straightforward social networking site to the messaging/advertising/ecommerce platform it has become.

I am tempted to conclude that Facebook simply goes about its business, and franchises the necessary patent assets from those who have actually bothered generating those patent assets. It is doubtful that Facebook acquired – much less uses – any real know-how as a result of the IBM or AOL deals.

Facebook drives innovation not from its sizeable patent deals, but by taking on engineering talent from its various acquisition companies.

Pre-IPO Facebook IP strategy

With full credit to Jim Farmer, the pre-IPO Facebook IP playbook might be summarised as follows:

  • File some patents, and opportunistically buy any patents if they threaten to compromise immediate operations
  • Employ key engineers at very high salaries and benefits to safeguard trade secrets
  • Own data generated by the platform at any cost via cunning use of copyright

Post-IPO Facebook IP strategy

Post-IPO, Facebook’s IP playbook might be summarised as follows:

  • Acquire as many patents as can be practically brought for defensive and assertive purposes
  • Lay the foundation for complete IP domination of the greater social networking space
  • Anticipate and contingency plan any aggressive posturing from third parties


Through the lens of its IP strategy, pre-IPO Facebook was relatively savvy and pro-active, while post-IPO Facebook is positioning itself for nothing short of global domination of social networking. This is perhaps the only viable strategy available when you are such a large and dominant player.

As things stand, Facebook has accumulated a sizeable patent portfolio that should deflect any attack on its operations for the time being. The older patent assets acquired pre-IPO will however start expiring over the coming years, and some of these may in fact be the most valuable patent assets Facebook owns.

Does Facebook have a sufficiently strong patent pipeline to maintain its patent portfolio at replacement levels? Will Facebook have to make a major patent acquisition in future to maintain its current dominance of the social media space. Whatever the answers, the outcome is sure to be instructive to all.