Facebook: the Yahoo! patents case

I had delayed writing about this as I had a busy run-up to Easter and just about everyone of note in the Bay Area seems to have weighed in on the Yahoo! versus Facebook legal case over patents. Fred Wilson (aka A VC) channeled the concern that the start-up community in general over wide-ranging patents being a tax on innovation.

There is a certain amount of prejudice inbuilt against incumbents going on; Silicon Valley doesn’t make big money from existing large businesses but the new, new thing – for example:

  • IBM vs. Apple, VisiCalc, Oracle and countless Boston corridor enterprise technology brands before them
  • Beckman Instruments vs.the traitorous eight who went on to found just about every other semiconductor company from the late 1950s through to the early 1970s: Fairchild Semiconductor, Intel, Intersil, AMD, National Semiconductor, LSI Logic and venture capital firm Kleiner Perkins
  • Microsoft vs. Apple, Oracle, Sun Microsystems, the open source community
  • Google vs. Facebook and just about anybody else looking to make money from online advertising

I don’t necessarily hold this against them, it is the classic tale of David and Goliath that resonates at a deep level in the human psyche. It probably helped us move beyond being slightly smarter than the average ape and turn our use of tools into a decisive advantage with humans becoming the apex predator throughout the world.

What a lot of these arguments are failing to do is look at the underlying form:

  • Yes, the patent system is broken
  • Yes, Yahoo! has multiple business issues which would merit a series of posts in it’s own right
  • Yes, Yahoo! is unlikely to survive at least in its present form. Though for reasons that I have gone into previously  I don’t think that Microsoft is a suitable suitor (just look at what has happened to its continued inability to match Yahoo!’s previous returns on search with Microsoft AdCenter) and more controversially I didn’t think that it was serious about its takeover bid first time around
  • Yes, Yahoo! is likely to be outmaneuvered by Facebook and be on a hiding to nothing

But for me, the story isn’t about Yahoo! or the inequitable nature of patent laws, but about Facebook and its business practices in relation to data.

In the 1990s file formats: .doc, .xls, .ppt and others were used by Microsoft to leverage a competitive advantage. Competitor applications couldn’t open them; so your information was locked into using Microsoft Office software. This was one of the reasons why the web was so transformational; HTML opened up publishing of documents that had been previously locked into Microsoft Office – electronic versions of scientific papers, price lists etc.

Data portability is the document format of web 2.0 (or social web). During my time at Yahoo! we introduced the requirement to sign into Flickr using a Yahoo! ID, Stewart Butterfield and the team at Flickr worked hard to ensure that existing Flickr customers who didn’t want to have a Yahoo! ID could move their pictures off the service.

The idea was that the customer’s data was their property and allowing them to freely move was as American as apple pie, capitalism and the free market. Allowing customer’s data to be portable fitted in with the web being free as in speech ethic that had predominated up until then. Portable customer data kept you honest and encouraged you to innovate as losing a customer was only one export click away.

In the case of Facebook; the data that really matters is your address book. Whilst Facebook eventually allowed consumers to download their profile information (after it had gained hegemony in the US social network sector), it holds on fast to your address book. Om Malk over at GigaOM wrote a really good post on how Facebook leeched off Yahoo! user’s address book to build its business, but didn’t allow Yahoo! users to transfer data back the other way.

This had a detrimental effect Yahoo!’s already weakened business. It wasn’t only Yahoo!, Facebook did the same on Plaxo and has been in conflict with Google over the same issue. In the Yahoo! patent case; Yahoo! is in the position of shooter and patsy – but like the dreams of conspiracy theorists looking for a dark hand moving the pieces around the board – Facebook is responsible.

So consumers and some companies got screwed on their address book; but what the great and good of the start-up community who criticised Yahoo! forget is where Yahoo!, Plaxo and Google have gone before their start-ups could be tomorrow. The problem is the over-reliance on Facebook Connect as a federated ID and as a marketing tool using consumer news feeds in their word-of-mouth marketing campaign strategies.

Federated IDs are not a new concept, Microsoft tried to have their Passport technology adopted in a similar way some ten years ago and it was stymied because of early adopter and technology sector mistrust.

