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Billion-dollar deals are starting to seem commonplace in the tech world. Hot on the heels of Microsoft’s $1.056 billion patent purchase from AOL comes the news that Facebook has spent $1 billion in cash and shares on buying Instagram, the photo-based social network smartphone app.
But while the AOL valuation had been predicted by at least some parties, the same cannot be said for Instagram. True, it has been phenomenally successful, growing to over 30 million users in just 18 months; however it remains a tiny company that has never made any money, while many commentators have questioned whether a simple app that allows users to apply retro-style filters to their photographs can possibly be worth so much. Missing from much of the mainstream comment about the deal, however, has been another puzzling aspect to the price tag – according to reports, Instagram does not own any patents.
Facebook has recently become wise to the importance of IP, buying swathes of patents from IBM to bolster its previously slim portfolio. So it seems surprising that it would spend such a vast amount of money on a company that may lack some fundamental IP protection. There is no shortage of alternative online and mobile photo apps available– these include the Yahoo!-owned Flickr – and it is probable that at least some of them will own relevant patents; you can also be sure that every NPE worth its salt will now be scrabbling through its portfolio looking for possible assertion weapons (although it is arguable that if there were any smoking guns out there they may already have been deployed). With its IPO looming, and already in deep litigation with Yahoo!, Facebook would not relish the idea of another suit at this time. However, the company may have no choice: Instagram is now a much more interesting target than it was just a few days ago.
The Instagram transaction was completed with astonishing speed. Gregory Roussel, a lawyer involved in the purchase, told Legal Week that it was all concluded within 54 hours, saying: "It's just the way Facebook does stuff." Perhaps, in their haste to get the deal finalised as quickly as possible, some IP considerations fell by the wayside. But, then again, maybe patents are simply not important in the space Instagram inhabits.
Facebook’s motive in purchasing the company seems clear – to neuter a potential threat to its dominance in the social media sphere. Photo-sharing is a crucial part of the service that Facebook offers, and Instagram’s stupendous growth means that it could have become a significant problem, whether it remained independent or was bought by a rival. Mark Zuckerberg has promised to keep Instagram as a separate entity, but Facebook will still benefit from its know-how, particularly in the mobile sphere (although how much use such specific technical expertise will be without IP protection is open to question), as well as its well-known brand - presumably all the relevant rights are in place to protect this! That said, not all of Instagram’s potential community are Facebook fans, and rival app Mobli was downloaded by two million users in the 24 hours following the news, apparently due to disaffected hordes deserting Instagram.
Only time will tell whether Facebook has made a shrewd strategic decision, or paid over the odds in order to get a deal done quickly. Comparing the two billion-dollar deals that have been grabbing the headlines in the past week, commentator Daniel Mbure had some sobering thoughts for Facebook about its hastily-agreed transaction: “Facebook’s use of its $1 billion seems a far cry from the strategic and robust purchase that Microsoft has made, something Mark Zuckerberg may have to think hard about in the run up to the IPO, and as other companies come knocking with patent infringement lawsuits.”
IP management, Brands, IP litigation, Patents, IP business, IP valuation