Yahoo Licenses Technology to Google

Internet search giants Google and Yahoo have put their patent disputes behind them. Google will license technology patented by Yahoo subsidiary Overture Services, according to one of two newly announced dispute settlements.

The other settlement covers an outstanding dispute over a stock warrant connected to a services agreement back in 2000. Google issued about 1.2 million shares to Yahoo in June 2003, but per a Google filing to the Securities and Exchange Commission (SEC) on Monday, Yahoo had said it was entitled to more shares.

Patent Resolutions

The arrangement involves Google licensing U.S. Patent No. 6,269,361, entitled "System and method for influencing a position on a search result list generated by a computer network search engine," and related patents, according to a statement released by both companies. For its part, Yahoo will dismiss a patent lawsuit against Google, the statement says. Overture, which Yahoo acquired last year, sued Google in April 2002.

When Overture first sued Google, it said Google was infringing on a patent for its pay-for-performance service, which let companies bid for placement in search results based on relevant keywords. Advertisers would pay Overture to drive traffic to their sites via search engines. In a response then, Google denied the patent-infringement charge.

Also part of the settlement of the warrant dispute and patent suit and in payment for the license, Google issued 2.7 million shares of its Class A stock to Yahoo.

Analysts say the settlement is good news for Google, which should be looking to resolve any lingering legal issues before its proposed initial public offering (IPO). The settlement also bodes well for Yahoo, as it could strengthen the company's hand if it pursues patent infringement claims against other companies, says Nate Elliott, an analyst at Jupiter Research in New York.

Representatives of both companies say they are pleased with the terms of the agreement.

Long-term Impact

The ripple effects of this deal will be felt for the long haul. Overture has granted Google a fully paid, perpetual license to its technology, according to Google's SEC filing. The filing also notes that, in connection with the settlement, Google will incur a non-cash charge in the third quarter, which ends September 30. Using the midpoint of the price range of its proposed initial public offering (IPO), Google estimated the charge at $260 million to $290 million. However, there will also be a related tax benefit in the quarter, estimated at $100 million to $115 million.

Per the filing, Google plans to use the actual IPO price to determine the size of the charge, and it expects the charge to send the company into a net loss for the quarter. Google did not estimate the size of that loss.

With the IPO brewing, the company should be trying to clear up any uncertainties it can, Jupiter's Elliott says. "It would seem to be purely positive for Google once they get over the idea of giving away a lot of shares," he says.

Gartner analyst Allen Weiner takes the same view.

"Any investor who's a serious investor looks to see what kind of legal issues are outstanding. Those are major issues," Weiner says.

The licensing deal comes as the major search providers are moving away from using third-party technology in their services, Weiner says. Because they want to use search as a critical part of a larger set of offerings, such as music services, search providers are developing their own technologies. It would be time-consuming and expensive to integrate another company's technology into these other offerings, notes Weiner.

"The only way you're going to create the ultimate integrated tool is to build it yourself," he says.

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