18 March 2012

Why Attacks on Yahoo! Over Facebook Lawsuit Are Unjustified

Gulliver meets a YahooLast week, Yahoo! sued Facebook in a US Federal District Court in San Jose, alleging that the soon-to-be public social media giant is infringing ten Yahoo! patents relating to online advertising, privacy, Web customization, social networking, and messaging.  (See Yahoo Sues Facebook for Patent Infringement… at allthingsd.com.)

The reaction from users and pundits across the internet has been almost uniformly negative, although this is perhaps not surprising considering that Facebook is rapidly heading towards one billion users.  Many of those users no doubt view themselves as part of a huge Facebook online community, and an attack on the company is – in a way – an attack on that community.

The move was described by All Things Digital as ‘either the boldest gamble of its history or the most boneheaded’, blaming Yahoo!’s ‘aggressive’ turn on new CEO Scott Thompson. Ars Technica kindly described one of the patents as being ‘written in dense legalese’, suggesting that they are overly broad and that Yahoo! has broken ‘a tacit agreement among major software firms not to sue competitors for patent infringement’.  Ars has also provided a discussion of each one of the ten patents on which Yahoo! is relying.  Even TangibleIP – the blog run by international intellectual property strategy and consulting company ipVA – has provocatively referred to Yahoo! as ‘the new troll on the block’.

BITING THE HAND THAT FEEDS

One of the more vitriolic attacks has come from former insider Andrew Baio, whose upcoming.org site was acquired by Yahoo! in 2005 (now upcoming.yahoo.com).  In an opinion piece for Wired, Baio has written that while he in no fan of Facebook, ‘this is a deplorable move. It’s nothing less than extortion, expertly timed during the SEC-mandated quiet period before Facebook’s IPO. It’s an attack on invention and the hacker ethic.’

Much of what Baio has to say in relation to the factual background is essentially true:

For years, Yahoo was mostly harmless. Management foibles and executive shuffles only hurt shareholders and employee morale. But in the last few years, the company’s incompetence has begun to hurt the rest of us. First, with the wholesale destruction of internet history, and now by attacking younger, smarter companies.

Yahoo tried and failed, over and over again, to build a social network that people would love and use. Unable to innovate, Yahoo is falling back to the last resort of a desperate, dying company: litigation as a business model.

That it’s Yahoo makes it even sadder. The complaint isn’t really wrong when it asserts that: “For much of the technology upon which Facebook is based, Yahoo! got there first.”

Of course, shareholders and employees might dispute Baio’s use of the word ‘only’ back there.  And it is with reference to shareholders that we suggest an alternative, and more realistic, view of Yahoo!’s actions.

RETURN ON INVESTMENT

Management at Yahoo! is answerable to the Board, which is in turn answerable to the company’s shareholders.  Those shareholders have invested money in Yahoo! over the years, some of which has been spent on investments such as internal R&D, as well as the acquisition of assets such as Oddpost, Flickr and Baio’s own upcoming.org.  Shareholders in Yahoo! – as in any company – are entitled to a return on their investment, or an explanation as to why this is not possible.

Baio states that he continued to work at Yahoo! until 2007, no doubt enjoying a generous salary and various perks of the job.  Yet now he turns around to bite the hand that fed him, alleging that Yahoo! ‘lied’ to him when they told him that the patents the asked him to file during this period would be used for ‘defensive’ purposes only.  Now he says: ‘I thought I was giving them a shield, but turns out I gave them a missile with my name permanently engraved on it.’

Baio seems to believe that because he did not file any patents on behalf of upcoming.org, prior to its acquisition by Yahoo!, it is somehow ‘wrong’ that he was tricked into giving them something that they did not buy along with the rest of the company.  He concedes that he was ‘naive’ back then, but it does not appear that much has changed in the intervening years.

What does Baio think Yahoo! was paying for?  Just some code (which they could perhaps have replicated for themselves, given time)?  It is a fair bet that the value of tangible assets of upcoming.org – probably little more than a few servers rapidly on their way to obsolescence and replacement – fell far short of whatever price Yahoo! paid.

INTANGIBLE VALUE

Of course, Yahoo! was mostly paying for intangible assets – including the intellectual property embodied in the online service, and perhaps its existing user base.

And having spent money on these assets, Yahoo! had not only the right, but an obligation to its shareholders, to take the reasonable steps available to protect them.  Baio’s patents may have been prepared and filed after the purchase of upcoming.org, but they reflected intellectual property developed beforehand.  And that intellectual property was what Yahoo! paid for.

The same reasoning applies to every other patent in Yahoo!’s 1000+ patent portfolio, whether the inventions resulted from in-house R&D, paid for in the salaries of Yahoo! engineers and programmers, or from IP which was acquired along with the various companies that Yahoo! bought over the years.

And Baio is right.  Yahoo! has failed to deliver on the head-start it had during the ‘Web 1.0’ years.  It has been overtaken by newer, faster, cleverer companies which ‘got’ the interactive web long before Yahoo! caught on.

But the fact remains that Yahoo! was once an innovator, rather than an imitator.  And during those times it protected its innovations, and the investment of revenues and shareholder funds that they represented, by filing patent applications.  Had it not done so, it would have nothing now to show for that expenditure, or for all of those years of creativity and innovation.  Having spent billions over the years on developing intellectual assets, it would have nothing whatsoever to show for it.  However dismal Yahoo!’s share price may appear now, a ‘desperate, dying company’ (as Baio puts it) with patents stands a better chance of survival than one without.

With the benefit of hindsight it is very easy to say – as Baio does – that ‘someone’ would have invented the things Yahoo! has patented, because they are so ‘generic’.  But ‘someone’ did invent them: Yahoo!  And they only appear ‘generic’ because they have subsequently become so widespread and obviously useful.  This is not evidence that any of them were obvious before the fact, or that the Web might have taken quite a different course if it were not for Yahoo!.

HISTORY REPEATS?

The bottom line is very simple.  Yahoo! has rights which it has acquired, by expenditure of funds, over a period of nearly two decades.  And by exercising those rights it can deliver a return on that investment to its present shareholders.  Furthermore, it is obliged to do so.

As various reports have pointed out, this strategy has worked for Yahoo! before.  The company sued Google prior to its IPO in 2004, and ultimately settled the case in exchange for 2.7 million Google shares (right now worth US$625 each, or a total of US$1.69 billion, if Yahoo! still held them all).

With the Facebook float touted to be the biggest in history, Yahoo! could do a lot worse than achieving a similar outcome this time around.

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