IBM Wields Cloud Patents For Defense, Profit

Cloud Computing: 8 Hidden Costs

IBM acquires patents at a prodigious rate and uses them to ward off challenges by rivals and patent trolls. It has been the single largest patent recipient for several of the past 20 years.

However, there's another aspect to its methodical pursuit. It also cross-licenses them to technology allies who may be under threat from a common adversary.

As reported this week, IBM is one of the largest holders of patents on cloud technologies and processes, having been granted 1,200 in the last 18 months. For the last 20 years, IBM has been at the forefront of landing patents in emerging technology areas. The company appears to have every intent of continuing the practice deep into the cloud era, even though many cloud operations are based on Web standards, open source software, and open APIs.

Nevertheless, IBM tends to be a more of a defensive player with patents than an aggressive seeker of royalties from other companies.

It's also frequently willing to cross-license patents to other companies, particularly technology partners and allies, to ward off the claims of its rivals. Among the big league cross-licensers and patent buyers: Google, Twitter, and Facebook.

That was one of the surprising conclusions of a study of the ways IBM has used its patents versus other companies since 1991. The study was conducted earlier this year by Maulin Shah, managing attorney of the patent law firm, Envision IP, in Raleigh, N.C., and New York.

[Want to learn more about IBM's cloud patents? See IBM Locks Up Cloud Processes With Patents.]

Twitter, for example, acquired 934 patents from IBM in 2014 for $36 million. Facebook in 2012 acquired 696 patents from IBM for $83 million. Alibaba, the Web-based Chinese search and shopping company, acquired 22 patents from IBM in 2013 for an undisclosed amount, before it launched its IPO.

IBM and Google

The largest acquirer of patents from IBM listed in the study was Google, which licensed 2,369 in 2011 and a few more in 2012, to bring its total to 2,400.

In a message to InformationWeek, Shah wrote that there is no information available in the public sphere on what Google paid IBM for the 2,400 patents. But they were acquired at the height of Google's battles with Apple, Microsoft, and Oracle over its use of the Android mobile operating system.

Google in turn transferred nine of these patents to HTC, maker of the HTC One smart phone, in its patent dispute with Apple.

"Ultimately, we suspect that the acquisition (of 2,400 patents) allowed Google to strategically leverage additional patents during settlement and cross-licensing discussions during litigation. Of the acquired patents, 895 have claims related to software and business methods," Shah wrote in his analysis earlier this year, "IBM Patent Sales Show That It Addresses Diverse IP Needs."

"It seems to me that IBM does not aggressively attempt to collect royalties through enforcement and litigation," Shah wrote in an email follow-up to InformationWeek's Aug. 4 story. "The company has amassed a large patent portfolio that it holds for defensive and cross-licensing purposes."

It's doubtful that many of IBM's patents become much of a profit center.

It makes millions in cross-licensing its patents to other companies, but it also keeps a large number of attorneys versed in patent law on staff to maintain both its patent library and its own patent-based defensive perimeter. It made $309 million on direct patent sales in 2012 and $352 million in 2013. In 2014, cross-licensing revenues amounted to $129 million, or 0.14% of IBM's revenue of $92.8 billion that year. Sales accounted for another $283 million, according to Shah's review of IBM's 10K form.

"To give you a comparison, Qualcomm, which has a strong licensing focus, generated $7.8 billion in licensing revenue in 2014, accounting for 30% of the company's overall revenue," Shah wrote.

So while IBM has a deep interest in accumulating patents in an emerging area, such as cloud, it isn't necessarily restricting competitors with them or breaking down the doors of fellow cloud suppliers to demand royalties. IBM is seldom involved in offensive patent proceedings, but it's known to be formidable adversary when it comes to demanding royalty payments.

"We found that the vast majority of IBM's patent assignments have resulted in the transferred patents being held defensively, or being used commercially as in the cases of Hitachi Global Storage Technologies and Lenovo," Shad wrote in his March 31 posting.

What's IBM's Endgame?

Still, IBM has always sought to monetize its investment in R&D and resulting patent, trademark, and copyright portfolio. When all its IP activities are combined, they are believed to yield $500 million to $2 billion a year in revenues.

Furthermore, IBM is sophisticated in how it uses patents to cement alliances, reward its friends, and stave off demands from competitors. "Arguably, it's more of a know-how company today than a hardware one," noted Bruce Berman, a spokesman for Envision IP. It can use patents to establish alliances and favorable relationships or to secure and retain clients.

IBM also allows more patents to lapse than many companies do, showing a keen sense of which ones to retain and renew in terms of future market value.

If nothing else, having 1,200 patents on cloud technologies and processes displays its investment stake in the cloud and gives it boasting rights as a leader in the field.

IBM has been the leading acquirer of patents for nearly two decades. It may not feel it can ill afford to sit back and trust that all be well for a cloud participant who happens to have few patents in its portfolio.

Yet, at some point the constant battle to hold patents and maintain a stiff defense may one day prove to be a thing of the past and no longer worth the investment.

Key elements of the cloud include services based on public Web standards, the Linux operating system, and the Internet's TCP/IP stack.

More of the compute infrastructure than ever before has entered the public domain and will not be returning to proprietary hands. Is it really a good investment to patent common processes and technologies in the cloud, especially if you have no intention of being an aggressive royalty collector?

Even if the mood inside IBM changed and a more aggressive patent strategy emerged, the builders of cloud services, from Rackspace to Google, Microsoft, and Amazon, all have their own know-how and ability to defend their pioneering ways. Patents might be the least valuable asset in their armories.

For now, only IBM knows for sure why it does these things. But if ever there was a realm of diminishing returns, patents on cloud computing would seem to be one of them.