Google! Licenses! Yahoo's! Secret! Sauce!
Caves in, pays up for Overture patents
In a move that recalls IBM's decision to mortgage its future, via an MS-DOS license, to Microsoft, Google has made peace with arch-rival Yahoo! The two giants have settled a contentious patent dispute with Google agreeing to license technology based on several Yahoo! patents that form the basis of their mutual, astronomical recent growth: contextual advertising. Only this is an IBM in reverse.
Overture Inc. pioneered the field of contextual advertising that it still leads, and the company was acquired by Yahoo! last year. Google's belated entry into the same business last spring set the two on a collision course.
Google will not only take a charge of between $260m and $290m this quarter, but will grant its arch rival 2.7m shares of Class A GOOG voting stock. Class A shares are rarer than hen's teeth: the soiled masses who are being offered a slice of Google in the IPO must settle for correspondingly soiled (and useless) non-voting Class B stock. Meanwhile, Yahoo!, already a significant shareholder in Google, gets even more leverage over its rival. (Yahoo! now owns 7.7 million shares in Google but plans to sell 1.6m shares in the IPO).
It's hard to underestimate the significance of the deal. Although Google is famed as a search engine, and would be comfortably profitable if that's all it did, it has only been given a billion-plus dollar valuation because of its position as an advertising brokerage. That's a path the company stumbled into only after some prodding from nominated grown-up Eric Schmidt, Fortune reported. Overture cost Yahoo! $1.6bn last year, but it now looks like money well spent. The financial and political leverage it has bought sees the two web giants walking into the future with Yahoo! in the boss' seat.
But does this seal their relationship permanently in place, with Google now destined to play the subordinate role to its Class A shareholder, and major investor? Perhaps history has a clue.
In the 1980s, IBM tried several times to break the stranglehold it felt Microsoft had over the IBM PC business. But in essence, the die was cast once IBM's only original hardware contribution to the PC project, the BIOS, had been reverse engineered, which meant anyone could make a PC clone. IBM had already allowed some third-party, Microsoft, to license the OS to all and sundry, and so it was Bill Gates who was left holding this very lucrative baby.
A moral for Google? Perhaps it's time to get those PhDs productively employed. Google often boasts about the number of PhD paid to perform walk-on roles in "the Googleplex", and the famed corporate culture allows these clever people to devote 20 per cent of their work time to research projects of their own choosing. However, only a few of them do anything really productive, the rest bunking off to enjoy recreational drugs or read stories to their children, as any normal person would. Others have remained at their desks, constructing ships in bottles, designs for tethered space stations, and emergent ant farms. Which isn't a lot of use to Google's bottom line. With 70 per cent of Google's income now based on technology licensed from its biggest rival, the company does need a long term story, one with "upside" as they say, to tell investors. Does it not? As a public company, the days of pretending to be a search engine are over.®