Nareen Melkonian
Mar 1, 2012
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Yahoo: A patent jackal covets the Facebook IPO lion's share

Facebook Chief Operating Officer Sheryl Sandberg delivers a keynote address at Facebook's "fMC" global event for marketers in New York CityEngulfed in the bidding frenzy of its upcoming $5 billion IPO, the last thing Facebook needed to hear was what Yahoo had to say to them this past Monday: if Facebook does not agree to pay licensing fees for about 10 to 20 patents that Yahoo holds, Yahoo will sue Facebook for patent infringement. “We must insist that Facebook either enter into a licensing agreement or we will be compelled to move forward unilaterally to protect our rights,” stated a Yahoo spokesperson.

I have a feeling that the ‘protection of their rights’ has very little to do with their intellectual property. Contradictory? Yes. But just recently in September, Yahoo integrated even more with Facebook so that friends could see what Yahoo News articles other friends were reading; that alone tripled Yahoo’s daily traffic. I highly doubt that the 10 to 20 patents Yahoo refers to were all adopted by Facebook in the last five months. This threat, therefore, has the distinct aroma of desperation and strikes the casual observer as an obvious attempt by Yahoo to get some much needed cash to fend off its dire financial straits. After several calculations, Forbes, Business Insider and Wall Street Pit, among other respected magazines, concluded that Yahoo’s core business is valued at zero.

Yahoo headquarters in Sunnyvale, CaliforniaHow does a corporation with 700 million users fall into such a situation? The list of missteps and lost opportunities that has dogged Yahoo in the past decade is not short. The mistake Yahoo is most known for is the one it made in 2002 when it had the chance to buy Google. Terry Semel, Yahoo’s CEO at the time, was not willing to spend the company's entire market value purchasing an equal. He decided that instead, Yahoo would compete with Google and become the most valuable and advanced Internet search firm. Today, Google covers over 65 percent of the entire US Search Engine Market Share, while Yahoo covers a little over 15 percent. Another purchase Yahoo failed to make was that of DoubleClick, an advertising agency that specializes in display ads. When Yahoo was hesitantly contemplating, Google jumped in and quickly acquired the network.

Jerry Yang, cofounder of Yahoo, who resigned January 17, 2012The ‘we can do it on our own’ attitude of Yahoo’s decision makers might very well be the cause of the company’s gradual decline. In 2008, founder Jerry Yang -- who recently resigned -- rejected Microsoft’s offer to buy Yahoo for $31 a share, which would have valued the company at $44.6 billion!  

The patents Yahoo threatens to sue for relate to advertising, web site personalization, social networking and chat services. This battle may be the start of the Internet search engine equivalent of the smart phone patent wars flooding the cell phone world. However, this is not the first time Yahoo has depended on its treasure chest of patents to wring in much needed cash. In 2004, Yahoo sued Google for an online bidding system for ads that Yahoo’s subdivision, Overture Services, had patented a few months before Google launched a similar system. What’s most interesting about this lawsuit though, is what former Google and current Facebook have in common with one another -- a commitment to an IPO. Just as Facebook is busy focusing on its $5 billion IPO currently, Google was focusing on its $2.7 billion one in 2004.

Is this just a coincidence or does Yahoo purposefully pounce on these threats when the enemy is vulnerable? I think I’ll side with the latter. No company wants bad publicity, which is precisely the reason Google quickly settled the case in 2004 and paid Yahoo over $260 million. However, in addition to Yahoo’s moderate stock price, high employee attrition rate and feeble product development efforts, this threat against Facebook only adds negativity to their already poor reputation.

A United States patent coverThis is a competitive world -- using patent infringement as a weapon only after being ranked on the bottom is, many people would agree, a petty and uninventive way to turn the tide around. Kodak, also a floundering company, tried to use the same strategy not long ago when it sued Apple and HTC for using its unlicensed patents. Although we cannot be certain about Facebook’s reaction, which as of right now is vague, any industry savvy person would conclude that Facebook is far too powerful to suffer more than a mildly sore neck from the lasso Yahoo is trying to throw around its runaway success.

Even if Facebook does dole out some cash to Yahoo, it’s unlikely that the hit to their pocketbooks and their stock value will be significant. Were Yahoo more selective with its opportunism, it wouldn’t have to idle in the shadows of giants like Facebook and Google, waiting to pickpocket their golden hoard.

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Jerry Yang
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