Three Thousand Purple Patents
Yahoo says its new subsidiary, built to auction off its IP, isn’t a fire sale. But what if a troll gets all that valuable property?
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Last month, I addressed the possibility that Yahoo might unleash a fury of patent trolling. I cited the history of Starboard Value LP, the hedge fund that forced Yahoo’s CEO to place four of its people on the company board: Starboard is known as a giddy advocate for divesting or exploiting intellectual property for quick returns. And then I outlined how Yahoo, without a lot of fanfare, had already been involved in a significant patent sell-off over the past few years, a veritable IP yard-sale with rummagers such as Google, Snapchat, and some mysterious British Virgin Island entities walking away with treasures.
This week brought another development. Yahoo acknowledged that in April it transferred over 3000 of its current and pending patents to a wholly owned subsidiary called Excalibur — with the intent to auction off the whole shebang. (“Excalibur,” for those not schooled in Medieval legendry, was the unbreakable sword presented to King Arthur by the Lady in the Lake, who apparently bears no relation to CEO Marissa Mayer: Yahoo tells me the name has no significance.) This was the realization of a possibility I speculated about in my column: that Yahoo would not include its IP portfolio in the grand sale of its core business, figuring that it could reap much more from a separate transaction. That discrete sale, of course, leaves open the possibility that the patents could fall into the hands of trolls who might pound companies big and small — and maybe even users — with aggressive litigation.
It’s unclear how much the new Yahoo directors had to do with this — the Starboard contingent didn’t join the board until a few days after the new company was formed. And, as I noted, Yahoo had already been selling some of its patents. But at the least one assumes that Starboard CEO Jeffrey Smith (who apparently views patents as ATMs) is cheering this development.
The Excalibur move, says Yahoo, is a result of concerns that the bidders for the Yahoo franchise might not fairly value the patents in their calculations. The company is retaining only a minority of its patents (1100 current and pending, compared to the 3000-plus it’s putting on the block). Those retained will “power and grow our core business,” says the company.
But if there ever is to be a future for Yahoo, it is unimaginable that it would not build on the areas of the patents in the Excalibur portfolio: “search, advertising & cloud tech.” Non-core? Sounds more like seed corn. The portfolio includes the seminal patents from the purchase of Overture, the company that invented click-to-pay search ads, before Google adopted that approach.
Even if the patents sold do not figure in Yahoo’s current and future plans, the separation and sale is a grim reminder that for this once-proud Internet giant, short-term revenues trump the future. It is essential for a relevant power in the Internet world to have as extensive a patent portfolio as possible, not so much to build new products or sue people, but to protect the company against suits from key competitors. That’s why Google bought Motorola for $12 billion and why Microsoft paid billions for Rockstar. These companies generally don’t make patent claims against each other, because the defendant might snap back and accuse you of using its patents.
When I spoke to Yahoo’s head of intellectual property Kevin Kramer, he was adamant that the Excalibur auction not be deemed a fire sale. While he spoke on background, he later gave a statement that accurately reflects his comments in the conversation:
We’ve seen some media speculation that this is a fire sale. Nothing could be farther from the truth. Yahoo has invested in serious R&D since our founding and this portfolio of non-core patents reflects that history, including foundational innovations in search, advertising, communications, e-commerce, and data center management. We want to responsibly value an asset that we think people should be interested in, and we’re pleased with the interest being shown thus far. Our Board wants to do what’s right to maximize value for our shareholders.
The best outcome, for Yahoo and all of us, would be for a company like Google, Microsoft or Facebook to buy the whole shebang. While it might give one of those already mighty powers even more leverage, those firms are more likely to retain them as assets in the mutually-assured-destruction game played by the titans of tech when they consider suits against each other. Yahoo contends that such a result likely result, since those companies have the resources to make a winning bid, presumably well over a billion dollars.
But also possible is the worst outcome — some or all of the patents falling into the hands of a litigious “Non Practicing Entity (NPE).” That’s a company whose business is not making and marketing actual products, but licensing and litigating. It would be ironic if Yahoo did this, because (aside from one embarrassing case when it sued Facebook with one of the Overture patents) it has a history of resisting patent trolls. (Not so Yahoo’s new board members.) Yahoo concedes that it is not restricting who can bid on Excalibur, specifically saying that it will not rule out out non-practicing entities. (In case you’re interested in a few thousand pre-owned patents, initial bids are due June 17.)
Once patents are in play, there are no guarantees. The company that buys the Excalibur portfolio might decide to sell off selected patents to an NPE. Or we might see a replay of the 2011 auction of Nortel patents, which was won by a $4.5 billion bid from a consortium of companies including Apple, Microsoft, Blackberry and Sony, dubbed “Rockstar.” After divvying up some choice IP to its partners, Rockstar acted like an NPE, and began a series of lawsuits against technology companies; critics called it “a straight up patent troll.”
As one of the original online giants of the 1990s, Yahoo has been an internet, search and digital media pioneer. Over the years, it has patented innovations that arguably cover a broad range of activities that all of us engage in daily. Looking at this development most pessimistically, in the wrong hands this portfolio could be the IP equivalent of a Russian satellite nation selling off its nuclear stockpile.
When I wrote my column about Yahoo’s IP last month, some people complained about the allegedly clickbait-y headline: “Will Yahoo Become a Patent Troll?” I was simply outlining what I saw as a potential outcome of Yahoo’s patent sale, especially in light of the interlopers who forced themselves on the company’s board. Now that the possibility is on the table, we can only hope that my headline wasn’t prophetic.
