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After years of positive relations, friendly blog posts, and referral traffic, Yahoo may have just been biding its time waiting to declare war on Facebook. Today it suddenly accused its former ally of infringing on 10-20 of its patents. It demands a settlement from Facebook or it says it will sue. The betrayer only warned Facebook privately once the New York Times had publicly published details passed to it by Yahoo. Though dastardly opportunistic, this patent trolling could produce a big windfall for Yahoo’s investors.Facebook tells me it was blindsided, saying “Yahoo contacted us at the same time they called the New York Times, so we haven’t had the opportunity to fully evaluate their claims.” Facebook has been very conservative about its use of patents. It bought some especially far-reaching social networking patents originally owned by Friendster from Malaysian company MOL for $40 million in 2010, but never used them offsensively even when it felt threatened by Twitter.Yahoo has long worked closely with Facebook, using the social network to power sign-up and login of its email service and Flickr. Just 11 days ago, Facebook congratulated Yahoo in a blog post noting its Open Graph protocol had helped Yahoo’s news reader app gain 25 million users, including 2 million each day, and more than 500,000 referrals a day. I doubt we’ll see such courtesies between these two anytime soon.Today’s attack comes at a particularly vulnerable time for Facebook, during the quiet period leading up to its IPO. Facebook could be forced to license the patents or settle with Yahoo by paying out pre-IPO stock, the same way Google was coerced into giving Yahoo 2.7 million shares in a patent settlement before the search giant’s 2004 IPO.Details are sketchy on which of Yahoo’s patents it believes Facebook has infringed upon. However, Forbes reported in November that Yahoo held 1,100 US patents with 2,661 pending, and it could have 3-4x that many international patents. These include patents on paid search that Facebook may be violating through its deal with Microsoft Bing, and basic social networking patents that could apply to core parts of Facebook’s business.Yahoo has held these patents defensively for years as a deterrent to trolling by other patent holders. But Facebook is a young company without a robust portfolio, and with record buzz about its IPO, now might be the perfect time to shake down the social network. A Yahoo crony tells the NYT that the two companies met today, and now it says “We must insist that Facebook either enter into a licensing agreement or we will be compelled to move forward unilaterally to protect our rights.”Honestly, this is despicable. After relentlessly stagnating as Facebook innovated, to now try to extort Zuckerberg’s company just as it enters the spotlight reeks of desperation. The only positive news from Yahoo in recent memory was thanks to the viral nature of Facebook’s social graph that Yahoo may says it owns the rights to. Did the Winklevii join Yahoo’s board?Perhaps Yahoo sees Facebook as too big of a threat to its ailing display ad business. Even if it does score cash or stock in a settlement, Yahoo’s shareholders should be worried. Your business model shouldn’t depend on the remarkable shortsightedness of a patent officer who thought it was ok to let someone own the concept of connections between personal profiles online.
It has been an interesting day to say the least. The news of Yahoo suing Facebook for infringing its patents has drawn sharp reactions from some of the more measured voices in our industry. Here is a small sampling of reactions:Fred Wilson, Union Square Ventures: ”The patents that Yahoo! is suing Facebook over are a crock of sh*t. None of them represent unique and new ideas at the time of the filing.”Brad Feld, Foundry Group: “It’s time for the entire industry to recognize that we are quickly shifting from a cold war (patents are deterrents) to a nuclear war that – like the one in War Games - the only winning move is not to play.”Andy Baio, Upcoming.org, a company acquired by Yahoo: “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.”Of course, there have been many more virulent and downright dumb reactions. Maybe you have read some of them by now. The industry wide indignation and condemnation of Yahoo has been quite amazing to watch, prompting me to make a few phone calls. During the course of the day, I learnt that Facebook is going to fight Yahoo tooth-and-nail.However, what I have not been able to figure out why Yahoo has taken this drastic action, one that is leaving it bruised and battered in the court of public opinion, at least in Silicon Valley. The decision to sue Facebook has not had any perceptible impact on the Yahoo stock price. I have read many explanations — Yahoo is an incumbent, it is dying, it doesn’t innovate, it has done this before, it is a bunch of losers with no strategies. (Actually any one of my past posts could be summarized as such.)However, being a natural born skeptic, I feel there is more than meets the eye to the whole Facebook-Yahoo scrum, for suing Facebook is a pretty drastic step for Yahoo.Facebook DisconnectWhy? Because, today, It is pretty beholden to Facebook, thanks to a dumb agreement the company entered in 2009. Just to refresh your memory, on December 2nd, 2009, Yahoo announced that it would integrate Facebook Connect into all its products. Here is what I wrote then:It’s clear that web identity is becoming a two-horse race: Google vs. Facebook. Back in the 1990s, Yahoo chose Google as its search provider and helped turn them into a major competitor and ultimately their nemesis. Their deal is of similar importance, as it gives Facebook Connect a big boost. Yahoo, despite its claims, is going to become less relevant in the web identity sweepstakes. It is part of the company’s growing de-emphasis of its technological chops. They are giving away search to Microsoft and it seems they are happy to take a backseat in identity sweepstakes. I think the company in its desire to become a media-web destination is becoming technologically irrelevant.AddressBookHere is what Yahoo said in a press release and that pretty much says it all:Yahoo!’s Facebook Connect integration will give consumers richer experiences on Yahoo!, including in Yahoo! Mail and on properties like Yahoo! News, Yahoo! Sports, and Yahoo! Finance. It will enable them to connect with Facebook friends on Yahoo!, view a feed of their friends’ related activity on Yahoo!, and share content–such as photos from Flickr or comments on news stories–with all of their friends on Facebook. The content that consumers share with Facebook friends will then create a loop that drives visitors back to Yahoo!.Yup! Thanks to its then feckless and incompetent management (and the then technologically irrelevant board that made even bricks look smart), Yahoo gave Facebook access to the address books of its 600 million odd users.Facebook, being smart enough to use that data, ramped up its own numbers from 350 million users into nearly a billion users. (Random tidbit: Facebook in February 2010 bought Octazen, a Malaysian contact importer firm and then shut it down and in doing so essentially eliminated any and all competition. In order to tap into address books, rivals would have had to build their own importers, no small feat in itself.)Yahoo CEO Scott ThompsonSome technology industry insiders believe that Facebook was pillaging Yahoo’s email address books for a long time before the two companies signed an agreement announced in December 2009. Infact, Facebook had been doing such a good job that at one point Yahoo blocked Facebook and started to scrape Facebook as well. This prompted Facebook’s attorneys to get in Yahoo’s face. Of course, Yahoo backed down. The two companies eventually signed the 2009 agreement that only accelerated Facebook taking more control over the Yahoo user base.In other words, there is and has been a whole lot of simmering animosity between the two companies. My theory is that for the first time in a long while Yahoo has management that is willing to mess with Facebook. Whether that is a good or bad move, it is open to debate – natch, a shouting match.
