Google's (GOOG) earnings debacle last week is the latest in a series of misfortunes that has befallen the giant Mountain View technology behemoth in the last few months. The company has been making less and less money from its online ad sales, and is yet to gain a serious stronghold in the mobile ad sales space. While it has made its Android OS more and more competitive vis-a-vis Apple (AAPL) iOS, which I discussed in anotherarticle, it is still to make enough money from selling ads via the Android media. It is embroiled in multiple patent lawsuits, some of which are not looking too well from Google's perspective, and to top it all, the FTC is investigating Google for anti-trust issues.
Make no mistake, this author has long held a strong opinion that Google has done more than almost any other company in ushering in the modern Internet age; an age that has freed up latent talent in millions of people and businesses around the world. Google's direct contribution to opening up a multi-trillion dollar business arena is immense. With all its imperfections and numerous detractors, today's world can really be divided into two time periods - before Google and after Google.
However, be that as it may, what we as investors need to consider is whether the recently brewing troubles are temporary in nature, or is this a vanguard of something worse to come for the company. So let me take a quick look at some of the issues facing Google, and see if we can figure out what our perspective should be as to the nature, longevity, and outcome of these troubles.
Lawsuit By Vringo
It all began with these two patents filed by Andrew Kennedy Lang, Ken Lang for short, now the CTO of Vringo, formerly the CTO of Lycos, to whom he sold rights to his patents back in 1998 and then repurchased them recently: Patents 6,314,420 and 6,775,664 (ironically, I found the text of these in Google Patents).
Patent 6314420 is titled "Collaborative/adaptive search engine" and itssummaryis here:
A search engine system is provided for a portal site on the internet. The search engine system employs a regular search engine to make one-shot or demand searches for information entities which provide at least threshold matches to user queries. The search engine system also employs a collaborative/content-based filter to make continuing searches for information entities which match existing wire queries and are ranked and stored over time in user-accessible, system wires corresponding to the respective queries. A user feedback system provides collaborative feedback data for integration with content profile data in the operation of the collaborative/content-based filter. A query processor determines whether a demand search or a wire search is made for an input query.
Patent 6,775,664 is called "Information filter system and method for integrated content-based and ..." and its summary is just the same as the one above.
These patents are vitally important to something that makes Google almost all its money - Adsense and Adwords. Let me quote from the original Vringocomplaint:
In the search engine industry, results are positioned on websites based on their determined "rank." For example, in search advertising, an advertisement with the highest "rank" appears in the first position, and so on down the page. Search engines seek to place the high quality advertisements in the best positions because such placements are critical to attracting advertisers, pleasing end users and producing search advertising revenues (the primary source of revenue for search engines). Andrew K. Lang and Donald M. Kosak, inventors of U.S. Patent Nos. 6,314,420 ("the '420 patent") and 6,775,664 ("the '664 patent") (collectively "the patents-in-suit"), invented a relevance filtering technology that is used in the search engine industry, and that has become the dominant technology used to place high quality advertisements in the best positions and thereby generate substantial revenue. At least some of the defendants knew about the patents-in-suit for years, and despite such knowledge, these defendants continued to use it unlawfully. This patent infringement action seeks a remedy for this unlawful taking.
There is hardly any issue in my mind here that Vringo is right and Google has used this patent for years. If you read any version (for example, Google's own articlehere) of Google's Adwords Quality Score and ranking algorithm, you will see how similar the concepts are. Judge Jackson has turned down the issue of willful infringement mainly because Vringo did not wish to pursue it. While that may be a smart decision given that they are claiming a 3.5% loyalty already, I do think that the infringement was pretty willful. I am sure Google is going to lose this case or settle, at least on major issues, and Vringo is going to make a good deal of money out of it. I am still somewhat puzzled by the reasoning behind Google's decision to take this to trial. They could have tried to just buy off or buy out Vringo and be done with it. If they thought they would teach the small ugly troll a lesson, I think this is a step that may backfire.
Microsoft has been fighting an ongoing war against Motorola Mobility (acquired earlier this year by Google for $12.5 billion) and it has already won two battles for patents dealing with software keyboards and file indexing technology that saw an injunction to ban Motorola phones beinggranted. In its recent onslaught, it has filed for infringement in the case ofpatentEP0845124B1 on a "computer system for identifying local resources and method therefore." that relates to acquiring data about local resources that Motorola uses in Google Maps. Apparently Motorola has rolled the ball into Google's court by claiming "it lacks sufficient information about actions occurring on Google's servers." This has led to Microsoft saying it will amend its complaint to include Google. The trial date is set for March 7th, and this will be the first time Google and Microsoft will be in a courtroom facing each other over a patent infringement issue.
Compared to the Vringo case, this is a regular small fry because although if Google loses the case it will have to pay some damages (or settle before trial), the free Google Maps app is nothing compared to Adsense in terms of revenue, where itreported$11.52 billion, or 82% of consolidated revenues, this quarter. So royalty related damages will not be comparably high here.