Facebook's Next Revenue Idea Shines a Spotlight on Patent Problems

Facebook (NASDAQ: FB  ) is looking for new revenue streams. Users may soon be able to pay a subscription fee to make the social networking site's annoying ads go away. That trade-off would be worth good money to many current users, who feel Facebook's service value eroding more with every unwanted sales pitch.

But I'm not here to dive deep into the implications for Facebook's future revenues in this move. Let's just say that I expect monthly fees to go down like Brussels sprouts with a side of rotten fish. Internet radio maven Pandora Media (NYSE: P  ) offers a reasonable proxy for Facebook's ad removal fees, having offered a very similar option for years. Subscription fees accounted for just 11% of Pandora's revenue in the last quarter and continue to grow slower than ad sales. Expect the subscription-hating trend to continue when Pandora reports earnings again tonight.

No, I'm here to show you how Facebook's brand-new business idea underscores the shortcomings of our current patent system.

How so?
You see, the idea came to light in a patent application, filed in 2011 but made publicly available a few weeks ago. It paints the ad-free upgrade in extremely broad strokes: "In particular embodiments, the user may select one or more social networking objects to replace advertisements or other elements that are normally displayed to visitors of the user's profile page that are otherwise controlled by the social networking system. ... In particular embodiments, the user is billed on a recurring basis for profile personalization."

But like I said, Pandora has been doing exactly this for ages, and it's not like Pandora invented the idea to begin with. In a wider sense, premium cable channels like HBO or Starz serve the same purpose: More content, fewer distractions, no advertising. Sirius XM Radio offers the same ad-free value proposition in the radio space, as long as you're willing to pay for the privilege.

And now Facebook wants to patent the idea of paying more for a more personalized, less distracting service. The application is silly on the face of it, but the Patent Office is likely to grant it anyhow. You know, like they handed Apple (NASDAQ: AAPL  ) a design patent for rectangular tablets with rounded corners -- a crazy grant that Cupertino nevertheless has wielded with some success in courts around the globe.

Welcome to Crazytown!
We're walking down a very dangerous road here. Somebody needs to put a stop to gratuitous patent grants before true innovation becomes impossible.

Patents are supposed to reward inventors of original ideas. Patents like this one only rewards the first person or company to file a claim for patently obvious ideas.

For another example of misguided patent grants, consider Vringo (NASDAQ: VRNG  ) . The company owns patents on such brain-bending innovations as placing ads next to search results. Business value: billions of dollars. Innovation value: zero. Any fifth-grader could come up with the same idea independently, but Vringo's predecessors happened to file the first patent claim.

So a completely obvious idea becomes a bludgeon in worldwide patent lawsuits. Facebook is just looking for another mallet, if only to beat back baseless suits from whoever actually tried to patent this plain old business process first.

After the world's most hyped IPO turned out to be a dunce, most investors probably don't even want to think about shares of Facebook. But there are things every investor needs to know about this company. We've outlined them in our newest premium research report. There's a lot more to Facebook than meets the eye, so read up on whether there is anything to "like" about it today, and we'll tell you whether we think Facebook deserves a place in your portfolio. Access your report by clicking here.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 07, 2013, at 3:34 PM, clifffiscal wrote:

    Any fifth grader could come up with the idea for search patents huh? Then why do I remember so many articles back in the 1990s that wondered about search engines and how great they were but when would they ever have real earnings. You must be very young Anders.

  • Report this Comment On March 07, 2013, at 8:40 PM, tjmcbntmkr wrote:

    A little research goes a long, long way in this world. Especially regarding the Vringo patents authored by one of the preeminent innovators in the search space. Lang's patents do far more than simply place ads next to search pages. These patents revolutionized the shotgun approach of the primitive search functions in place prior to his work by refining search results based on reliavance to both the individual and community factors. These flipant statements dismiss a fantastic improvement that resulted in Googles revenues from search and ads increasing over 20% with their adoption to the tune of billions of dollars. So it's just as easy to dismiss the entire article if this is indicative of the bias and downrights misinformed "research" of the author.

  • Report this Comment On March 07, 2013, at 10:08 PM, valuetrader007 wrote:

    Word of advice there is so much inaccuracy in your article, if someone comes and sue you guys for Libel it will probably be justified. first of all before google switched to smartass system(which infringes on Vringo patents) it was utlizing overture patents(now yahoo) to display ads(google payed 300 million to yahoo in losing patent case)...the system was inefficient and google moved on to smartass system. switch resulted in 20% increase in revenue year over year. you can argue all great things that came from google for free(Android) are result of smartass bringing in $ which resulted in further revenues indirectly through ads. If this smartass system was so obvious why google did not have this to begin with? are you saying google engineers are dumber than 5th graders? google's patents have referenced Vringo patents in their filing so they were aware of these patents.

  • Report this Comment On March 08, 2013, at 3:56 AM, taishiba wrote:

    you are misinforming people on VRNG and other topics.

    can it be you are biased against VRNG since you are a big owner of Google (GOOG)?

    Why do you not disclose your GOOG holdings at the bottom or top?

    What a joke!

  • Report this Comment On March 08, 2013, at 3:57 AM, taishiba wrote:

    Vringo bought the patents from Lycos, a search ENGINE which existed BEFORE Google.

    Your fanboy worship of Google is insane.

    Google lost the case to a worthy opponent.

  • Report this Comment On March 08, 2013, at 10:54 AM, tjsimone wrote:

    "The company owns patents on such brain-bending innovations as placing ads next to search results. Business value: billions of dollars. Innovation value: zero. Any fifth-grader could come up with the same idea independently, but Vringo's predecessors happened to file the first patent claim."

    So anders, why didnt you patent it then....you seem like you are so in the know...

    My take...whoever has the patent was the originator of the idea, and deserves it. America was built on this system, and has done pretty well with it in place.

    Anders, just because you cant understand something, does not mean it does not work....

  • Report this Comment On March 09, 2013, at 5:17 AM, taishiba wrote:

    Patents are protected under the US Constitution...

    See link below.

    Learn your basics before proclaiming yourself to be a so called expert and stop shilling for Google.

    It is OBVIOUS you are a google 'fanboy' but why don't you disclose you are a measly shill for Google?

    http://goo.gl/qQXRY

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