Yahoo versus Facebook: not so inexplicable after all?

Yesterday's news is today's comment and tomorrow's speculation -- at least when the news is the highly-publicised and well choreographed story of Yahoo's patent infringement action against Facebook.  The report in the Guardian is typical of the genre:
"Yahoo is filing a lawsuit against Facebook claiming infringement of patents covering advertising, privacy controls and social networking, following through on a threat it made last month.

In a court filing , the former web giant - which has been reduced to a shadow of its former self as internal strife and the rise of Facebook have eaten away at its position - said that Facebook, founded in 2004, infringes 10 of its patents.

Yahoo had first threatened the suit last month. It demanded that the giant social network, which is preparing to go public in what may be one of the largest public offerings ever, should license the patents [Yahoo is definitely not a "non-practising entity", but some may feel that its status as a "former web giant" qualifies it as a sort of wannabe-troll now that patent licensing revenue is a more appealing and/or easier proposition than regaining lost territory on the internet].

Facebook, in response, pledged to defend itself vigorously against what it called "puzzling actions" by Yahoo. "We're disappointed that Yahoo, a longtime business partner of Facebook and a company that has substantially benefited from its association with Facebook, has decided to resort to litigation," the company said in a statement.

The patent claims could cast a spotlight on Facebook's vulnerabilities as the company tries to complete an initial public offering of stock this spring. At the end of 2011, only 56 US patents had been issued to Facebook. That's a relatively small number compared with other big tech companies. Yahoo, founded in March 1996, has filed more than 1,000 patents covering various aspects of its operation [In an ideal world, the quantity of patents held would be irrelevant; their significance would be in what they covered and how likely they were to stand up to invalidity challenges]. ...

Yahoo, which has seen its revenue fall steadily over the past three years, made hundreds of millions of dollars from a patent settlement that it reached with Google just before that internet search leader went public in 2004 [Behaviour which is profitable is likely to be repeated ...]. That covered the system used to generate the advertisements seen beside search results: Yahoo owns Overture, the company which first came up with the idea of keyword-targeted adverts to go with searches.

Yahoo will be hoping for a similar result this time round. It has been steadily losing share to Facebook in online display advertising: in 2008 it hit a high, when Yahoo's share of US display revenues peaked at 18.4% and Facebook had just a 2.9% share. According to eMarketer, in 2011 Facebook's share of overall US display advertising revenues grew to 14%, up from an 11.5% share in 2010, while, Yahoo's share of US display ad revenues fell to 10.8% in 2011 from 14% in 2010 ...[Other than returning to giant-hood, there's no way that Yahoo's existing business model is likely to reverse this slide, which makes a business founded on patent licensing revenue more attractive. The trouble is that it's unlikely to be sustainable unless new giants keep emerging, decide to public and have to buy off the turbulence that a multiple patent infringement action creates at the time a share price has to be determined]".
At least one clever person saw this coming.  In "Yahoo-Facebook: Brace for the countersuit" Tech Fortune's Roger Parloff reports how IP analyst Erin-Michael Gill (MDB Capital) predicted this last November. Gill now says that Facebook will respond by countersuing Yahoo, asserting patents it has acquired in anticipation of this type of attack. Be that as it may, Gill says Facebook will probably strike a cross-licensing deal that will require it to pay a "substantial sum" to Yahoo.

Kara Swisher (AllThingsD) describes Yahoo's action as "what is either the boldest gamble of its history or the most boneheaded".  She points to Yahoo's claims that Facebook has been “free riding” on its intellectual property and that royalty payments alone will not suffice. Triple damages and injunctive relief are what it seeks [following the Supreme Court's ruling in eBay v MercXchange, it's by no means certain that a court would exercise its equitable jurisdiction over injunctions in a manner that would disrupt the lives of innocent third parties -- the vast proportion of the US population which depends on Facebook for so much of its information and social networking].

Closer to home, Myles Jelf (head of the Media Group at law firm Bristows) comments:
“Whilst the patent infringement proceedings brought by Yahoo against Facebook don’t on their face appear to raise any startling new legal principles, the fact of the litigation is interesting from a commercial perspective, in that in recent times Facebook has been something of a lifeline for Yahoo – bringing considerable traffic to Yahoo’s principal business at a time when the search engine market is increasingly competitive [But if Yahoo is saying a long goodbye to its principal business, perhaps it's not so surprising after all]. Some observers have already noted that the timing of the proceedings, coinciding with Facebook moving towards an IPO, may not be entirely accidental. Given the typical timescales and complexity of US patent litigation, it is unlikely that Facebook will be able to resolve the accusations through the courts before its IPO is to be completed – even if it believes they are entirely baseless [Presumably the IPO could be put on hold. This might even work to Facebook's advantage if it goes to the market later, having seen off Yahoo's patent challenge and/or acquired and/or merged with Yahoo following a settlement, and having acquired an enhanced patent portfolio of its own]. It is also no surprise that the litigation has been started in the US rather than elsewhere in the world, as the US patent system is still much more generous when it comes to granting patents over the business method aspects of technology than, say, patent offices in Europe [Indeed, it's curious that litigation in the US has a sort of winner-takes-all quality about it, when the European Union is twice its size]".
IP Finance will keep an eye out for major developments in this litigation.
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