Like Facebook, the businesses adopting Facebook Connect usually rely on some sort of advertising-related business model, either for their revenue, or for garnering customers; yet with Facebook Connect – Facebook holds all the cards on targeting information that means:

  • Your advertising platform will always be worse than Facebook’s because they have a better customer view – as we’ve seen in search this is likely to turn into a zero-sum game
  • For more e-commerce-based businesses, Facebook data could be used by rivals to directly target your customers – because Facebook already has your customer list. By using Facebook Connect you already gave it to them and they could even infer a good estimate of customer engagement were by how often and how long they logged in

It has the potential to be digital equivalent of the way Standard Oil used its dominant position as a buyer of railroad transportation to screw over rivals. By supporting Facebook in the Yahoo! patents case; I believe that leading players within the start-up community inadvertently darkened their own futures.

It is hard to imagine now, but in the mid-1990s Silicon Valley was genuinely afraid of Microsoft:

Another big factor was the fear of Microsoft. If anyone at Yahoo considered the idea that they should be a technology company, the next thought would have been that Microsoft would crush them.

It’s hard for anyone much younger than me to understand the fear Microsoft still inspired in 1995. Imagine a company with several times the power Google has now, but way meaner. It was perfectly reasonable to be afraid of them. Yahoo watched them crush the first hot Internet company, Netscape. It was reasonable to worry that if they tried to be the next Netscape, they’d suffer the same fate. How were they to know that Netscape would turn out to be Microsoft’s last victim?

That was Y Combinator’s Paul Graham on Microsoft back in the day and how fear of it partly sewed the seeds of failure at Yahoo! Great ideas couldn’t get funded if they where considered to fall anywhere near the purview of Microsoft – and Microsoft wanted everything, at that time the company mission statement was:

A computer on every desk and in every home running Microsoft software

Now the vision uses softer language that also takes into account technological change with Steve Ballmer describing it as:

…enabling people and businesses to realize their full potential

Microsoft still isn’t a cuddly business by any means. Let me show you: Some six years ago I spent a weekend in San Francisco on the dime of the agency I worked with at the time. The reason why I had a free weekend was that I was originally going out there to pitch an international brief for an enterprise technology company – and the weekend should have been very busy and productive in preparation fo the pitch early the following week.

The US folks had checked the substantial non-compete list that we had been provided with by Redmond and senior clients had been checked in with and they were ok with it.

Happy days, I was put on a Thursday flight from Heathrow to San Francisco with British Airways. I deplaned, got through immigration and got a taxi into town. I went to the hotel first; dropped by bags off and washed my face and then got a taxi to our San Francisco office down near the ball park.

As I walked in the door, I could see of the office general manager getting off the phone. Apparently my trip was a waste of time; someone at head office had a call with someone at Microsoft who asked us to withdraw at the last minute as the company operated in a space that Microsoft would like to enter in the next five years.

I ended up spending the Martin Luther King day weekend at the Hotel Monaco close to Union Square and spent much of the Saturday exploring the Asian Art Museum, the then Sony Metreon centre and shopping off Haight.

The point I am trying to make is that fear is relative, Microsoft is a changed but still fiercely ambitious and competitive business.

Facebook is much more than Microsoft. If we look at address books as an example; Facebook bought and closed down Malaysian start-up Octazen to close the door on others using their technology to import contact lists in February 2010.

Facebook is keenly competitive in the way that Microsoft has been, but it has learned from Microsoft’s mistakes; it has lawyered and lobbied-up much earlier in its development, so with Facebook there will be no humiliating Judge Jackson trial which gifted the start-up culture of Silicon Valley a second chance.

I believe that in the medium-to-long-term Facebook will have a neutron bomb effect on the Bay Area start-up finance community and at the moment they only have themselves to blame.

Although it may seem counter-intuitive to the start-up community at the moment, fueling Yahoo!’s patent duel with Facebook may make more sense in the long run.

More information
Yahoo! Crosses The Line – A VC
Will Yahoo Torch its Search Deal With Microsoft, Outsource Search to Google? – Search Engine Watch (#SEW)
Is the internet too perfect a market? – renaissance chambara
A quick primer re @blakei @yahoo #delicious – renaissance chambara
Yahoo-Facebook patent fight: more than meets the eye | GigaOM
Google Renews Battle Over Facebook Contacts, Removes Phone Directory Sync On Nexus S – TechCrunch
Why Scoble Got the Boot from Facebook: Plaxo’s New Feature – Mashable
What happened to Yahoo – Paul Graham
Steve Ballmer: Microsoft Venture Capitalist Summit 2008 – Microsoft News Center
Facebook Acquires Contact Importing Startup Octazen – GigaOM