Microsoft recently beat out Facebook for the right to purchase 925 patents and patent applications from AOL. The winning bid? $1.6 billion. But now Microsoft has turned around and essentially flipped a large portion of that patent portfolio, and the buyer is...Facebook!
In the context of a declining stock market and problems in Europe, Facebook — and more accurately, Facebook's investors — has to be getting worried about its upcoming IPO, which is supposed to be able to value the company at $100 billion. The Instagram purchase was stage one. Now comes this big patent buy, with Facebook paying for $550-million worth of patents that Microsoft evidently doesn't really need.
That said, you could argue — as CNET's Paul Sloan implies — that Microsoft was just doing Facebook a nice, big favor by leveraging its balance sheet to vacuum up the AOL patents, sparing Facebook the need to spend any of its own cash. Microsoft is nowhere in social media, so a "long-standing alliance" with Facebook makes sense, as both companies pitch in to weaken Google.
Facebook is obviously going to be in a defensive position, post-IPO, and that's not a position that the company is used to: being public, with a mega-valuation and numerous prospects for competitors to file lawsuits for patent infringement. Microsoft is helping to hedge some of that risk, although it's worth noting that the Big Brother in this collusion of companies started by Harvard dropouts has to protect its own interests, as well.
Microsoft now finds itself in an interesting position. Along with Apple, IBM, and Oracle it stands as one of the remaining pre-Web technology companies that still has a fairly strong business (monumentally strong, in Apple's case). While it's developed some Web-based technologies — particularly the Salesforce killer Dynamics CRM — Microsoft isn't really a Web company (Bing doesn't count) in the same way that Amazon, Google, or Facebook are. It is more of a mobile company than Facebook to be sure, given its partnership with Nokia and investment in the Windows mobile OS. And with its Xbox system, it's huge in gaming. So in a strange way, after wandering in the woods while the Web took off, post dot.com meltdown, Microsoft is in a position to leapfrog the whole Web 2.0 realm and proceed directly to Web 3.0, which will be far more mobile in nature.
The desktop Web, meanwhile, is bounded on one side by struggling Yahoo and on the other by surging Facebook. Neither are well-positioned to move into mobile. Heck, Yahoo may not even survive to see the advent of the fully mobile Web and whatever comes after Web 3.0. Meanwhile, Microsoft continues to sell its stodgy old business software packages and bring in the revenue; that's where all the good news was in the company's most recent positive earnings.
You can debate all day about whether Microsoft needs Facebook more than Facebook needs Microsoft. But for now, Microsoft seems happy to let the little brother "borrow" its balance sheet.