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Facebook and Twitter: Patent Strategies for Social Media


Written by Gene Quinn (left), Founder of IPWatchdog, Inc.
Steve Brachmann (right), Freelance Journalist
Posted: February 14, 2014 @ 4:48 pm

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Companies in technology sectors, especially social media companies, have seen some incredible investment through recent initial public offerings (IPOs) of corporate stock. Multi-billion dollar valuations for companies like Facebook, Twitter and more gave investors some excitement, but questions about sustainability, revenue generation and user growth has caused stock prices to dip in recent months.

Many of these companies have valuations that seem to fly in the face of their business models, which harkens back to the days of “irrational exuberance” of the “dot com” era. Still, social media companies can enjoy billions of users, but many of them use their services for free and generate negligible ad revenue for the company providing the platform. Will social media evolve into a money-making proposition or will these companies falter? Time will tell, as it tells with all things.

Against this backdrop and with the full knowledge that higher levels of investment almost universally require significant intellectual property holdings, we thought we’d take some time to look at the current state of the social media industry, including revenue and innovations. To accomplish this task we will also take a closer look at some recent inventions patented by major companies in this field.

 

Tech Companies See Explosive IPOs

Over the past decade, the Internet has seen somewhat of a continuation of the intense financial gains that companies have realized since the start of the dot-com business age. After the first generation of dot-com companies, we’ve seen the emergence of social media companies like Facebook and Twitter as well as explosive new smartphone and mobile device technologies from Apple and Google. Every year, it seems like an existing corporation or a completely new name rides the wave of the global market towards incredibly high company valuations.

The immense scale of the Internet supports this quick rate of corporate growth. During September 2013, Facebook welcomed 728 million account holders every day, and it’s monthly active user level was at about 1.19 billion people. The number of new daily users has slowed somewhat, but is still at about 29 million new daily users per quarter. Widespread consumer access to company services through the Internet has given these companies a model for growth that the business world has scarcely seen before.

Yet, many of these companies are seeing their stock prices flag after strong IPOs in recent years. This has largely been seen as a reaction to high price-to-earnings ratio for many of these stocks; Twitter, for instance, currently has a stock valuation of $37.4 billion, more than 30 times its projected 2014 revenue. The metrics used to explain Twitter’s revenue model, such as timeline views per monthly-average user and revenue per 1,000 timeline-views, are complicated. Still, the company supported a year-after-year revenue growth of 121 percent as of the third quarter of 2013. So revenue is growing even if stock prices seem overly optimistic given current levels of revenue.



  High Value Patents - Strength Meets Quality

Mon, Dec. 15 @ 12pm ET — Join Gene Quinn, Steve Kunin and Tyron Stading for a discussion about how patent quality, patent strength and what practitioners can do to draft better, more valuable patents. CLICK HERE to REGISTER. Webinar sponsored by Innography - IP Answers. Business Results.



 

Disappointing After IPO

As these Internet-based companies increase their technologies, they increasingly come up against issues related to their patent portfolios. Often times, these companies don’t have much in the way of patent holdings or even many applications filed for inventions with the U.S. Patent and Trademark Office. This can be a relatively common situation when companies are formed by young entrepreneurs who tend to be a bit more idealistic. Sometimes start-ups formed by young entrepreneurs will affirmatively choose not to purse patents because they philosophically disagree with exclusive rights. Of course, this is not only the way young entrepreneurs think. Nevertheless, failure to pursue a patent footprint can spell disaster for any technology based start-up. Even if you are successful, if you have no patent footprint it will be quite difficult to attract the levels of capital necessary to operate, and you also paint yourself as a target that cannot fight back in the rough and tumble patent enforcement world.

For example, when Twitter entered its IPO, it only held nine patents and had filed another 95 applications with the USPTO. Social gaming developer Zynga is another tech company we’ve profiled in the past that saw skyrocketing revenues with few patents; as we covered in an IPWatchdog feature article published in July 2011, Zynga’s IPO was expected to reach a valuation of $20 billion and the company only held one patent.

When Zynga went public it quickly reached a high of $14.69 per share on March 2, 2012, and then from there went on a precipitous decline, reaching a low of $2.12 on November 9, 2012. The stock has since rebounded and today is at $4.84 per share, which is a very respectable increase since November 2012, but still just one-third of its all-time high.  See NASDAQ: ZNGA. Difficulties for Zynga were easy to predict, which we did, not only because of their non-existent patent portfolio, but also because of their complete and total dependence on Facebook.

