Why Yahoo! Should Seek At Least $3 Billion From Facebook For Patent Violations

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Tonight, the New York Times broke news that Yahoo! (YHOO) was finally playing offense against Facebook.

The company met today with Facebook:

The two companies spoke on Monday to discuss the issue, with Yahoo contending that Facebook is infringing on 10 to 20 patents, according to these people, who were not authorized to discuss the issue publicly. Yahoo is asking Facebook to pay licensing fees or risk facing a lawsuit.

This is an issue I’ve written about in Forbes in November, December, and I also wrote about the issue 3 weeks ago here.

How much should Facebook have to pay Yahoo!?

How much do Facebook and its backers want to go public for a $100 billion valuation?

If Nortel’s patent stash is worth $4.5 billion to own and Motorola’s is worth $12.5 billion, then I would argue that Facebook should pay at least a 3% tax now to Yahoo! shareholders in order to successfully get liquid now.

Yahoo!’s Scott Thompson, Tim Morse, and its General Counsel Mike Callahan are absolutely right to go after Facebook now before it IPOs.  Yahoo! botched the mother-of-all patent infringements when they gave Google (GOOG) a perpetual license to the GoTo.com patent in 2004 3 weeks before Google’s IPO.  Yahoo! got a ridiculously small amount of cash and some preferred stock in Google which Yahoo! promptly sold post-IPO for less than $100 a share.

It’s not often in life you get second chances, but Facebook has given Yahoo! a chance to do it right.

And for those like Nicholas Carlson at Business Insider who calls Yahoo!’s actions “galling… patent trolling… a shakedown…. [and] an act of desperation”, I say that’s complete garbage.

Nic finishes his post by saying:

Who knew Thompson would make us miss Jerry Yang. For all his faults, he’d never do something like this.

As Nic’s boss, Henry Blodget, would say: “Oh please.”  This is exactly the point, Jerry probably wouldn’t have done this.  And find me one Yahoo! shareholder today who is upset about this action.

Silicon Valley has had a very clubby and liberal attitude towards patents.  Make love, not war.  Grow the pie.  Innovate.  Don’t litigate. Don’t be a patent troll.  Lawyers are evil.  Anyone who sue for patent infringement must be from the east coast or Wall Street.  Well, that’s just not the world we live in anymore.  So, you can deal with it or not.

Google used to be all peace and love and aren’t Microsoft (MSFT) and Apple (AAPL) bad to be hurting our great little innovation in our garage/Googleplex over here… until they bought Motorola Mobility (MMI) for $12.5 billion to fight fire with fire.

Maybe Nic Carlson doesn’t think that President Obama should have a Super PAC because it’s evil and not fair.  Maybe he thinks Obama should take a principled stand against it and not raise money.  But Obama would lose if he followed that advice.  Right now, these are the rules of the game, and Obama will play by them.

Yahoo! knows that it will be playing by the rules of the US Patent Office game as well.  And they know that their 1,100 patents (boiled down to 10 – 20 key ones) will trump Facebook’s 100.

The other angle here to pay close attention to is whether some other larger party might rather own Yahoo! before reaching a settlement with Facebook rather than after.  For example, Apple might rather own Yahoo!’s patents and not accept any settlement or licensing arrangement now.  Instead, Apple might want to wait until the day when Facebook enters the mobile OS space or teams up with Microsoft to buy Nokia (NOK) in order to avoid being pushed behind iOS or Android to be just another app.  Then, I would assume the price to Facebook of a settlement would be much higher than $3 billion.