Analysts fear Yahoo’s Facebook betrayal points to Valley-wide kiss of death

Josh Peterson Tech Editor
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Analysts are viewing Yahoo’s lawsuit against Facebook with ire and confusion, fearing it may be a sign of Yahoo’s new leadership fighting to revitalize a company seemingly on its last legs. Some are fearful the company will lash out against other Silicon Valley companies with similar claims in what appear to be its dying moments.

In a suit filed Monday, Yahoo, which benefited substantially from its former alliance with Facebook, alleged that the younger company infringed on 10 different patents. The contested patents cover technology related to advertising, messaging and social networking.

Yahoo alleges it invented Facebook’s “entire social network model,” denouncing Facebook as a company that enjoyed a “free ride” on Yahoo’s technology. Yahoo is after licensing fees generated by Facebook’s revenues.

When Yahoo’s newly minted CEO Scott Thompson took the helm, he told Forbes he would bring Yahoo “back to innovation.” His actions, however, tell a different story.

The suit is not uncharacteristic of Yahoo: it employed a similar tactic against a younger Google prior to its IPO in 2004. In that case, Yahoo won 2.7 million shares of Google stock in a patent settlement — which it promptly sold for cash.

An analyst at the investment blog noted that this “cannot be viewed as a shameful way to make money,” pointing out that other established companies — Microsoft, Apple and Eastman Kodak — have used similar tactics.

While not a complete ambush, Yahoo contacted The New York Times and Facebook simultaneously in late February to warn of a then-possible suit against the social network. More concrete signs were in the air last Wednesday, when it was reported that talks between the two companies had fallen apart.

“We’re disappointed that Yahoo, a longtime business partner of Facebook and a company that has substantially benefited from its association with Facebook, has decided to resort to litigation,” a Facebook spokesperson told The Daily Caller in an emailed statement.

“We will defend ourselves against these puzzling actions,” said Facebook.

Yahoo’s recent resurgence in traffic and news readership is attributable to its use of Facebook’s Open Graph technology. Mike Kerns, Yahoo’s Vice President of Social, Games & Personalization, told tech blogger Robert Scoble in December about the benefits his company has experienced from its partnership with Facebook.

That interview, however, was prior to Thompson’s arrival as Yahoo’s new CEO in January.

The tech community unleashed a torrent of venom on Yahoo and Thompson in recent weeks, via social media and blogs, as news of the now-active suit spread. The company has been criticized for its lack of innovation and “focus,” but Yahoo’s recent aggression only served to reduce the company to a “patent troll” in the eyes of Silicon Valley insiders.

Josh Constine of TechCrunch said Yahoo had stabbed Facebook “in the back.” Nicholas Carlson called the move “galling,” and featured Thompson’s photo upside down to demonstrate his fury.

Sarah Lacy, editor-in-chief at the tech blog PandoDaily, called for a Silicon Valley backlash against Yahoo, lest the whole Valley suffer.

“Sure the odds are higher that Facebook might settle with the IPO hanging in the balance,” wrote Lacy. “But only if bankers start to tell the company that it’ll dramatically affect demand. If this were Yelp or Pandora, it might. But it is hard for me to imagine that the most anticipated IPO of this whole generation of companies will hinge on a patent troll.”

“And if it does,” she warned, “all of Silicon Valley is in trouble, not just Facebook. In fact, weaker Valley companies are even more vulnerable to the whims of a failing Yahoo, lashing out as it dies, trying to take others with it.”

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