Lessons From Yahoo

When a company finds itself stuck and getting surpassed by more innovative competitors, it faces a choice. Innovate or legislate. Innovation is hard. It can be very expensive depending on the industry. Legislation is cheaper, and can derail competitors for a long time.

That sort of evolution is manifesting itself today. If you have been watching Yahoo, you know what I mean. Twice they blew their dalliance with Microsoft ($MFST). They got their pants beat by Google ($GOOG). But they also were beaten by several other competitors in other areas, like Bloomberg.

Much of it was a problem of focus. What kind of company was Yahoo and where do they fit? Are they a media company, search company, advertising company? They forgot to listen to the marketplace and figure out their role within it.

It’s not just Yahoo that uses the tactic of the courts or legislation to bolster up barriers to entry. Different industries do it with tariffs, taxes, restrictions and other artificial means to restrain competition. Steel, Railroads, Computer chips, Farming, Auto, Insurance, and Banking have all lobbied Uncle Sam at one time or another for a special cut out or provision designed to block a competitor.

It works for a short time, but usually the competitor figures out a way around the block. They eventually eat the competitor for lunch. For example, Toyota was perfectly happy with import restrictions. It allowed them to raise the price on their cars. They still crushed GM($GM) and Ford($F). That’s just one example, there are many more in businesses you would never think of.

The broader point is should there be patents on software? It’s a fantastic question to ponder. My gut tells me that there shouldn’t be patents on ideas, but there should be patents on ways to implement those ideas. But I am open to a lot of discussion on this. I am no intellectual property rights attorney.

For example, Quicken($INTU) has great software to help one manage their finances. Shouldn’t the unique internal code they use to build that application be patentable? This carries on to areas like programming algorithms for trading. There was a huge incident a few years ago when a Goldman ($GS) employee went to jail for stealing code.

It also carries into the new patent law passed by the Republican Congress, Democrat Senate and signed by Obama. I believe that big companies will patent everything and sue small start ups to aggressively erect barriers to entry.

That patent law seemed like a small issue at the time. I had lunch with a great IP attorney that told me the time for intellectual property rights begins ticking for the entrepreneur when they start talking to potential investors about their idea. That’s a small change that has a huge influence on outcomes.

Why? Because people like me (angels), rarely if ever sign an non-disclosure document (NDO). We see so many business plans and so many ideas that we couldn’t possible execute them all. However, if we have to sign an NDO every time, we could never talk to anyone because the legal profession would tie us up in knots.

My hope is the judge in the Yahoo($YHOO) case will simply toss them out of court and say there is no legal standing to file suit.