By MICHAEL LIEDTKE, Associated Press
SAN FRANCISCO (AP) — With its own fortunes sinking, Yahoo is angling for a windfall from rising Internet star Facebook.
The effort will hinge on the latest in a series of high-tech tussles over intellectual rights. Yahoo and Facebook are sparring over whether Facebook's eight-year-old social network relies on some of the innovations that Yahoo has patented or acquired since it launched its website in 1994.
Yahoo Inc. is demanding that Facebook license the technology or face a lawsuit. If the issue goes to court, Yahoo could depict Facebook founder and CEO Mark Zuckerberg as an entrepreneur who rips off other people's ideas — a portrait already explored in the 2010 movie, "The Social Network."
Yahoo confirmed the looming patent battle in a Tuesday statement issued after The New York Times reported the intellectual rift.
"We must insist that Facebook either enter into a licensing agreement or we will be compelled to move forward unilaterally to protect our rights," Yahoo said.
The ultimatum evidently surprised Facebook Inc., based in Menlo Park, Calif.
"Yahoo contacted us at the same time they called The New York Times and so we haven't had the opportunity to fully evaluate their claims," Facebook said in a statement.
The patent claims could cast a spotlight on Facebook's vulnerabilities as the company tries to complete an initial public offering of stock this spring. At the end of 2011, only 56 U.S. patents had been issued to Facebook — a relatively paltry amount at a time when other companies have been spending billions of dollars to shore up their defenses in what has become an intellectual arms race.
Google Inc., for instance, agreed to buy Motorola Mobility Inc. for $12.5 billion primarily because it wants the cellphone maker's portfolio of 17,000 patents.
Yahoo, which is based in Sunnyvale, Calif., owns more than 1,000 patents. It hasn't publicly identified which ones it believes Facebook is infringing. The dispute boils down to 10 to 20 patents covering online advertising, messaging and other Internet services, including social networking, according to The New York Times, which quoted unnamed people familiar with the issue.
The patent claims could be seen as Yahoo's desperate attempt to piggyback on a more popular rival.
Yahoo's revenue has been steadily falling during the past three years while Facebook's revenue has soared from $272 million to $3.7 billion. The contrast stems from the increasing amount of time people are spending on Facebook's online hangout, a trend that has been luring advertisers away from Yahoo.
Yahoo's troubles have weighed on its stock, which hasn't traded above $20 in nearly 3 ½ years. The shares added 4 cents Tuesday to close at $14.90, leaving Yahoo with a market value of $18.5 billion. Facebook is expected to price its IPO at a level that gives the company a market value ranging from $75 billion to $100 billion.
With an audience of 845 million users, Facebook has become so influential that Yahoo now ties much its own online services to its rival's social network. That strategy is helping Yahoo to attract more Web surfers on desktop computers and mobile devices.
Facebook's upcoming IPO helps explains why Yahoo decided to assert its patent rights now. Facebook may be more likely to work out a licensing agreement rather the risk having the specter of a legal battle dampen investor enthusiasm for its eagerly anticipated stock market debut.
"As a shareholder, I am happy they are going after Facebook. It's a perfectly legitimate thing for them to do," said Eric Jackson, a managing member of the hedge fund Ironfire Capital. He hopes Yahoo can extract several billion dollars from a Facebook licensing agreement.
Yahoo made hundreds of millions of dollars from a patent settlement that it reached with Google just before that Internet search leader went public in 2004.
Under that agreement, Yahoo received 2.7 million shares that were valued at $230 million when the IPO was priced. But Yahoo didn't sell all its Google holdings at the time of the IPO. The company eventually booked gains of nearly $1.3 billion from the stock it received in the Google patent settlement and other shares it got as part of an old Internet search partnership between the two companies.
Given that Google relied on the Yahoo patents to sell Internet search advertising, Jackson believes Yahoo should have had an even bigger windfall. Google's ad revenue last year exceeded $36 billion.