Yahoo's acquisition of Overture Services could give it some potent legal ammunition in its battle with Google in the lucrative Web search market.
With the Web portal's proposed $1.63 billion buyout of commercial search specialist Overture Services on Monday, Yahoo would acquire 60-plus patents related to technology and processes for indexing the Web, as well as for pay-per-click and bidding systems to grant sites higher placement in search results.
In his brief comments to investors Monday, Semel highlighted the role intellectual property (IP) played in his decision to buy Overture instead of building a rival system to replace its two-year partner.
"We'll add...to our technology assets Overture's impressive intellectual property portfolio of both algorithmic and sponsored search patents," he said. "These are some of the key reasons we have opted to acquire Overture. We believe that the advertising industry is in its earliest days of a great future."
The search market is expected to be reap $4 billion in revenue by 2005, according to researchers. As the industry matures, the competition for a piece of that large pie could lead companies to bulk up their IP legal teams, much like in other industries such as online advertising sales during the dot-com bust.
"Yahoo has been giving this issue more weight than others," U.S. Bancorp Piper Jaffray analyst Safa Rashtchy said.
Overture has already filed two lawsuits against rivals Google and FindWhat, and plans to "vigorously protect its patents," the Pasadena, Calif.-based company said Wednesday.
From ridicule to dominance
Overture, formerly called GoTo.com, claims the rights to a system and method for Web sites to influence their rankings within search results. The company auctions keywords, giving the top bidders the highest placement in searches that use those terms. Overture's system also uses a pay-for-performance model, under which advertisers pay the bid price only when someone actually clicks on a displayed link.
The business was ridiculed at first, but proved its worth in recent years, eventually attracting America Online, Yahoo and Microsoft's MSN as customers. AOL recently dropped Overture in favor of rival Google.
Behind the scenes, Overture has long sought to protect its growing market dominance, having hired a staff of IP experts and aggressively wielded its portfolio of pay-for-performance search patents against rivals.
Overture sued FindWhat.com in February 2002 after FindWhat filed a summary judgment request in a New York federal court in an attempt to fend off any potential infringement charge from Overture. Two months later Overture filed a second lawsuit, charging Google with patent infringement in its pay-for-performance ad system.
According to the Google lawsuit, Overture's patent covers 67 separate claims, including exclusive rights to a "system for enabling an advertising Web site promoter using a computer network to update information relating to a search listing within a search-result list generated by an Internet search engine."
Overture CEO Ted Meisel on Monday touched on the growing importance of IP to the company. "We?have been No. 1 based on (our IP), have engaged in some licensing of that," he said, adding that it?s "not at this point material, but I think it's just indicative of the value of the IP in that area."
Google declined to comment on the IP issue.
Overture insiders say that when the company bought AltaVista and the Web search assets of Fast Search & Transfer, patents played a big role in the decisions. With respect to AltaVista, Overture owns some of the oldest patents on Web search.
When Altavista was part of Digital Equipment Corp., it secured seven patents related to Web crawling technologies, seven on indexing and two on query processing. It has 16 patents pending related to forward-looking search technologies.
The push for patents
Overture and Yahoo aren't alone--all of the key players in search have been amassing patents lately.
Earlier this year, Google was granted a patent from the U.S. Patent Office for a method of determining the relevance of Web pages in relation to search queries. Google founder Larry Page was part of a group at Stanford that patented PageRank, its formula for calculating the importance of Web pages based on the number of other pages linked to it. Google also has three outstanding patent applications.
Meanwhile, Microsoft holds general search-related patents including methods for searching directory listing information, a system for improving search area selection and a third for "concept" searching using a Boolean or keyword search engine.
Online retailer Amazon.com also has a patent application that could affect search-related advertising. In March, it updated a patent application for a method of auctioning advertisements that appear on a Web page to the highest bidder.
Business method patents, such as Overture's bid-for-placement system, are common but controversial within the computer industry.
A U.S. appeals court significantly expanded the definition of business processes that can be patented in a 1998 decision in State Street Bank v. Signature Financial Group. The ruling opened the floodgates to patent applications from e-commerce companies seeking to protect their services. Amazon.com, Barnesandnoble.com and Expedia are among the major names to become entangled with patent suits, most of which ended in settlements.
Lately the U.S. Patent and Trademark Office has been curtailing its grants of various business methods patents because of criticism that the patented ideas were overbroad and obvious.
Patent cases are notoriously hard to win. If patents are too broad they can become obsolete and if they're too specific it can be hard to prove infringement.
"No matter what, this industry is growing so large that if someone has a valid patent on a fundamental part of search or paid listings it will have a big impact on the industry," said Phillip Thume, chief operating officer of FindWhat.com. "But only when someone tries to enforce them do you find out if they are valuable."
Because of the uncertainty over patent enforceability, companies often seek to secure patents as a defensive measure aimed primarily at preventing rivals from threatening them with infringement suits.
"Having patents on your own technology, business and inventions is invaluable in today's competitive market, even if you're not enforcing your rights directly against others, they become invaluable when you get sued or threatened," said Neil Smith, senior partner at Howard Rice and a specialist in IP litigation. "You can have counter claims for infringement of your own patents, or cross-license with" the plaintiff.
"It gives you something to trade or helps you stay out of trouble when you're dealing with companies that are competitors."
But other legal experts said they are worried that advancements in search technology might be stifled due to patent conflicts.
"If (search companies) turn around and offensively try to shut down competition then you could see significant lags in innovation and dimishing the quality of people's access to information," said Jason Schultz, staff attorney at the Electronic Frontier Foundation.