Many were still enjoying a long summer weekend last Friday thanks to the 4th of July coming smack in the middle of the week. Yahoo! (NASDAQ:YHOO) and Facebook (NASDAQ:FB), on the other hand, were closing a deal to form a strategic alliance that would end their patent battle. Indeed, Yahoo and Facebook announced that they entered into definitive agreements that launch a new advertising partnership, extend and expand distribution arrangements, and settle all pending patent claims between the companies.
Under the agreements, which include a patent portfolio cross-license, the parties will work together to bring consumers and advertisers premium media experiences promoted and distributed across both Yahoo! and Facebook. Yahoo! and Facebook will also work together to bring Yahoo!’s large media event coverage to Facebook users by collaborating on social integrations on the Yahoo! site.
While I don’t know the specifics of the deal reached or the terms of the patent cross-licenses, I can still say that this represents a brilliant deal for both companies. It also likely signals that the Internet space is starting to leave its adolescence behind and is entering the beginnings of a mature marketplace.
“We are excited to develop a deeper partnership with Facebook, and I’m grateful to Sheryl and her team for working hard together with our team to develop this dynamic agreement. We are looking forward to building on the success we have already seen to provide innovative new products and experiences for both consumers and sponsors,” said Ross Levinsohn, interim CEO of Yahoo!. “Combining the premium content and reach of Yahoo! as the world’s leading digital media company with Facebook provides branded advertisers with unmatched opportunity.”
“I’m pleased that we were able to resolve this in a positive manner and look forward to partnering closely with Ross and the leadership at Yahoo!,” said Sheryl Sandberg, Chief Operating Officer at Facebook. “Yahoo!’s new leaders are driven by a renewed focus on innovation and providing great products to users. Together, we can provide users with engaging social experiences while creating value for marketers.”
This is an interesting development, and one that seems to make sense from both perspectives. When giant corporations are suing each other it is because they are in immature markets, such as we see with the enormous patent litigation surrounding various smart phones, tablet devices and the operating systems that power them. See Smartphone Patent Wars. Lawsuits are the mark of an immature market because in the end no one really ever wins, that is except for the lawyers. The patent litigators make out handsomely, and there is absolutely nothing wrong with that. My patent attorney brethren thank you immensely I’m sure, and I am hardly going to take issue with capitalism at work. If you want to sue someone and you have the funds to hire an attorney then have at it!
It is hardly a little secret that the patent litigators are the ones that win at the end of the day, but try and convince a Fortune 500 company hell bent on dominating the world in a new or emerging technology sector that they will make more money at the end of the day if they cooperate. Yes, monopoly profits are higher than oligopoly profits, but they are still higher than in a truly competitive marketplace. So is fighting over the difference between monopoly profits and oligopoly profits worth the cost of fighting a patent litigation? These patent litigations easily cost many tens of millions of dollars in attorneys fees alone for each side. In the case where Polaroid and Kodak faced off in the most epic patent battle ever there was nearly $500 million collectively paid to attorneys.
Don’t get me started on the lost opportunity costs either. How many companies in the throws of heated patent litigation are putting their feet to the pedal and moving forward aggressively with innovating? How many continue to explore product lines that may ultimately be further infringements? Nothing stops companies in their tracks faster than a patent litigation, which invariably turns into a counter-suit for patent infringement and is fought on a variety of different fronts — at one or more Federal District Courts, at the International Trade Commission and at the United States Patent and Trademark Office for reexamination purposes. Each will get appealed to the Federal Circuit, likely not at the same time. Then there can be enforcement efforts overseas too! Yes, the only thing that rivals a patent litigation in terms of getting a company to stop in their tracks is an anti-trust investigation launched by the Department of Justice in coordination with the Federal Trade Commission.
So why do big companies fight? They fight frequently when they think they can dominate the world and don’t want to share. They must decide, consciously or unconsciously, that oligopoly pricing isn’t enough, which strikes me as odd. In any event, the other time they fight is to create leverage for a broader business deal. Given the speed with which the Yahoo-Facebook patent battle settled amicably with a strategic alliance it seems that the lawsuit here was all about creating leverage. It was late winter 2012 that this case began, and we are not even yet to the Major League Baseball All-Star game. It had to be about leverage.
The fact that this case was about leverage further indicates a mature market. The parties are not fighting the take no prisoners patent war that is engulfing the “smart” industries, although the take no prisoners method to fight patent battles is hardly smart at all really. Nevertheless, Yahoo and Facebook realize that they are better off working together than fighting in court, making attorneys rich and running the risk of stagnating and allowing competitors to seize the moment.
Instead, Yahoo and Facebook will continue to build on their original multi-year partnership moving forward. As a part of that initial partnership Yahoo allows Facebook users to discover and connect news and information on Yahoo! sites and share them with their Facebook friends, Yahoo! has integrated the feature called “Social Bar” on more than 100 of its properties globally, and more than 90 million users have implemented it. As a result, Yahoo! has the largest active user base among all news sites that have integrated with Facebook’s Open Graph platform, making Social Bar the world’s leading social news application.
Moving forward, Yahoo! and Facebook will work more closely and collaborate together on multiple events annually over the next several years to continue to enhance user experiences for consumers. This will also create more advertising opportunities, so it sounds like a win-win all around. Now if Facebook would just ditch the new Timeline thing we could all go back to our normal lives!