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Google-Yahoo Terms Are Clearly Relevant

By Robert MacMillan
washingtonpost.com Staff Writer
Tuesday, August 10, 2004; 9:53 AM

Google Inc. has one fewer page of negative search results to its credit today after it settled a patent infringement lawsuit brought by rival search firm Yahoo Inc. Victory, however, comes at a price, which in this case will include charges of $260 million to $290 million and a first-quarter loss.

Nate Elliott, an associate analyst with Jupiter Research, told the Los Angeles Times that the announcement, made yesterday, is "absolutely a monkey off Google's back. Any time the basis for your business model is patented by someone else, it's worrisome." The Times offered a quick description of the million-dollar problem: "The Yahoo lawsuit threatened Google's primary source of income: targeted ads delivered next to search-engine results. Yahoo took up the case last year after it bought Pasadena-based Overture Services Inc., which had filed the suit accusing Google of misappropriating the patented system advertisers use to bid on keywords." The Times noted that Google derives almost 98 percent of its revenue from these ads, taking advantage of a market that Jupiter Research said would grow to $5.5 billion in 2009 from $1.9 billion this year.
Los Angeles Times: Google Settles Yahoo Patent Suit in Anticipation of IPO (Registration required)

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The San Jose Mercury News provided a summary of the settlement and explained how the companies will benefit: "Under the terms of the settlement, Google will issue 2.7 million shares of stock to Yahoo. The deal also resolves another dispute with Yahoo over stock issued last year under a 2000 agreement between the two companies. All told, the settlement is worth about $328 million to Yahoo, assuming the Sunnyvale company sells all its shares at $121.50, the midpoint in the per-share range that Google has suggested for its initial public offering, or IPO. The pact offers advantages to both companies. It bolsters Yahoo's financial bottom line at a time when it is aggressively trying to dislodge Google as the Internet search leader. And Google, by taking a one-time charge on its books, dismisses what has become a time-consuming and costly legal battle."

An important addition on Yahoo's plans for the shares came from The Washington Post: "Yahoo already owned about 5.5 million shares of Google as a result of an early investment in the search engine giant. In its filing with the SEC, Google disclosed that Yahoo now intends to sell an additional 1.1 million shares in the company's upcoming IPO, which would increase the total size of Google's roughly $3 billion public offering from 24.6 million shares to 25.7 million shares."

Mitchell S. Rosenfeld, a lawyer with the Capstone Law Group in San Mateo, Calif., told the New York Times that "outcomes of patent cases, especially involving software, are notoriously unpredictable. Since the case involves the method Google uses to sell advertising, which represents 98 percent of its revenue, Mr. Rosenfeld said, the very worst outcome might potentially threaten Google's core business. 'The odds for that death star scenario are pretty small, but they are still significant enough to mean something in the eyes of investors,' he said." David Ashby, a patent attorney with the IP Strategy Group in Cupertino, told the Merc that "it certainly gives Google the freedom of operation, which is big if you're about to go public. This lets them sleep at night."

Danny Sullivan, editor of the online newsletter Search Engine Watch, said he thought Yahoo might have been able to draw more blood from Google if it had kept the lawsuit alive. "It's not a deal that takes cash out of Google's pocket," the Merc quoted him as saying. "This was a way for Yahoo to hurt its competition, and they're hardly putting a dent in them."
San Jose Mercury News: Google settles with Yahoo (Registration required)
The New York Times: Google and Yahoo Settle Dispute Over Search Patent (Registration required)

Reuters found an analyst who was more concerned by whether the market could handle the increase in shares. "Google receives nearly all its revenue from sales of advertising related to its searches, but experts said the patent in question was no longer a core part of the technology behind Google's search engine. 'It's not the secret sauce,' said Martin Pyykkonen, analyst at Janco Partners. 'You also have to believe that they [Google] believe that the market can absorb the increase in the shares,' Pyykkonen said, 'The issue is not absorbing the shares, but the obvious question is at what price?'"
Reuters via Yahoo News: Google to Pay Yahoo to Settle Patent Dispute The Washington Post succeeded where others failed in picking up a quote from Google, though calling the statement anodyne would have been an insult to anodyne people: "'We are very pleased to have resolved these issues and with the terms of the agreement,' said Google spokesman Steve Langdon." Yahoo spokeswoman Nicki Dugan provided the bookend: "We are pleased with the terms of the settlement agreement and pleased to have the resolution behind us."

The Post also provided commentary from someone who sees this settlement as a prelude to resolving a case of his own: "Yesterday, David Rammelt, an attorney representing American Blinds & Wallpaper -- a company that has filed an unrelated trademark infringement lawsuit against Google -- said the rich settlement was a sign that Google recognized the damage could be immense if Yahoo had prevailed. 'I have not seen too many $250 million patent settlements this early in litigation that didn't have some merit,' Rammelt said. 'You can't look at this and decide it is a nuisance value settlement. It is, rather, a substantial acknowledgment by Google that it was violating the patent laws.'"
The Washington Post: Google Ends Its Dispute With Yahoo (Registration required)

The big remaining question, of course, is "when will Google go public?" It was supposed to be sometime this week, according to USA Today, which cited documents the company filed with the Securities and Exchange Commission that suggest it instead will come later this month.
USA Today: Google to give Yahoo stock to settle legal dispute

I Can't See Clearly Now

The Wall Street Journal yielded up a bigger-picture look at how Google's idiosyncratic public offering plans are "giving some investors fits."

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