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The Patent That Justifies Microsoft’s Interest in Yahoo!

I’ve watched coverage of Microsoft’s bid for Yahoo! and the related maneuvering between Google and Yahoo!. The explanations are not very convincing. Microsoft doesn’t need Yahoo’s search technology or their morale-impacted work force. Yahoo’s search market share continues to decline and there’s little of strategic relevance in the rest of their business. What’s the attraction?

Usman Latif has the first interesting explanation I’ve seen, which he explores in depth in a ten page article at Techuser. The issue he uncovers is U.S. patent 6,269,361 on the bid-for-position paid-for search mechanism that funds Google and indeed all of the Web 2.0 phenomena. Patent ‘361 was issued to GoTo.com, later called Overture, in 2001. Yahoo! acquired Overture in 2003 and used the ‘361 patent in litigation with Google shortly thereafter.

Usman is uniquely positioned to recognize the importance of this patent as he has followed paid-for search patents for years and has previously written (in 2005) about the strange settlement between Google and Yahoo, reached on the eve of Google’s IPO. Google negotiated a perpetual, royalty-free license to this patent, but it is not irrevocable! Usman’s surmise is that Google’s license would be revoked if they sue Yahoo over any other intellectual property. That’s a commonly requested clause in such agreements and, on the eve of their IPO, one that Google likely had to submit to.

If you are at all interested in patents or in the current Microsoft-Yahoo-Google machinations, take a look at Usman’s paper. It makes more sense that all the fluff that’s been written in the financial press.

By Brough Turner, Founder & CTO at netBlazr

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I don’t see it!While being Alex Tajirian  –  Jul 8, 2008 7:56 PM

I don’t see it!

While being guilty of not reading the entire patent application, the last line of the Abstract says, “A higher bid by a network information provider will result in a higher rank value.”

However, current advertising auctions are not the same as the GoTo mechanism. Google, for example, multiplies each advertiser’s bid by its “quality score,” which is based on click-through rates and other (unknown) factors, to compute the advertiser’s rank. It then charges each advertiser the smallest amount sufficient to exceed the rank number of the next advertiser. This is radically different from the last line of the patent Abstract.

Yahoo recently moved away from GoTo’s “the higher the bid, the higher the rank,” to an auction mechanism similar to Google’s.

Moreover, Google’s current auction has some undesirable properties, but it is being used because of some attractive bidding procedures, ie, theoretically there are better revenue generating auction mechanisms than Google’s, but are less user friendly.

Alex you can't be logical about patents! Brough Turner  –  Jul 8, 2008 9:04 PM

Alex, you also can’t go by a patent’s abstract.  The issue is whether someone is implementing each of the clauses in any one or more of the claims.

There is enough meat in ‘361 that Google decided to settle, albeit under pressure when they were preparing for their IPO.  Among other things Usman suggests, is that Microsoft may want access to the benefits of the Google-Yahoo settlement (whose terms we are guessing).

Read Usman’s full article for what has already gone on with this patent and what the related business issues could mean for Microsoft.

Brough, You are correct on Alex Tajirian  –  Jul 21, 2008 6:40 PM

Brough, You are correct on the two counts: I cannot make any conclusions without reading the entire patent application (which I wouldn’t have understood anyway) and I should have read Usman’s full article. Here’s my two cents: Facts: 1. Acquisition of Yahoo is more expensive than licensing the technology from Yahoo. 2. Patent 361 owned by Yahoo is relates to PPC search results. Question: Thus, why is Microsoft taking the more expensive option? Microsoft, with the acquisition of Yahoo, gets something of value in addition to the patent that it cannot get without. Plausible sources of additional value are: 1. Other Yahoo assets. 2. Better ability to compete directly with Google 3. Extract some money from Google for past and/or future use of patent. It seems to me that after the merger Microsoft would not be accused of trolling if one were to consider the discussion by Joachim Henkel and Markus Reitzig in “ Patent Sharks,” HBR, June 2008, availalbe here; neither is Yahoo. (I hope to learn another lesson or two about trolling.) Yahoo has to analyze whether Value of [“hush money”, ie, “strategic investment” from Google + stay independent] is greater than Microsoft’s premium. If yes, then it should reject Microsoft’s offer. However, in whose eyes are we measuring staying independent? CEO founders are more likely to attach a higher value to staying independent than the market. A “typical” over-guesstimate is a factor of 3. Success depends on staying independent and Microsoft will not take legal action against Yahoo and/or Google related to the patent agreement. For Google, it would favor no merger if: Cost of [Continued access to patent] is less than the cost of access to patent after a merger. Success depends on Microsoft not taking any legal action against Google and no flags raised by the Justice Department for a cozy Google-Yahoo relationship.

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