Twitter has also recently had a rocky ride in the stock market, although nothing like the difficulties Zynga experienced. Heading into December 2013, Twitter was priced at $41.57 per share and by December 26, 2013, had reached an all-time high of $73.31. Twitter then pulled back a bit heading into 2014, but on word that Twitter saw its first quarter of declining usage the stock price feel from $65.97 on February 5, 2014, to $50.03 on February 6, 2014. The stock has rebounded a bit since then, today closing at $57.44, but losing close to 25% one day on one news item can’t exactly inspire confidence. Does this suggest that without quarter after quarter user growth Twitter is unattractive? That seems to suggest that Twitter is a growth play much like many of the dot com stocks of the 1990s. Of course Twitter needs to work on growing its user base, but the market seems to be telling Twitter that it also better work on better monetizing the user base it currently has because these stock valuations have tremendous user growth cooked in likely because there doesn’t appear to be a meaningful monetization strategy.



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Acquiring Patents

Instead of protecting their own developed technologies, some companies are finding it expedient to purchase patents in bulk from other corporations in the industry. Recently Twitter, rather than enter into litigation against IBM, bought 900 patents from that company, including at least three that IBM stated Twitter was infringing upon in a letter to the corporation. Prospective litigation also led Facebook to acquire patents from IBM as well. While acquiring patents can be a smart move one has to wonder whether these acquisitions come with any real opportunity for monetization. IBM undoubtedly took back a license itself, and given IBM’s aggressive licensing strategy many of these patents are likely already encumbered with licenses to others. Such encumbrances aren’t the case with home grown and patented technologies.

While patent transactions in response to litigation are up in recent years, the overall patent market has subsided slightly. Both patent prices and number of patent transfers dipped during 2013, although this data could be skewed slightly by the huge sale of 6,000 Nortel patents for $4.5 billion during 2011. There is a growing belief within industry, however, that the value of patents is diminishing as the result of certain rulings from the Supreme Court, rulings from the Federal Circuit and the recently enacted America Invents Act, which created a variety of new ways to challenge issued patents. There is still more fear that current patent reform legislation pending in Congress would further weaken the value of issued patents. While that is not particularly good for patent owners it does suggest that companies like Twitter and Facebook that did not organically grow their own patent portfolios may be able to pick up defensive patent portfolios rather inexpensively in the future.

To increase revenues, these tech companies seem to be turning more to innovation in growth fields, especially in the fight to attract mobile users. Facebook Creative Labs just announced the release of its first invention, an app called Paper, a timeline and news reader program for mobile devices that creates a more immersive experience for users. Increased mobile ad spending has been linked to rising stock shares for social media companies like Groupon, LinkedIn and Zynga along with Facebook and Twitter. Nevertheless, it seems likely that at some point companies are going to need to prove some sort of revenue model in the mobile market in order to continue to plausibly support the high earnings-to-price ratios they’ve enjoyed up to now.

 

Twitter’s Patent Holdings

From U.S. Patent No. 7,688,349, entitled “Method of Detecting and Tracking Groups of People.”

A quick search of Twitter’s issued patents and patent applications shows that this company still hasn’t been very active in protecting technological developments. A search yields about 1,700 patents and patent applications, but most of those patents were developed by IBM and sold recently to Twitter.

The Twitter patent holdings purchased through International Business Machines of Armonk, NY, represent an array of intriguing digital technology patents. Camera identification services that could aid real-life identification of social network members could be developed from U.S. Patent No. 7688349, entitled Method of Detecting and Tracking Groups of People. This patent protects a system of detecting individuals within a group using an image capture device and determine the trajectory of their movement to determine if a person is traveling with a group. We also noticed an innovation related to emergency preparedness in U.S. Patent No. 7757111, which is titled Method and System for Insuring Data Integrity in Anticipation of a Disaster. This system would be able to initiate emergency data storage procedures in response to a forecasted disaster event to ensure that data is protected through the event.

From U.S. Patent No. 8,612,529, titled “Method and System for Suggesting Messages and Accounts from a Real-Time Messaging Platform.”

