Inventor of Pay-Per-Click and Ad Auction Fails to Patent, Google Profits

InThePlex

We were ready to go public and we’re on fire, revenues going through the roof and all that, and were getting our IP portfolio together for the bankers, and everybody was like, ‘What patents do we have?’ And we didn’t have too many. … All we could do was patent everything else we could think of, a bunch of obscure things like the way we accept bids. These were silly patents, but the real patents would have been worth billions. … we learned our lessons about patent protection.”

said Bill Gross, founder of GoTo, who developed the concept of pay-per-click online advertising and real time auctions for pay-per-click ads before Google. These two concepts were used by Google in its search engine and made Google one of the most profitable businesses in history. GoTo failed to patent its inventions related to these concepts and potentially lost a lot of money as is explained below. This is the second post about Google based on information from Steven Levy’s  book In The Plex: How Google Thinks, Works, and Shapes Our Lives. The first post is here.

Google’s Auction Based on Ad System from GoTo
In 2000, Google’s venture capitalists were pressuring Google to make more money. So, Google founders, Larry Page and Sergey Brin, instructed Google employee Salar Kamangar to look into ways to make more money with the ad system. Eric Veach and Kamangar decided to use auctions to sell ads next to search results. And they got this concept from a search competitor called GoTo.

GoTo was founded by Bill Gross. Gross implemented an auction to determine the price that an advertiser would pay placement when a given keyword was searched. The higher the bid, compared to other bidders, the higher on the page your advertisement would appear in the search results.

The difference between GoTo’s implementation and how Google implemented the auction was ad placement. Gross’ implementation intermingled ads with organic search results. Many people disliked the intermingling, including Page and Brin. Google provided ads on the right and at a block at the top of the page, but not intermingled in the list of organic search results.

In addition, Gross implemented pay-per-click advertising. Before pay-per-click, most ads were sold on a pay-per-impression basis. An impression is when a person saw the ad. So regardless of whether a person clicked on the ad, the advertiser was charged when a person saw the ad.

GoTo Waits Too Long to Apply for a Patent & Is Barred
In 2000, “We were ready to go public and were on fire, revenues going through the roof and all that, and were getting our IP portfolio together for the bankers, and everybody was like, ‘What patents do we have?’ And we didn’t have too many,” said Gross. GoTo missed the one-year bar.

A patent application generally must be filed within one year of an offer for sale, a sale, or a public disclosure of the invention. This is referred to in the U.S. as the one year bar. At the time GoTo realized it needed to file patent applications on its core features of real-time auctions and its pay-per-click ad system, the system had already been disclosed for more than one year. Therefore, GoTo was barred from filing patent application(s) on those features and lost the ability to protect those core features with a patent(s). All GoTo could do “was patent everything else we could think of, a bunch of obscure things like the way we accept bids. These were silly patents, but the real patents would have been worth billions” Gross said.

The one-year bar in the U.S. can be problematic for independent inventors, startups, and small businesses because often you will want to determine whether there is a market for the invention before spending money on the patent process, but patent law encourages you to file a patent application before you make your invention public and not to rely on the one-year grace period (if you are interested in foreign protection, many foreign countries provide no grace period).  Here, we don’t know the reason why GoTo missed the one year bar, maybe they didn’t think about patenting, maybe they didn’t realize the value of the core technology within one year, or maybe they didn’t have the resources, etc. Whatever the reason, the one year bar is a common problem, not only for GoTo, but for inventors and companies generally. Patent law encourages early patenting. This post provides ideas for patent protection based on the available financial resources.

Google Turns Down Goto’s Requests for Merger; Goes Alone
Later in 2001 Gross suggested to Page and Brin that GoTo and Google merge. But according to In The Plex, “Kamangar successfully argued against any kind of acquisition, saying that Google could do it alone.”

However, when Google implemented its own auction it implemented it as a generalized second-price auction, which is different from the direct auction the GoTo used.

Further the Goto’s (now named Overture) method required bidding for each slot on the page. So if you wanted to bid for the 1st position and the second position you had to place two bids, one for the first and one for the second. In Google’s system, you could place one bid and receive the  position that corresponded to that bid at the end of the auction. Also, the Google system factored not only the bid price but quality of the ad to determine the location of the ad on the page.

Improving on Other’s Work
So while the GoTo implementation was different in some ways from the system that Google built, it is possible that if GoTo had filed patent applications on the core features, that the resulting patents could have covered Google’s system and given GoTo better leverage in merger negotiations with Google. Who knows how much they would actually be worth, but Gross said, as quoted above, they would have been worth billions.

Some might argue that Google implemented a better system, with the second price auction, and therefore Goto should not be rewarded. But, Google started with GoTo’s invention and then improved upon it. The patent system does reward inventors when others use the invention regardless of whether its the original or an improvement. See the basic wheel v. spoked wheel example for more on this concept.

Lessons about Patent Protection
Later Goto (then called Overture) sued Google on the “silly patents.” And Yahoo eventually acquired Overture. Google settled those suits, but for much less than if Goto had patents on its core technologies.

According to In The Plex, Bill Gross was positive when addressing the fact that his ideas involving pay per click and ad auctions had made billionaires at Google, but not at his company. Gross said, “I feel we won…There was a satisfaction in braking the code. We originally invested $200,000 in GoTo, and when we sold Overture, we made $200 million. That’s a pretty good return. And we learned our lessons about patent protection.”

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