Facebook's Yahoo! Patent Problem

The second area where Facebook is potentially vulnerable from Yahoo! is search. Back in 2004, Yahoo! pushed Google to a pre-IPO settlement of cash and preferred stock. The deal had to do with the Overture patent relating to the GoTo.com patent 6,269,361. This was around the whole paid-search business model that AdWords/AdSense copied from GoTo.com.

Most people see Yahoo! as making a colossal blunder in agreeing to the deal. Even today, 96% of Google's revenues come from advertising related to AdSense and AdWords. Yahoo! should have played hardball but didn't.

But is Facebook in direct violation of the GoTo.com patent? Isn't it a social networking site and not a paid-search site? Well, Facebook is certainly making the bulk of its $4 billion in revenues from ads, and its display ads make money based on IP against which Yahoo! has a good claim. What's more, it's quite likely that Facebook could seek to expand into search in the coming quarters and years.

When you're doing 5% of the revenues of Google but are hoping to be valued at 60% of its valuation, it's logical to believe you might feel pressured by Wall Street to increase your revenue in the future. Going into search would be an obvious extension, especially with Google already expanding its search business into social. Whenever Facebook chooses to do that, Yahoo! can slam them.

Given all this, it makes absolute sense that Yahoo! would seek to strike a deal with Facebook now -- pre-IPO -- and for Facebook to agree.

We will see what happens. Increasingly, it seems like Dan Loeb's influence is growing on Yahoo!'s board. That's good news if Yahoo!'s investors want to see the company extract some value from Facebook aggressively. This will require Yahoo! getting very offensive, instead of trying to be everyone's buddy in the Valley.

In fact, if Yahoo! wanted to really play hardball, it would cancel the Microsoft(MSFT) search deal at the same time it goes after Facebook.

Microsoft gets free access to Yahoo!'s search IP as part of its Bing outsourcing deal. However, that goes away if Yahoo cancels the agreement (after a one-year tail period).

Microsoft owns 1.6% of Facebook, too. So, it would be forced to come back to the table with Yahoo! and try to work out a better deal for Yahoo! longs in such a scenario.

Don't expect Facebook to hit a $100 billion valuation without Yahoo! paying it a visit in the coming weeks.

At the time of publication, Jackson was long YHOO.

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