Apple patent throws wrench into Facebook plans

Flickr user coolmikeol

COMMENTARY A new patent awarded to Apple (AAPL) has the potential of locking Facebook out of an important area of growth: using credits to acquire such "media items" as songs, videos, images, e-books and podcasts. The definition of "digital asset" also raises questions of whether Zynga's (ZNGA) virtual goods -- the mainstay of its revenue -- would also fall under this patent. Even payment systems like Bitcoin could run into trouble.

Apple has already proven that it is willing to use patents as weapons in the mobile computing space; it has expanded its suit against Samsung in Australia to 278 patent claims. At what point does the company, which will be challenged to keep growing at its current rate, start to use patents to attack competitors in its widening spheres of operations?

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A credit for your thoughts

Patent number 8,112,360, originally filed in May 2006 and granted today, is called Digital Media Acquisition Using Credit. Here's the first independent claim that covers the basic method (with another claim covering a computer system that would do this):

A method for acquiring a media item from an online media store using a credit, said method including at least: (a) identifying a media item being purchased by a purchaser, the media item having a purchase cost associated therewith; (b) determining whether the media item is permitted to be acquired using an item credit, the determining being based on at least the purchase cost and a country of origin for the purchaser, wherein said determining (b) includes at least: (b1) determining a media type for the media item; and (b2) determining whether the media type for the media item is permitted to be acquired using an item credit; (c) determining whether the purchaser has at least one item credit available at the online media store; and (d) thereafter applying the item credit associated with the purchaser so as to reduce or eliminate the purchase cost of the media item when said determining (b) determines that the media item is permitted to be acquired using an item credit.

So, the system must do the following:

• associate media items with a price in company or store credits
• determine whether a given item is available for a credit purchase
• identify the country in which a given user is in case there is a limitation on selling to that country
• perform the transaction

Facebook's straight-line growth is the reason this patent could be such a problem for the company. Although sales have moved along nicely, they haven't hit the massively rapid growth that high valuations of young companies tend to demand in high tech.

As the company notes in its SEC filing, its financial performance is driven by the people who use the service:

To the extent our active user growth rate slows, our business performance will become increasingly dependent on our ability to increase levels of user engagement in current and new markets.

Although the company bravely says that it aims to connect all Internet users in the world, that is unrealistic. There are already signs of slowing growth in key markets.

As Facebook can see from Apple and Amazon (AMZN), media sales could be a big way to drive growth. Many media-centered companies would love access to Facebook's users. That's how Zynga made its mark. But Facebook eventually demanded that Zynga, or anyone else interested in using its network to trade in virtual goods, has to use Facebook credits to complete the transaction. And since Facebook does check from where someone is connecting (presumably including country), that puts any media sales squarely under the new Apple patent.

This wasn't an attempt by Apple to block Facebook; it filed the application when the social network was a university curiosity. But that's exactly what Apple could do, if it wished. And the issue extends anywhere "credits" are used to buy media. For example, any media companies using Bitcoin or other credit-based payment systems to sell their wares could also fall under the patent's shadow. Even media companies that want to give away free copies of content through stores using a credit mechanism would have potential problems.

There's also the question of how widely one could interpret a media item. Would it be reasonable to say that the term covered virtual goods that people use in playing games, such as the ones that Zynga runs? This could make life sticky for a number of companies.

[venusvegasvada]

Thanks Govt. for screwing us and changing our patent laws last Sept. Now you see why all the big companies wanted the law and why the little guys didn't want the system changed. Thanks for throwing the small guys under the bus.

All you really accomplished by replacing our American "First to Invent" system with Europe's "First to File" system is to grease the Corps and make it easier to steam roll patents and crush opposition. Congratulations. Clap. Clap. Clap.

If you really wanted to speed up and streamline the Patent Office (as was stated) then you should have hired more people to work the backlog. Our system before worked just fine and protected all inventors, regardless of how deep their pockets where.

Such a freaking, inexcusable disappointment signing that #$@ing law.

[KBlack01]

I am not educated on patent law however all I can saw is wow! So this means that Apple now owns a patent that is essentially a blanket that covers any sort of virtual currency/credit? I mean seriously, this is not innovative nor is a difficult concept for anyone over the age of 5 to dream up. I doubt anyone copied Apples patent and I for one, would never think to check against pending patents to see if I could provide my customers with a site credit. Am I confused or is this just an extension of a gift certificate or a prepaid card that is specific to a store or group of stores?

If I am right I would seriously question the mental state of our patent office.

[OldWarrior144]

Further, can this be applied to buying media with credit card "Rewards points"?

[CHSCLM]

I'm confused because I thought you couldn't patent something that is already common knowledge or already in use? is that not right? As you say companies have already be using services like these for years.

[eriksherman]

There may be something in the exact wording, like checking the country of the user to see if it's OK to sell the particular type of media, that does something a bit different. Patents aren't granted just for big inventions. And Apple filed the patent application six years ago and could have been doing it up to a year before.

[Dukme]

Only big corporations can afford to file for patents. We need to get rid of it in order to advance the human race to the next level. Competition is key to advance us further.

[LukiG]

This is ridiculous, hundreds of shops use in-store credits to sell multimedia. iStock for example was doing it for ages. It always irritates me when company is awarded a patent even if its already a common practice and they even weren't the one inventing it.

[GreggySF]

I can't believe how many news feeds have JUST discovered how patents work:
1) They always take years to approve. So the fact that this was filed in 2006 and approved in 2012 is not an "Apple Conspiracy" nor unusual
2) When a patent is "pending" any competitor that decides to go ahead and copy the invention does so at their own risk. IF it is later approved, they are then liable to show that it is not valid OR abide by its rules
3) Your comment that Apple: "Apple has already proven that it is willing to use patents as weapons..." is unfair. If a patent owner does NOT defend their patent as soon as an infraction is found, the patent is then declared moot. This has been true since the days of Henry Ford and still is how patent law works.

The press likes to vilify Apple for being a company that defends its intellectual property against those who copy. It sometimes is on the other side of the story when it has copied someone else's invention. That is why they have lawyers. I'm sure Facebook has lawyers too.

[eriksherman]

You are confusing patents with trademarks - not immediately "defending" a patent does not cause a patent to be automatically declared moot. Furthermore, Apple has a long history of using patents as offensive weapons, as the former president of Sun noted in an experience he had with the company some years ago. It's not as though an alleged infringement is so clear-cut that a company can know beyond a doubt whether a particular practice by another company is definitely an infringement or not. And a number of the infringement claims that Apple has made against Samsung, Motorola, and others have been tossed out by courts, so someone could reasonably question the amount of copying that is going on.

I stressed the 2006 filing date because this one predates the patent filings that relate to the iPhone and iPad. Of course patents take years to prosecute a patent.

To be clear, this isn't vilification. It's looking at common business strategies and tactics.