Will Yahoo Become A Patent Troll?
The company’s intellectual property is worth billions. What does the hedge fund now on Marissa Mayer’s board plan to do with it?
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Last week Yahoo CEO Marissa Mayer’s continuing efforts to salvage the once-dominant Internet power involved a strategic retreat. The hedge fund Starboard Value LP had been attempting to replace the Yahoo board with its own slate of directors. Instead of vigorously opposing the move, she agreed to include Starboard CEO Jeffrey Smith and three of his allies.
Let’s state the obvious: Starboard is not in this game because it wants to restore Yahoo to its glory as one of the fearsome horsemen of tech. Do not look for Jeffery Smith to coo over slides celebrating Mayer’s achievements in mobile revenue, or obsess over the design of a new weather app. This hedge fund is not about putting a dent in the universe, a goal to which techies often aspire, but about putting bulges in its partners’ wallets, a goal to which hedge funds always aspire. The question I’d like to explore is just how it will go about doing this.
Let’s take it as a given that Starboard will push Mayer to hasten the previously announced sell-off of its media assets and services, aka the core business. After that happens, it will presumably figure out how to best turn the company’s shares in the Chinese commerce giant Alibaba and its stake in Yahoo Japan into shareholder value, in a way that legally minimizes any taxes the United States of America might collect on the machinations.
But I’m wondering about Yahoo’s intellectual property. Put more squarely: Will Yahoo become a patent troll?
To Starboard Value, patent holdings are intoxicating and irresistible; the hedge fund is drawn to them like a shark to bloody chum. When it attempted to take over AOL in 2012, it demanded that its CEO Tim Armstrong monetize its patents. Even though the Starboard coup failed, Armstrong still got pressured into selling off AOL’s patent portfolio to Microsoft for over a billion dollars, a sum exceeding what experts predicted.
Starboard’s love of monetizing patents, particularly by selling them off, is based on a fire-sale mentality. Selling off patents, or shifting a workforce from engineers to lawyers is a sign that a company has given up aspirations of greatness.
Starboard is also not above pushing the companies it controls or influences into behavior associated with more toxic patent shenanigans, like classic patent trolling. Case in point is a company once known as Openwave. Before Starboard’s interest the company made messaging software for mobile operators. In 2010, Starboard targeted the company and eventually gained control, installing one of its partners as chairman. It moved the firm to Reno, changed its named to Unwired Planet, and set about making money from its IP. Before Starboard, Openwave was a firm with as many as 2200 employees and was devoted to developing products. In its Unwired Planet incarnation, there were 16 people, devoted to wringing dollars from previous patents and another portfolio it acquired from Ericsson, in exchange for a cut of the booty. It sued Apple, Google and Square. People called it a patent troll, an appellation its executives shrugged off. "You can call us anything you like," Unwired Planet general counsel Noah Mesel told Bloomberg. "We happen to be at the point in our business cycle where what’s left is a patent portfolio."
In 2013, the CEO of a company called Tessera had clearly taken note of this, and was not at all happy that Starboard was demanding that the company replace its board with a slate suggested by Starboard. Oddly, the revenues of Tessera were already centered on intellectual property. It was well known as a “Non Practicing Entity,” a company that makes money from its intellectual property, including taking alleged infringers to court. But its interim CEO Richard S. Hill contended that Tessera came by those revenues honestly, with a workforce of scientists who actually invented stuff. With Starboard banging on the door like Jack Nicholson with a Heeeeere’s Johnny! grin, Hill dreaded the worst — that it would dismiss the scientists, stop innovation, and make Tessera’s sole business selling off intellectual property and suing people on claims of infringement.
So panicked was Hill that he took the unusual step of going public on the issue. He penned an article for Forbes about his fears. The headline was, “Don’t Turn My Company Into a Patent Troll!” This is the way it began:
For perhaps the first time in U.S. corporate history, stockholders of a public company will vote on May 23 on whether to turn a technology innovator into a patent troll. As chairman and interim CEO of that company, Tessera Technologies Inc., and as a man who spent my adult life creating stockholder value by serving customers in the marketplace rather than bushwhacking defendants in court, I pray that our stockholders vote no.
A funny thing happened after that. Starboard won its board seats, and indeed ramped up the patent monetization. But the other shoe — the departure of Rick Hill — never hit the carpet. Even though his prayers were not answered, Hill stuck around, returning to reclaim his earlier role as the chairman of the board, now populated with the invaders from Starboard.
