August 9, 2004 11:04 AM PDT
Google, Yahoo bury the legal hatchet
Google said it expects to record a charge of between $260 million and $290 million as a result of the settlement, leading to a net loss for the third quarter, ending Sept. 30. Google said it will realize an income tax benefit in that quarter of between $100 million and $115 million related to this noncash charge.
As part of the deal, Google has agreed to license several patents from Yahoo subsidiary Overture Services, ending a two-year court battle that threatened Google's primary source of revenue: advertising. Overture, a pioneer in commercial search, holds intellectual property rights to pay-per-click and bidding systems that grant Web sites higher placement in search results--both fundamental to Google's ad network.
The two companies also ended a dispute over Yahoo's right to buy shares in Google, which is preparing for an initial public offering. Yahoo held warrants to purchase 3.7 million shares of Google under an agreement struck in 2000. Google issued 1.2 million shares to Yahoo in June 2003 pursuant to a conversion provision in the deal, but Yahoo contended it held rights to more, according to a Google filing with the U.S. Securities and Exchange Commission.
To resolve the two matters, Google agreed to issue 2.7 million shares of Class A common stock to Yahoo, based in Sunnyvale, Calif. In turn, Yahoo dropped its lawsuit against Google and issued a "fully paid, perpetual license" to Overture patents, according to SEC documents that Mountain View, Calif.-based Google filed on Monday.
"We're pleased with the terms of the settlement and glad to have the dispute resolved," said Yahoo spokeswoman Nicki Dugan. Google spokesman Steven Langdon echoed the sentiment: "We are pleased to have resolved these issues and with terms of the settlement."
One-time partners, in recent years Yahoo and Google have been locked in a battle for dominance in the booming Internet search market, which is expected to be worth about $3 billion this year.
In turning a blind eye to Web search during the Internet heyday and by licensing and promoting Google's technology, Yahoo inadvertently helped the company become the No. 1 search provider. Once it became aware of the revenue potential of search-related advertising, Yahoo went on the offensive and eventually ended its partnership with Google, in which it still has an investment.
The competition shaped up in July 2003 when Yahoo spent $1.63 billion to buy Google's chief advertising rival Overture with its 60-plus patents related to technology and processes for indexing the Web.
Overture, formerly called GoTo.com, claims the rights to a system and method for Web sites to influence their rankings within search results. The company auctions keywords, giving the top bidders the highest placement in searches that use those terms. Overture's system also uses a pay-for-performance model, under which advertisers pay the bid price only when someone actually clicks on a displayed link.
Overture's patent covers 67 separate claims, including exclusive rights to a "system for enabling an advertising Web site promoter using a computer network to update information relating to a search listing within a search-result list generated by an Internet search engine." Google licensed U.S. Patent No. 6,269,361 and several related patents held by Overture.
Yahoo still has a pending lawsuit against FindWhat.com for infringement of the same patents. The two companies have a scheduled hearing in April 2005.