Facebook's patent headaches: More to come?March 27, 2012: 5:00 AM ET
Yahoo filed a patent suit against the social media giant. Does Amazon have a case too?
By Roger Parloff, senior editor
FORTUNE -- Last month, just weeks ahead of Facebook's highly anticipated IPO, the "it" company of the Internet got hit with a meaty patent suit. Struggling behemoth Yahoo sued Facebook in federal court, alleging that it infringes 10 of its patents, covering such functions as messaging, social commenting, and advertising display. Facebook, which pledged to defend the suit vigorously, professed surprise at Yahoo's "puzzling actions."
In the grand scheme, such a suit was foreseeable. Explosive success in the tech world carries a nearly built-in booby trap: The youthful startup grows faster than its patent portfolio, leaving itself wide open to holdups by more wizened patent stewards.
Will we see other patent holders come knocking at Facebook's door? Such a company would have to endure the publicity blowback Yahoo's been getting for "troll-like" conduct. But one player that must be mulling it over is Amazon.
In 1998, Amazon (AMZN) paid close to $100 million in stock for PlanetAll, one of the first social-networking sites. At the time Bezos termed PlanetAll "the most innovative use of the Internet I've seen." Though Amazon shuttered Planet All in 2000, it kept developing its social-networking inventions, many of which have applications in e-commerce. Amazon now has at least 11 patents that build upon the PlanetAll inventions. Five of them have been granted since 2010, including one "for a social-networking system capable of notifying users of profile updates made by their contacts."
Both Amazon and Facebook declined to comment on whether any potential patent issues are brewing between them.
Erin-Michael Gill, chief IP officer at MDB Capital, an investment bank that focuses on IP-rich companies, says that one way to predict patent disputes is to compare how often companies cite each other's patents in their own patent applications. If each company's patents are of equal quality, and each cites the other at about a 1:1 rate, then one would not expect litigation, since each company seems equally reliant on the other's technology.
When Gill performed this analysis between Facebook and Yahoo (YHOO), he says, he found Facebook to be 1.6 times more reliant on Yahoo's patents than Yahoo was on Facebook's, suggesting possible vulnerability on Facebook's part. Facebook's largest asymmetry, however, was with Amazon. Facebook cited Amazon's patents 5.5 times more often than Amazon cited Facebook's.
Gill won't put a dollar figure to what either company could possibly extract from Facebook, though he predicts that Yahoo, at least, will pocket a "substantial" sum. Yahoo extracted about 1% of Google's (GOOG) stock from a patent suit settled two weeks before Google's 2004 IPO -- or about $230 million at Google's IPO price. Yahoo, however, unwisely sold most of its stake that same month.
This story is from the April 9, 2012 issue of Fortune.