Facebook will purchase some 650 social networking-related patents from Microsoft for $550 million, the two companies announced today. The patents in question are among the 925 patents Microsoft just purchased two weeks ago as part of a billion-dollar deal with AOL. Here's how the two deals work together:

  • Microsoft will pay AOL a billion dollars for ownership of 925 patents plus a license to 300 additional patents AOL isn't selling.
  • Facebook will give Microsoft $550 million for 650 of those 925 patents, plus a license to the remaining 275 patents Microsoft isn't selling. Facebook will not get a license to the 300 patents AOL licensed to Microsoft.
  • It's probably safe to assume Microsoft is getting a license to the 650 patents it's selling to Facebook, but we're trying to confirm that now.

The deal is a big win for Microsoft, which has built out an impressive IP licensing business in the past few years — first with Linux and Android, and now moving into social networking. Microsoft general counsel Brad Smith laid it out simply in a statement, saying that "Today's agreement with Facebook enables us to recoup over half of our costs while achieving our goals from the AOL auction."

For Facebook, the move is slightly more defensive: the young company is facing one major patent lawsuit from Yahoo, and will undoubtedly see more filed as it nears its high-profile IPO later this year. Facebook general counsel Ted Ullyot hinted at the defensive nature of the deal in his statement, saying "This is another significant step in our ongoing process of building an intellectual property portfolio to protect Facebook's interests over the long term."

Given the structure and timing of the two deals, it's almost certain that Microsoft and Facebook planned them in tandem as part of their longstanding partnership — Microsoft's more experienced IP team could negotiate a better deal given the company's larger size and leverage, while Facebook wouldn't have to participate in an auction where the other participants would know it desperately needed IP cover and drive the price up.

We've reached out to Microsoft and Facebook for more detail on how these deals were struck; we'll update you as we learn more.