Monday, November 14, 2005
All the available money in the world today is simply not enough to buy all the patents at their valuation. A good software patent can generate hundreds of millions in revenues through use and licensing. What, then, is the password to access the software billions? Who has the ‘code-next?’ Is there a ‘road ahead’ for the citizens of countries where software patents are denied? Which software-driven business model will swallow the other? Has Google already gone on eBay’s auction?
On September 7, 1998, when Google Inc. started its operations in a garage in Menlo Park, California, perhaps the only luxury it could afford was the remote control device for its garage ‘office’ door! Even with its Google-vision and foresight, it could not have visualized the journey which catapulted Google from the garage to its headquarters in Mountain View, from 3 to more than 3000 employees, and from $100,000 to an $ 80 billion company, in a short span of 7 years.1 Starting as a college research project by two graduate students, it evolved into a multi-billion dollar company, with a global market share of 36.5% in search engine industry! Well, it’s not a unique story and there are several such examples of successful companies. But the real ingenuity of Larry Page and Sergey Brin – the founders of Google – lie not in just establishing the company but in driving it to a phenomenal success using their judicious mix of unconventional wisdom, angel investments, and strategic use of Intellectual Property Rights.
Could we have ever thought of making billions of dollars from a ‘bot’2 – an intelligent software program which searches for terms matching certain criteria? Here’s how bots crawled up in the global mindspace. With the advent of affordable connectivity and faster broadband, millions of potential customers started getting on-line more often, and staying on-line longer; and the internet, almost suddenly, became a very powerful sales channel. Simultaneously or consequently, companies also started strutting their stuff on the net with equal zeal. Traffic on the highway to international marketplace was increasing daily. Internet was surpassing the British Empire as the territory upon which the Sun would never set. The concept of ‘forever open’ was even more beckoning than ye olde 24/7 store.
With the aim of having their own store window on every home screen in the world, all businesses were soon fighting tooth and nail for ‘eyeballs.’ While customers were keen to search for products and services, the sellers of those products and services were even more eager to be found. And the ‘match-maker’ took the cake (and maybe, even the bride). The match-maker programs, or search engines, appeared into the mainstream business about eight years ago (1997), when companies realized that search results influenced transactions. For instance, Domino’s Pizza’s on-line sales increased by 64% in July 2005 and now contribute 10.6% to its total business sales. Yahoo’s earnings growth increased by 84% in 2003.3 Search-engine advertising is one of the fastest-growing businesses now with a Compounded Annual Growth Rate (CAGR) of about 35%.4 According to Jupiter Research5, on-line advertising will continue expanding for the next five years and will reach $18.9 billion in 2010 as against $9.3 billion at the end of 2004.6 In Europe, search engine marketing is expected to increase by 65% this year (from approximately $1.04 billion in 2004 to $3.66 billion in 2005), according to a study by Forrester Research.7 The search engine market in France – largest growth market in Europe – is expected to grow by 19% by the end of 2005 and 31% by 2010. UK’s search marketing spend will grow from approximately $932.61 million at the end of 2005 to $1.22 billion in 2010. Similarly, Netherlands’ search engine market is expected to grow by 40% and Sweden’s by 26% by the end of this year. However, the market in other European countries will grow only by 4%. According to Google’s own predictions, their on-line advertising accounts are expected to increase by 35% between 2004 and 2005, and the company expects to acquire 372,000 new advertiser accounts in the next 4 years8. On an average, Google adds about 100,000 customer accounts every year. By 2008, Google expects to add 652,050 advertiser accounts to its customer base.
Google always focused on building a better search engine, better than their competitors, such as AlltheWeb, 20search, AOL Search, Ask Jeeves, Dogpile, Excite, Infospace, Iwon, Lycos, Mamma, MSN, Open Directory, Yahoo, Contact Us, and LookSmart. A search engine, in fact, is a result of team work – three mechanisms working together: one identifies web pages to be included in the database; the other indexes the sites; and the third includes a search mechanism with an interface, which scans for keywords within the index. In other words, if we want some specific information from the vast internet having billions of web pages, we have to rely on search engines. Google is one of the most respected registered trade marks in the industry. Google loves technology and has developed its own server infrastructure with the breakthrough PageRank™ technology to change the way we search on the web. The patent for PageRank technology is currently owned by Stanford University, which has licensed it exclusively to Google till 2003, which has been further extended till 2011, when the license becomes non-exclusive. The patent expires in 2017.
Apart from search engine technology patents, Google’s intellectual property (intangible assets) include innovative business models and trade marks such as Froogle, Gmail, Ride Finder, Zeitgeist, Blog Spot, etc. We may wonder why Google comes out with so many innovations and seeks to obtain patents and trade marks. The reason is simple: patents give their owners the right to exclude others from making, using, or selling an invention and therefore, the patent-holder can increase profits and remain protected from direct competition. Patents that are used to limit competition are also useful in strengthening a company’s position in licensing negotiations.
Microsoft holds general search-related patents which include methods of searching information in directory catalogues; a system for enhancing search area selection; and a method of ‘concept-searching’ which utilizes Boolean or keyword search engine. Amazon, an on-line retailer, has also claimed a patent which could impact the search-related advertising industry. In March 2004, Amazon updated its application for a method that auctions-off ads appearing on a particular web page. Patents were also awarded to NEC for its “focused search engine” and to Alexa Internet (part of Amazon) for tracking web surfing history. Microsoft has hired a team of experts in natural language information retrieval who are writing academic papers to file search-related patents.
