Buried in Google's prospectus are three references to a lawsuit filed by Overture. Here is one example:
Overture Services (now owned by Yahoo) has sued us, claiming that the Google AdWords program infringes certain claims of an Overture Services patent ... If Overture Services wins, it may significantly limit our ability to use the AdWords program, and we also may be required to pay damages.
As a prospective Google IPO investor, why should you care? Isn't this just more run-of-the-mill litigation?
First, AdWords is how Google generates 95% of its revenue, so if the program were limited (or if Google had to pay damages and a royalty to Overture/Yahoo), that could be extremely serious.
Second, Google is defending many lawsuits, but this is the only one serious enough to get its own paragraphs in the prospectus.
So how valid is Overture's complaint?
Here's Overture's description of their invention from the patent abstract:
... each [advertiser's] account contains at least one search listing having at least three components: a description, a search term comprising one or more keywords, and a bid amount.... the network information provider influences the position for a search listing through a continuous online competitive bidding process.... comparing this bid amount with all other bid amounts for the same search term, and generating a rank value for all search listings having that search term.
Here's how Google's AdWords works, in Google's own words:
A. Create an ad ... B. Select your keywords ... C. Choose your currency and a maximum cost-per-click .... rank is determined by combination of cost-per-click and clickthrough rate.
Google's program sounds very similar to the Overture patent -- set keywords and bid amount, and your placement is determined by a real-time auction for those keywords. Google also has an added feature that will deemphasize ads if few users are clicking on them, regardless of the bid amount.
If Amazon can successfully patent one-click ordering, what's to stop Overture from successfully patenting keyword auctions for ad placement? Google says their defenses include "non-infringement, invalidity of the patent in question and unenforceability of the patent on grounds of inequitable conduct before the Patent and Trademark Office."
The Overture suit isn't the only challenge to the AdWords program, just the most serious. There are a number of lawsuits challenging Google's practice of allowing advertisers to use trademarked search terms.
Judge for yourself. Read the actual lawsuit (it's only two pages long), plus the patent abstract (just one page) and the entire patent filing.
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Overture's lawsuit looks serious - 6/23/2004 05:21:55 PM
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Auction process clarified - 6/22/2004 06:08:20 PM
In Google's amended prospectus filed yesterday with the SEC, the company revised and clarified the auction process.
We at www.buygoogle.com have compared the original S-1 filing with the amended version. All changes to the auction process are highlighted in a redlined version showing each addition to and deletion from the original document. Some highlights: Google has toned down their original language promising to make the IPO available to "all segments" of the investing public. They now stress that investors will be subject to qualification requirements of their brokers, and the underwriter group will now serve only a "broad range" of the investing public, not "all segments". Google stresses that they have the ability to set the IPO price lower than the "clearing price," or the price derived in the auction. They would do this to "achieve a broader distribution of our shares." But the company cautions that: Our initial public offering price may have little or no relationship to the value that would be established using traditional indicators of value, such as: • our future prospects and those of our industry in general; • our sales, earnings and other financial and operating information; • multiples of our earnings, cash flows, and other operating metrics; • market prices of securities and other financial and operating information of companies engaged in activities similar to ours; and • research analyst views. Read the redlined version of the Auction Process section for more detail. If there is any interest in this exercice, we at buygoogle.com may post redlined versions of the founders' letter and the risk factors as well. |
New prospectus highlights risk factors - 6/22/2004 05:46:07 AM
Google filed a revised prospectus with the SEC. The revisions may be in response to confidential SEC comments. This is the third version of the document released since April 29, and it is still marked as "not complete." The NYT summarizes the changes:
The plain-speaking letter from the Google founders, which used to at the beginning of the document, has been moved to the middle. The letter stresses Google's long-term vision, slams the investment banking and analyst community, and highlights Google's "don't be evil" culture. The letter was modified to say that the long-term focus may not maximize the value of the company, since "competitors may be rewarded for short-term tactics and grow stronger as a result." The original version of the letter can be found here. Now the already lengthy section on "risk factors" has now been moved to the beginning, ahead of the letter from the founders. "It notes that because of the auction process, the initial price 'may have little or no relationship to the price determined using traditional valuation methods.' So when analysts start to cover Google's stock, presumably using those traditional methods, they may publish target prices far below the offering price, possibly causing the price to decline." The Times article speculates that "Google's vaunted corporate culture may be under stress as a result of competition and the stock offering," and cites an anonymous source that employees may have "Google-bombed" the search index so that doing a Google search on "out of touch management" results in a page about Google's executives. [Update 6/22/04 -- This Google-bomb wasn't planted by Google employees, it was set by Daniel Brandt of google-watch.org. More on this here. The Times blows it again.] A story at siliconvalley.com summarizes other changes: "A deal to outsource some critical billing and other services may not be as close to completion as earlier suggested; the minimum number of shares investors will be able to bid for in the Dutch auction distribution is five, much less than the 100-share minimum usually required." Merrill Lynch has been dropped from the list of IPO underwriters, reportedly at Merrill's request. It appears that the scrawny fees that Google has negotiated may not be worth the trouble for Merrill (such as updating its computer systems to support the auction process): "It is not that Merrill cannot provide the IT system. It is a matter of cost. If it costs a million and you stand to make $200,000 why bother.” And separately, Google is exploring how to "give something back" by "publicly releasing some of its underlying software code" to universities and researchers. Google technical director Craig Silverstein says it isn't fair for Google to draw smart people from all over the world and "just keep it all for ourselves." "I'm not saying we're going to open-source Google, because that would be a little dumb when we have these Microsoft guys making noise," he said. |
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