Yahoo sued Facebook (FB) for several patent issues. What’s the history behind this and who will win?

What Is Yahoo’s Claim?

FB is using pay-per-click (PPC) advertising. When a visitor clicks an ad, they are sent to the advertiser’s website. Yahoo has the patent on that. FB has been using this without paying. Very likely, they have been notified of being in violation and they’ve chosen to ignore Yahoo.

Has Yahoo Won on this Issue Elsewhere?

Although this is probably the single most valuable web patent in the last ten years, very few people know about it. In 1998, there were many kinds of search engines. GoTo.com came up with a crazy idea: a search engine that was also the Yellow Pages: companies paid to be listed. When you click the listing, you go to the company’s site. It was “pay to be listed”. I heard about this and a number of us thought it wouldn’t go anywhere; why pay if you can show up in Yahoo, Dogpile, and many other search engines?

Google was started in 1998 with a few hundred thousand dollars in venture capital. By early 2002, it had run out of money. Nobody wanted to licence the search engine. They tried to sell Google, but nobody wanted that either. Looking for ways to make money, Google met with GoTo. They signed a nondisclousure agreement (NDA) and GoTo showed Google how to place ads for a fee. Sergey Brin famously ran out of the meeting and demanded a bucket of gasoline so he could set himself on fire to cleanse himself of the filth of advertising.

But Google wasn’t paying salaries, the food had run out, and they had only a few months of rent left. So Google engineers reverse-engineered (copied) GoTo’s idea and placed ads on Google. They figured this would be a temporary solution until they could figure out how to make money.

Months went by and the advertising revenues grew. The money problem was solved. But they ignored GoTo.

GoTo changed its name to Overture and a year later, it was bought by Yahoo for about $1.6b.

Google set its IPO for 2004. Before the IPO, Yahoo sued Google for violation of the patent.

Google had two choices: settle the lawsuit or go to trial. The trial would take time and happen after the IPO. If Google lost the trial (which was very likely: copied the tool, signed NDA), Yahoo would collect damages. Worst yet, Google’s new investors would then sue Google for the amount because it was a liability that had been passed on to the investors. If Yahoo won $3b, the investors would sue for an additional $3b. Google would have to pay twice.

So Google settle just before the IPO. Yahoo got 2.7 million shares of Class A stock. With the IPO, this became worth a billion dollars.

In return, Google got a perpetual licence to use GoTo’s PPC patent.

This is Google’s deepest secret. Google prides itself as a technology company, run by engineers, based on innovation. Over the years, Google has spent close to $30b in innovation and research. Not a single one of those hundreds of projects has produced money. Nothing at Google has ever made money. 98% of Google’s revenues come from advertising, an  idea that was stolen from GoTo and for which Google had to settle a lawsuit. If it wasn’t for GoTo’s advertising, Google would have disappeared in 2002, just another startup.

What about Facebook?

And now we come to Facebook. The same situation: FB made $3.7b in 2011. Most of that was from advertising: yep, same PPC, the same as Google, the same as GoTo, the same patent. Therefore Yahoo is suing.

How much will Yahoo get? FB thinks they are “bigger than Google”, so Yahoo will ask for more. Can FB get out of it? This is business. Yahoo won’t let them out of it. Watch for a quiet announcement that FB and Yahoo have settled the issue.