The boom in the search engine industry has now flagged-off a patenting race among Yahoo, Google, Microsoft and IBM. Patents are critical to any organization that is engaged in technology-oriented business, and ignoring it could prove to be fatal. The dynamics of search engine business is governed by patents. Google’s competitor, Yahoo – after acquiring Inktomi (March 2003) and Overture (July 2003) – received a treasure chest of patents. Before its takeover, Overture acquired AltaVista in April 2003 (for $106.6 million)9, and with that some of the ground-breaking patents on web search. AltaVista had seven patents on web crawling technologies, seven on indexing and two on query processing. It had 16 patents pending related to forward-looking search technologies. In addition to Inktomi, Yahoo also acquired a few more search-related patents. Yahoo’s CEO, Terry Semel, commenting that he would acquire more patents, said, “We’ll add…to our technology assets Overture’s impressive intellectual property portfolio of both algorithmic and sponsored search patents.”10 Smaller companies and individuals are also applying for patents with the prospect of licensing the patents to the bigger companies, for a price which may rival a first-born’s ransom.
Outside US, most other countries don’t grant software patents. This can be a huge advantage or disadvantage for the residents of those countries. How you look at it depends on whether you are an unprotected inventor or an unauthorized user of the software. A search engine, in the final analysis, is a software program, and therefore, it must be dealt with in a particular manner to meet the patent office requirements. For the software inventors, who deserve to patent their software but are deprived of the monetary benefits because of their country’s patent laws, there are ways and means to achieve the desired goals.
Google’s revenues have soared high because it has patented its technologies and protected its trade marks, and has harnessed them over the years to yield billions of dollars. Its net income rose sharply from approximately $90 million in 2002 to $100 million in 2003 and $400 million in 2004. Google’s licensing revenues have increased tremendously from $20 million in 2002 to $40 million in 2004.11
If we relate the search engines’ utility to other popular on-line business models, eBay seems to be another wonder in the virtual world. eBay was established in 1995, and has more than 1.4 billion listed items (2004) and 50,000 categories for sale, with 2.3 million unique visitors (Dec 2004), and transactions worth more than $34.2 billion (2004). Although eBay is the world’s on-line marketplace and not a search engine, yet it performs similar functions of a search engine. When we type the ‘keywords’ or ‘characteristics’ of items to be bought through eBay, it gives a list of detailed offers with sellers’ profiles. eBay also uses DoubleClick’s12 solutions for its on-line advertising programs, where sellers reach targeted buyers on eBay through “bid-per-click” keyword advertising to increase traffic and attract more buyers to their item listings or store located in the eBay marketplace. Google is fast becoming a rival to eBay in the on-line advertising business. Ultimately, whoever gets the maximum exposes of the advertisers will be the winner. The fascination of this business model is pulling Yahoo too into the arena. The value-addition of a search engine sometimes overshadows even the value of the product or service in the transaction. eBay and Amazon, horizontals and verticals, they must all have underlying search engines.
So, is Google on eBay’s auction? Although there is hardly any chance of Google going under the virtual hammer on eBay’s auction, one would have expected that Google would be the search engine behind the global auction house. However, eBay uses a different search engine to power its website. With all the ironies in life, it would not be surprising if eBay had used Google to find the provider/developer of their search engine. Will eBay move to any other innovative search engine anytime soon? (Till the time this article was written, there was no comment from eBay). It is generally expected that eBay will keep improving its service. The world has never stopped seeking to better its best. And, when it comes to new software patents, the ’search’ is always on!
Footnotes and References
2. Bot is a type of computer program to perform automated tasks. It is also called a spider, crawler or robot.
3. “Online Sales Lift Domino’s Profits,” http://www.news.bbc.co.uk, July 25, 2005.
4. “Yahoo! To Acquire Overture,” http://www.corporate-ir.net, July 14, 2003.
5. Jupiter Research provides impartial research, analysis and advice to help companies profit from the impact of the Internet and emerging consumer technologies on their businesses.
6. “Search Engine Advertising Drives the Growth,” http://www.adverblog.com.
7. Langford Robin, “Search Marketing Growth to Slow By 2007,” http://www.netimperative.com, March 18, 2005.
8. Kopytoff Verne, “Google Forecasts Growth – Search Engine Sees 372,000 New Ad Accounts in 4 Years,” http://www.sfgate.com, October 20, 2004.
9. “Overture Completes Acquisition of Alta Vista Business,” http://www.internetadsales.com, February 26, 2004
10. Olsen Stefanie, “Patents Raise Stakes in Search Wars,” http://www.news.com.com, February 25, 2004.
12. DoubleClick is US-based digital marketing investments solution company
1. “Microsoft and Patents,” http://www.swpat.ffii.de.
2. “Microsoft Files for Patents Related to XML Parsing and Word Processing,” http://www.xml.coverpages.org, January 27, 2004.
3. “European Search Engine Market to Grow 65% in 2005 According to Forrester Research,” http://www.forrester.com, March 17, 2005.
4. Stephenson, David, “Google: The Search for Internet Intellectual Property Integrity and Financial Security,” http://www.fwlaw.com, February 14, 2005.
5. “Google Patent for Page Rank,” http://www.webmasterworld.com, August 30, 2004.
7. Sullivan, Danny, “The Evolution of Paid Inclusion,” http://www.searchenginewatch.com, July 2, 2001.
8. Wallace David, “The Continual Evolution of Search Engine Marketing,” http://www.searchengineguide.com, July 6, 2005.
9. Kuchinskas, Susan, “Google Magazine Search,” http://www.internetnews.com, December 9, 2004.
10. Hammonds, Keith, “How Google Grows… and Grows…and Grows,” http://www.fastcompany.com, April 2003.
11. “Inktomi Corporation (Acquired by Yahoo),” http://www.scripophily.net.
12. Price, Gary, “Yahoo Files for Several Patents,” http://www.blog.searchenginewatch.com, August 1, 2005.
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