When Patents Attack: Could Facebook Be Next?

Illustration by Serge Bloch

By Ashlee Vance

Paul Maritz has witnessed a number of patent skirmishes. The chief executive officer of VMware spent 14 years at Microsoft, much of it during the 1990s when the company was quickly extending its dominance and threatening older technology powerhouses. He remembers visiting Hewlett-Packard, Digital Equipment Corp., and other behemoths to essentially pay obeisance, ponying up for licensing deals that gave Microsoft access to key intellectual property—and kept the Redmond (Wash.) company from prolonged legal battles. “We had to do that,” says Maritz. “We were the new kids on the block.”

He sees a similar dynamic playing out in the tech industry today. So far, Silicon Valley’s rising stars—companies such as Facebook, Twitter, Zynga, LinkedIn, and other social media darlings—have mostly avoided becoming casualties in the ongoing patent wars, which have centered on the world of mobile devices. Yet as Maritz puts it, “When the continents shift and new players come into a space, it results in an unstable situation.” According to legal experts and technology executives, plenty more patent confrontations loom. Older technology companies such as Oracle, IBM, and Microsoft maintain rich patent portfolios covering essential technologies used by the Web set, especially database and file-management applications. “The new-generation companies like Google, Facebook, and LinkedIn will eventually run afoul of the established companies,” says Timothy D. Casey, a former patent lawyer at Apple and co-founder of the SilverSky Group, an intellectual property and business strategy consultancy. “It’s a familiar pattern in the technology industry.”

Part of the risk for the new generation of Web companies comes from their weak patent portfolios. Facebook has only 12 patents to its name, while the totals for Twitter, Zynga, LinkedIn, and Groupon range from zero to two each, according to filings with the U.S. Patent and Trademark Office. That puts them in a position similar to where Google was earlier this year, when it had far fewer mobile-related patents than its competitors. According to one study by the investment bank MDB Capital Group, Google had applied for or received a total of 307 mobile-related patents as of early August, compared with 3,134 for Research In Motion, 2,655 for Nokia, and 2,594 for Microsoft. That relative weakness spurred the search giant to pay $12.5 billion for Motorola Mobility and its 17,000 patents on Aug. 15, its biggest acquisition ever. Newer Web companies may ultimately have to take similar steps to bolster their position. “If you want to be a permanent fixture of the landscape, you better get some defense,” says Maritz.

One possible battleground is in the data center. Oracle, IBM, and Microsoft, in particular, have spent decades patenting technology for managing files and storing information. Rather than pay for products offered by these companies, the trend among Facebook, Twitter, and others has been to use free, open-source software that borrows, at least conceptually, from this past work. These companies make heavy use of programs such as the MySQL and Cassandra databases, for instance, and the Hadoop file-management system. Quite often, the Web companies even build new open-source applications and release them to the public, undercutting some of the Old Guard’s most lucrative franchises.

To date, database patent holders such as Oracle and IBM have had little motivation to target the open-source products with lawsuits. Most of their largest customers, which include major Wall Street firms and retailers, also use open-source software, and patent battles would just create unease among them. The same rules of engagement, however, may not apply to their relationship with the Web giants. This new generation prides itself on not buying technology from established Silicon Valley players, says Jonathan Schwartz, the former CEO at Sun Microsystems, which was acquired by Oracle in 2009. “To the extent that is true, they are very attractive targets,” he says. (IBM, Oracle, and Microsoft declined to comment.) And the open-source label did little to keep Google’s Android software out of trouble. That mobile operating system is at the heart of the recent tech-world patent battle that has attracted lawsuits from Apple, Microsoft, and Oracle.

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Why Facebook Needs Sheryl Sandberg

Facebook HQ: Sandberg in the user operations department. Facebook plans to move into Sun Microsystems' old campus later this year Photograph by Robyn Twomey

By Brad Stone

On a Tuesday afternoon in late April, 30 managers of Facebook's various business units come together to discuss a matter that preoccupies its famous founder: how to keep their rapidly growing little company from getting too big. The meeting, organized and led by the second-most-famous person at the social network, Chief Operating Officer Sheryl Sandberg, focuses on how to solve the problems of users, advertisers, and partner websites by using automated systems rather than bringing in thousands of new employees.

One by one, the managers stand and present their progress on new productivity-generating tools. A service called social verification offers a way for Facebook members who get locked out of their accounts to have friends verify their identity. Another new system intends to scare away creators of fake profile accounts by displaying their locations on a map and asking if they really want to continue.

Sandberg, sitting with one leg tucked underneath her, the other folded over the arm of the chair, listens intently and responds with a mix of positive feedback and disarming camaraderie. "That is a huge accomplishment," she says when an international manager talks about new efficiencies in the Hyderabad office. "Whoever worked on this, you guys should feel great. It took us four years at Google to do this." The success of an automated tool that eliminates duplicate profiles on the service evokes an "awesome."

Sandberg hopes the new procedures discussed at these meetings will allow the Palo Alto company to maintain a moderate pace of hiring. She believes that other booming Internet companies that doubled and tripled their staffs during similar periods of unchecked growth—Google (GOOG) has more than 26,000 employees—eventually came to regret the innovation-killing bureaucracy that resulted. Facebook has only 2,500 employees. A new headquarters under renovation one town over in Menlo Park, on the former Sun Microsystems campus, currently maxes out at about 3,600. "We think one of the best ways to stay small is just to stay smaller," Sandberg says later.

As the meeting winds down, a product manager shows a slide that nearly makes Sandberg jump out of her seat. The chart displays Facebook's advertising revenue and volume—both lines are tilting upward. It also shows the number of man-hours spent on support operations, a line that holds steady. "This is a beautiful chart. I might frame it on my wall," Sandberg says. "Guys, this is the difference. This is about, how big do we want to be as a company?"

Ever since Silicon Valley started turning out companies with beautiful growth charts, entrepreneurs and their investors have talked about the need for "adult supervision"—a seasoned executive who can take over a startup from its inexperienced founders, guide it through the hazards of hyperkinetic expansion, and convert a great idea or breakthrough technology into a bona fide business. Today, however, young founders generally want to remain at the helm of their companies, and there's a new shorthand for the kind of leader who's willing to serve as a second-in-command, complementing without overshadowing the wunderkind entrepreneur: a Sheryl Sandberg. As in, "we're growing, but God knows how we'll make money. What we really need is a Sheryl Sandberg."

No one needs a Sandberg more than the company that currently has her. In the three years since Sandberg, 41, defected from Google and joined Facebook as its COO, she has helped to steer the company to previously unimaginable heights, devising an advertising platform that's attracted the world's largest brands and forging a remarkably trusting partnership with Mark Zuckerberg, its imperious 26-year-old founder. (He turns 27 on May 14.)

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