It’s unclear why he changed his mind and embraced the vanquishers. (Hill, Tessera and Starboard did not respond to requests to comment on this story.) One explanation may be that Tessera was not gutted in the way Hill feared. In public documents, the company claims that its workforce still includes around 200 engineers, though the bulk of its revenues are from licensing, including patent litigation.
In any case, Rick Hill, the guy who wrote that article, is one of the new directors in the velvet coup of Yahoo’s board that Starboard pulled off last week. With four reps on the board, Starboard is in position to become a purple patent eater.
But Starboard might be regretting that it didn’t act sooner. Because there’s an interesting twist to the Yahoo IP story. It turns out that Yahoo has already been selling off its patents. In a big way, for a couple of years. While fighting for Yahoo’s life, CEO Mayer has been pumping up its sagging revenues by selling some of its valuable property, including to competitors. When I asked Yahoo for comment on this, its spokesperson pointed me to comments made by CFO Ken Goldman in the earnings call regarding the final quarter of 2015. Goldman explained that Yahoo has “begun to explore divesting non-strategic assets of value. As an example, these efforts include the responsible monetization of non-strategic patents, the sale of valuable real estate, and other non-core and non-strategic assets. In total, we estimate that these efforts could generate significant cash, in excess of $1 billion.”
What are some of those non-strategic patents? A December 2015 report in PatentVue tallied some of last year’s sales.
Ten patents to Snapchat, involving instant messaging and screen sharing.
Nine patents to LinkedIn, involving social media.
Six patents to Visa.
The sell-out, however, precedes 2015. Earlier, Yahoo had sold six patents to Match.com, and five to Pandora. It even picked up $70 million by selling some patents to Alibaba.
The biggest buyer, though, was Google, which bought 55 patents in 2014 alone. These involved search, location, music, social and a variety of geeky stuff involving cache management and other under-the-hood technologies.
Well-known tech companies are not the only beneficiaries of Yahoo’s property. The company has also been selling patents to some firms with names even the most devoted geek would not recognize. These include Energetic Power Investment, buyer of 26 patents in August 2014, and Jollify Management, which received 10 patents. These seem to be companies whose business is intellectual property. According to IAM, a publisher focusing on IP, both are registered to the same address in the British Virgin Islands.
While it might be true that a lot of those patents do not involve the current business of Yahoo, some include search, which CEO Mayer has consistently said is one of the pillars of the company’s planned revival. Others involve activities that Yahoo might be considering if its goal was to restore the company to anything approaching its former glory. For instance, messaging is the dominant paradigm on the Internet now. One would think owning the rights to “sharing and implementing instant messaging environments” would be pretty valuable. But it was one of the patents sold to Snapchat.
Still, when you’re facing eviction from your modest apartment, it makes sense to sell off any furniture you have in storage, even if you had hoped to use those one day when you moved into that house you hoped to buy when your fortunes were balmier.
Meanwhile, Yahoo’s pace of producing patents has slowed dramatically. In 2007, it filed for 299 patents. By 2013 it was down to 66.
But there are plenty of patents left at Yahoo, including ones remaining on search, ads and even fantasy sports. Estimates of the value of the portfolio run as high as $4 billion. Some of the patents — particularly earlier ones, when Yahoo was pioneering Internet commerce and advertising — are probably quite broad, and if they were aggressively litigated could potentially cause some havoc. One wonders if what Starboard has in mind is separating the core business from the intellectual property, and then keeping the IP for continued sales and maybe even a flurry of lawsuits. (It would not be unprecedented, says Stanford law professor Mark Lemley, citing as an example Nokia, which sold its hardware and kept its IP.) There is potential for Yahoo to become the mother of all trolls.
How likely is this? Consider the following description of Yahoo’s new inside power:
Starboard is involved in…coup d’état attempts at …intellectual property-rich firms, and once in charge, its modus operandi is to defund the company’s research and development for a quick gain at the cost of long-term performance — a practice I call cutting down the apple tree to harvest the apples.
The writer quoted is Tessera chairman Richard Hill, the guy who once publicly warned against the IP barbarians at his gate known as Starboard Value. He probably would say something different now. After all, Hill now is a Starboard man — sitting on Yahoo’s board.
