Yahoo-Facebook patent fight: more than meets the eye

It has been an interesting day to say the least. The news of Yahoo (s YHOO) suing Facebook for infringing its patents has drawn sharp reactions from some of the more measured voices in our industry. Here is a small sampling of reactions:

Of course, there have been many more virulent and downright dumb reactions. Maybe you have read some of them by now. The industry wide indignation and condemnation of Yahoo has been quite amazing to watch, prompting me to make a few phone calls. During the course of the day, I learnt that Facebook is going to fight Yahoo tooth-and-nail.
However, what I have not been able to figure out why Yahoo has taken this drastic action, one that is leaving it bruised and battered in the court of public opinion, at least in Silicon Valley. The decision to sue Facebook has not had any perceptible impact on the Yahoo stock price. I have read many explanations — Yahoo is an incumbent, it is dying, it doesn’t innovate, it has done this before, it is a bunch of losers with no strategies. (Actually any one of my past posts could be summarized as such.)
However, being a natural born skeptic, I feel there is more than meets the eye to the whole Facebook-Yahoo scrum, for suing Facebook is a pretty drastic step for Yahoo.
Facebook Disconnect
Why? Because, today, it is pretty beholden to Facebook, thanks to a dumb agreement the company entered in 2009. Just to refresh your memory, on December 2nd, 2009, Yahoo announced that it would integrate Facebook Connect into all its products. Here is what I wrote then:

It’s clear that web identity is becoming a two-horse race: Google vs. Facebook. Back in the 1990s, Yahoo chose Google as its search provider and helped turn them into a major competitor and ultimately their nemesis. This deal is of similar importance, as it gives Facebook Connect a big boost. Yahoo, despite its claims, is going to become less relevant in the web identity sweepstakes. It is part of the company’s growing de-emphasis of its technological chops. They are giving away search to Microsoft and it seems they are happy to take a backseat in identity sweepstakes. I think the company in its desire to become a media-web destination is becoming technologically irrelevant.

Here is what Yahoo said in a press release and that pretty much says it all:

Yahoo!’s Facebook Connect integration will give consumers richer experiences on Yahoo!, including in Yahoo! Mail and on properties like Yahoo! News, Yahoo! Sports, and Yahoo! Finance. It will enable them to connect with Facebook friends on Yahoo!, view a feed of their friends’ related activity on Yahoo!, and share content–such as photos from Flickr or comments on news stories–with all of their friends on Facebook. The content that consumers share with Facebook friends will then create a loop that drives visitors back to Yahoo!.

Yup! Thanks to its then feckless and incompetent management (and the then technologically irrelevant board that made even bricks look smart), Yahoo gave Facebook access to the address books of its 600 million odd users.
Facebook, being smart enough to use that data, ramped up its own numbers from 350 million users into nearly a billion users. (Random tidbit: Facebook in February 2010 bought Octazen, a Malaysian contact importer firm and then shut it down and in doing so essentially eliminated any and all competition. In order to tap into address books, rivals would have had to build their own importers, no small feat in itself.)

Yahoo CEO Scott Thompson

Some technology industry insiders believe that Facebook was pillaging Yahoo’s email address books for a long time before the two companies signed the 2009 agreement. In fact, Facebook had been doing such a good job that at one point Yahoo blocked Facebook and started to scrape Facebook as well. This prompted Facebook’s attorneys to get in Yahoo’s face. Of course, Yahoo backed down. The two companies eventually signed the 2009 agreement that  only accelerated Facebook taking more control over the Yahoo user base.
In other words, there is and has been a whole lot of simmering animosity between the two companies. My theory is that for the first time in a long while Yahoo has management that is willing to mess with Facebook. Whether that is a good or bad move, it is open to debate – natch, a shouting match.