When eBay bought Skype from Joltid in 2005, the whopping US$2.6 billion price tag didn't include the Global Index peer-to-peer software that the world's biggest Internet Telephony system is based on. And now, Joltid is trying to cancel Skype's license on the Global Index technology in a move that threatens to shut Skype down once and for all. Is it just a canny commercial chess move to force eBay to sell Skype back to Joltid at a huge discount - or is it the end of Skype as we know it?
Skype is not only the world's biggest Internet Telephony engine - it's also the world's biggest international voice carrier. Developed by the brains trust behind peer-to-peer filesharing system Kazaa, it has quickly risen to dominate the market. But while it's successful with users, it has proven to be a crippling investment for eBay, which bought Skype for US$2.6 billion in 2005, and has subsequently revalued it down by nearly a billion dollars to US$1.7 billion.
Now, details are emerging of a legal arm-wrestle that threatens to shut Skype down completely. When eBay acquired Skype from Niklas Zennstrom and Janus Friis' company Joltid in 2005, the hefty pricetag didn't include a core piece of Joltid's peer-to-peer communications code, called Global Index. Global Index is the peer-to-peer communication layer that Skype is built on top of - and it's also the basis of Joost, an upcoming P2P video streaming technology. The critical Global Index code was licensed to Skype moving forward.
With eBay struggling to get its money's worth from Skype, and finding little synergy between the communications software and its main online auction engine, the company started looking to spin Skype off in an IPO that would get it operating as its own business - certainly, with nearly 450 million users and the lion's share of the market, it's a platform with potential.
But after a falling-out between Skype and Joltid, Joltid has claimed that, through certain legal actions, Skype has invalidated its license on the Joltid P2P code - which is imperative to the Skype engine. Skype is scrambling to develop alternative software to do the job, but with the final court battle set for June 2010, it appears unlikely that this will be possible - particularly without breaching Joltid's IP.
This excerpt from a quarterly report filed with the US Securities and Exchange Commission explains eBay's tenuous position - emphasis is ours:
Skype licenses peer-to-peer communication technology from Joltid Limited pursuant to a license agreement between the parties. The parties had been discussing a dispute over the license. In March 2009, Skype Technologies S.A. filed a claim in the English High Court of Justice (No. HC09C00756) against Joltid Limited. Following the filing of the claim, Joltid purported to terminate the license agreement between the parties.
In particular, Joltid has alleged that Skype should not possess, use or modify certain software source code and that, by doing so, and by disclosing such code in certain U.S. patent cases pursuant to orders from U.S. courts, Skype has breached the license agreement. Joltid has brought a counterclaim alleging that Skype has repudiated the license agreement, infringed Joltid’s copyright and misused confidential information. On the basis of, among other things, the parties’ mutual dealings since the execution of the license agreement, Skype asked the English High Court for declaratory relief, including findings that Skype is not in breach of the license agreement, that Joltid’s notice of breach and subsequent notice of termination are invalid, and that Joltid has certain indemnity obligations in relation to the U.S. patent proceedings.
Trial is currently scheduled for June 2010. Although Skype is confident of its legal position, as with any litigation, there is the possibility of an adverse result if the matter is not resolved through negotiation. Skype has begun to develop alternative software to that licensed through Joltid. However, such software development may not be successful, may result in loss of functionality or customers even if successful, and will in any event be expensive. If Skype was to lose the right to use the Joltid software as the result of the litigation, and if alternative software was not available, Skype would be severely and adversely affected and the continued operation of Skype’s business as currently conducted would likely not be possible.
So here's where things get interesting from a commercial standpoint; this legal challenge could completely shut Skype down - so naturally enough, that black cloud will scuttle any IPO plans that eBay had to raise money from its difficult child.
If eBay is able to come up with an alternative platform that keeps Skype's customers happy while abandoning Global Index and not causing any IP issues then it can go ahead with an IPO. But this is a herculean undertaking that even eBay admits it's not very confident about. Given it's already a cash sink for eBay, you'd have to wonder if the company is likely to throw big dollars at developing or acquiring another technology.
But if June 2010 comes around and eBay hasn't sorted anything out, and the court case starts looking like it's going Joltid's way, then suddenly Joltid will be in an excellent position to put in a bargain-basement offer to buy Skype (and its projected US$1 billion 2011 revenue) back from eBay and laugh all the way to the bank.
With the future of the world's favorite Internet Telephony service at stake, it will be fascinating to see how this plays out.
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