We’re noticing a real lack of recently issued patents developed by Twitter. We did happen across one recent patent that has a few intriguing social media applications: U.S. Patent No. 8612529, issued under the title Method and System for Suggesting Messages and Accounts from a Real-Time Messaging Platform. This system is capable of analyzing user submitted content to determine additional content from other account holders that may be of interest to that user. This patent cites the Google Adsense program as a prior similar method of analyzing textual snippets to suggest content. However, the Claim 1 section of this patent is very long, making it a broad patent and relatively less valuable.

 

Facebook’s Patenting Attempts

Compared to the meager activity coming out of Twitter in San Francisco, the bustling nature of Facebook makes it look like a much stronger contender in the field of social media intellectual property. We’re seeing a large number of patent applications being filed by the Menlo Park, CA, corporation, but it seems that these Facebook patent applications far outnumber the patents eventually issued to the corporation. That may well be as the result of the fact that obtaining a patent in this space can take many years unless the applicant is also willing to pay an additional fee for prioritized examination by the U.S. Patent and Trademark Office.

Compared to Twitter, Facebook also seems to be more aware of its need to protect mobile technology inventions. This is evidenced by one innovation that piqued our interest, described in U.S. Patent No. 8612542, which is titled Location Based Content Aggregation and Distribution Systems and Methods. This patent protects a system that makes it easier for mobile device users to share pictures tagged with geographical location data directly with a multitude of other users through a means of messaging.

Another interesting invention that could provide a quirky new way for users to interact on Facebook is protected by U.S. Patent No. 8650497, entitled Presenting Question and Answer Data in a Social Networking System. This patent protects a computer-implemented method of displaying questions-and-answer content from social network users that provides more social interaction. For instance, a restaurant could send content to a mobile device user who checked-in to the location and ask how their experience was or is.

We also noticed a patent that seems to reflect some of the same content suggestion technologies that Twitter has protected in the patent linked above. U.S. Patent No. 8650252, issued under the title Instantaneous Recommendation of Social Interactions in a Social Networking System, protects a method of analyzing social interactions to present content of interest to a user as selected by a recommendation unit. Much like the Twitter invention, this program seems designed to encourage social interactions among users with similar interests.

 

Conclusion

Both Facebook and Twitter will need to grow up and mature as companies if they are going to succeed for the long haul. A review of the patent portfolios suggests that Facebook has a much greater chance of ultimately succeeding because it seems to have a much more developed patent strategy than Twitter, which afford the company a larger number of monetization opportunities.

While many like to believe patents are not necessary the simple fact is that they are necessary to play in the high stakes high-tech game played by the elite tech companies in the world. IBM, Apple, Microsoft, Texas Instruments and many, many other companies acquire patents that protect themselves, but then engage in aggressive licensing campaigns that can easily bring $1 billion or more back to the company annual simply through licensing programs.

Whether these companies thrive, survive or eventually become a relic of history will largely depend upon how well they monetize not only their platforms, but how well they monetize period. Without a thoughtful strategy to protect the innovations they create they are leaving money on the table. It was one thing to make ideological decisions when the company was private, but publicly traded companies really need to answer to shareholders, at least in theory. Twitter’s continued allergy to filing patent applications may well come back to haunt the company, which has already seen its first quarter of declining usage.


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Posted in: Authors, Companies We Follow, Facebook, Gene Quinn, IBM, Internet, IP News, IPWatchdog.com Articles, Patents, Social Media, Social Networking, Steve Brachmann, Twitter

About the Authors

is a US Patent Attorney, law professor and the founder of IPWatchdog.com. He is also a principal lecturer in the top patent bar review course in the nation, which helps aspiring patent attorneys and patent agents prepare themselves to pass the patent bar exam. Gene started the widely popular intellectual property website IPWatchdog.com in 1999, and since that time the site has had many millions of unique visitors. Gene has been quoted in the Wall Street Journal, the New York Times, the LA Times, USA Today, CNN Money, NPR and various other newspapers and magazines worldwide. He represents individuals, small businesses and start-up corporations. As an electrical engineer with a computer engineering focus his specialty is electronic and computer devices, Internet applications, software and business methods.


Steve Brachmann is a writer located in Buffalo, New York. He has worked professionally as a freelancer for more than five years. His work has been published by The Buffalo News, The Hamburg Sun, USAToday.com, Chron.com, Motley Fool and OpenLettersMonthly.com. He also provides website copy and documents for various business clients.




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  1. Here is an interesting infographic that really tells the patent tale between Facebook, Twitter and LinkedIn.

    https://www.deltasight.com/twitter-ip-comparison-facebook-linkedin/

    -Gene