Yahoo v. Facebook: Litigation Threats Trump a Partnership

Yahoo (NASDAQ:YHOO) and Facebook seem to have gotten along rather well in the past, so it came as a shock to some when the Internet portal and search engine announced it was demanding licensing fees from Facebook for the use of its patents. Failure to agree to its terms, Yahoo threatened, would result in a lawsuit.

While most industry analysts were caught off guard by the aggressive move, it appears that Facebook was as well. The social networking giant, which is preparing for its IPO, was apparently blindsided, with a spokesperson claiming that the company learned of the action at the same time Yahoo announced it to the world via a New York Times article. Quoted in the Globe & Mail, the spokesperson said: “Yahoo contacted us at the same time they called the New York Times and so we haven’t had the opportunity to fully evaluate their claims.

Details about which patents are involved and how much Yahoo is seeking haven’t been released, but there are reportedly 10 to 20 patents under dispute, covering privacy controls, messaging, and news feeds.

In the past few years, Yahoo and Facebook have worked together on a number of partnerships. In 2009, the two companies collaborated by adding Facebook Connect integration to Yahoo’s home page. Just last year, a new Yahoo News feature was rolled out that allowed people to see the news stories their friends had read via a two-way feed between the two sites, and by the fall of 2011, analysts were writing about how prominent Facebook was going to become on Yahoo. Yahoo was coming off of tough times, but the growing integration with Facebook had the potential to add social media- flavored relevance and attract more visitors.

Partners don’t always play nice

What happened that could have soured such things so quickly and to this extent? There’s probably no need to look any further than the two companies’ polar opposite fortunes in recent months.

Yahoo lost co-founder Jerry Yang in January (after firing CEO Carol Bartz the previous September), took on a new CEO on Jan. 9, and lost four board members (including its chairman) in February. The company rejected a reported $44 billion takeover bid by Microsoft (NASDAQ:MSFT) in 2008, then effectively put itself up for sale. In short, Yahoo has been struggling for years and it’s only getting worse. Shares in the company were trading at over $100 in 2000, $43.42 in 2006, $29 after the rejection of the Microsoft bid in 2008, and they have been hovering in the $15 range ever since.

In the meantime, Facebook surpassed Yahoo as the world’s second most visited website (Facebook is currently second, Google [NASDAQ:GOOG] is first, and Yahoo has slipped to fourth) and the drop in visitors means less ad revenue.

As Yahoo’s fortunes have declined, Facebook has been glowing in its yearlong lead-up to the IPO , which could value the company at $100 billion.

Lawsuits over patents have become increasingly common in the tech world and maybe someone at Yahoo decided that one way to slow things down for Facebook and potentially replace declining ad revenues at the same time would be to play the patent card. By springing the action on Facebook while it’s focused on the IPO, there may be reluctance on that company’s part to enter into a drawn out court battle that could hurt its offering, making it more likely to agree quickly to a deal (and one that is favorable to Yahoo). Yahoo has little to lose at this point, although it’s doubtful that any licensing deal is going to help it to regain its former glory.

The action has certainly poisoned any relationship that may have remained with Facebook, but there’s always deeper Twitter integration to pursue.

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