AOL sells 800 patents to Microsoft for $1 billion

UPDATED: AOL stock rises sharply on news of sale

Marking the latest escalation in the technology industry's intellectual-property arms race, Microsoft is paying AOL a shade over $1 billion for 800 patents, the cream of which AOL CEO Tim Armstrong has described as "beachfront property in East Hampton."

AOL investors are being told they will reap a portion of the billion-dollar bounty and AOL shares rocketed up almost 40% to $25.63 in premarket trading. (Make that up 43% at 11:20 a.m.)

The deal includes a non-exclusive licensing agreement for Microsoft to have access to AOL's remaining patent portfolio.

From an AOL press release this morning:

"The agreement with Microsoft represents the culmination of a robust auction process for our patent portfolio," said Armstrong. "We continue to hold a valuable patent portfolio as highlighted by the license we entered into with Microsoft. The combined sale and licensing arrangement unlocks current dollar value for our shareholders and enables AOL to continue to aggressively execute on our strategy to create long-term shareholder value."

"This is a valuable portfolio that we have been following for years and analyzing in detail for several months," said Brad Smith, General Counsel and Executive Vice President, Legal and Corporate Affairs, Microsoft. "AOL ran a competitive auction and by participating, Microsoft was able to achieve our two primary goals: obtaining a durable license to the full AOL portfolio and ownership of certain patents that complement our existing portfolio."

As for early reaction, intellectual-property analyst Florian Mueller writes on Twitter: "The deal du jour adds to my impression that social media patents are a strategic asset."

The patent arms race has been cited as a major motivation for Google spending $12.5 billion for Motorola Mobility and Facebook acquiring 750 patents from IBM last month.

(Update: Eric Jackson at Forbes says Yahoo will be next to emulate AOL.)

(Update 2: The price Microsoft paid was far higher than had been expected, according to The Benchmark Company's Clay Moran.)

(Udate 3: Some are calling a fire sale a fire sale, including GigaOm's Mathew Ingram: "It's great that AOL made a billion selling its patents to Microsoft, but you can only sell your furniture once -- not a long-term strategy.")

(Update 4: From AOL's perspective, this deal is all about funding the future vission of Huffington Post, says James Poulos at Forbes.)

(Update 5: Talk about adding insult to injury. Peter Kafka at All Things D has learned that the deal includes a portion of the remains of Netscape.) 

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