Yahoo’s Only Weapon Against Facebook: Patent Litigation

Back in 2004, Yahoo (NASDAQ:YHOO) wanted to find a way to stop the momentum of Google (NASDAQ:GOOG). It decided to pursue patent litigation against the company ahead of its IPO, and in the end, Yahoo got about $300 million in Google stock as a settlement.

But while it helped financially, it didn’t solve Yahoo’s real problem — that is, the company didn’t (and still doesn’t) have the strategy to become a winner in the search business. Since the IPO, Google’s stock climbed more than 470%. Yahoo is down about 50% since that time.

Now, we might see a replay of this. According to a New York Times report, it looks like Yahoo might launch a patent suit against Facebook. Yahoo appears to have 10 to 20 patents that cover key intellectual property for things like social networking, personalization and messaging.

By dropping the suit ahead of the Facebook IPO, Yahoo certainly is creating a sense of urgency. Does Facebook really want to explain this during the road show? A snafu like this could hurt demand for the offering. If the patents are a legitimate threat, Facebook might issue some shares as a settlement or strike some type of licensing arrangement.

But again, it really just looks like a desperation move on Yahoo’s part. After all, if Yahoo has great patents, why hasn’t it been able to turn it into great products that users love?

It’s true that litigation is rife in the tech world. After all, intellectual property is vital, so why give away something that has required substantial investment? And in some cases, the litigation can be intense, as shown by late Apple (NASDAQ:AAPL) founder Steve Jobs, who talked about Google’s Android operating system in Walter Isaacson’s best-selling biography:

“I will spend my last dying breath if I need to, and spend every penny of Apple’s $40 billion in the bank, to right this wrong. I’m going to destroy Android, because it’s a stolen product.”

The result was an aggressive campaign of patent litigation that was a key reason Google spent $12.5 billion for Motorola Mobility (NYSE:MMI).

Then again, Jobs built an extremely lucrative business that is worth protecting — at all costs.

As for Yahoo, it has not built a social network that users want. Rather, it allowed Facebook to dominate the market. And now all Yahoo has is some patents. True, it might extract money and become a distraction for Facebook’s IPO, but it will do nothing to make Yahoo relevant again.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.

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