The Fight For Skype

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skype_logo.jpgDon’t be fooled. Even though there hasn’t been any news on the various lawsuits around Skype’s intellectual property ownership, that doesn’t mean things aren’t happening behind the scenes.

Negotiations continue, say multiple sources, between eBay, the new proposed Skype owner group, and the original founders Janus Friis and Niklas Zennstrom, via their company Joltd, in what is turning into a very high stakes and very emotional game of poker.

Joltid first sued eBay/Skype in July 2009, claiming breach of a license agreement that granted Skype the use of key technology.

Multiple sources have confirmed to us that settlement negotiations were underway with Joltid to give the company a percentage of Skype to drop the litigation. Joltid was to receive “between 5% and 15% of Skype” to settle.

But the announcement of an agreement to sell most of Skype to a new investor group scuttled the settlement, say our sources, because of the massive debt that the company would be burdened with following the closing. Part of the purchase price for Skype is lender financed, and the debt would be on Skype’s books.

The breakdown in negotiations led to the second Joltid lawsuit. Our sources say that a settlement should be possible, but that emotions are keeping the parties apart. “We’re talking about some very rich, very emotionally immature people here. On both sides of the table. It’s not about money, it’s about saving face.” The fact that so much of the conflict is playing out in the press is evidence of this as well.

There’s another odd issue here as well. In the first lawsuit, Joltid claimed that Skype misused Joltid source code: “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.”

But the second lawsuit by Joltid claims that Skype never had the source code to begin with. The lawsuit’s goal is to prevent them from getting it. From the lawsuit: “An executable-only object code form of the GI Software was licensed by Joltid to Skype, a well-known Internet-based company that provides users throughout the world with free or low-cost telephone services over the Internet. Skype did not obtain a license to the GI Software source code, however, and the license it did obtain was terminated based on Skype’s breaches of the license agreement.”

Our sources say that Skype does indeed have the GI software source code, although it isn’t clear if they have a right to it or not. The key issue seems to be that they modified that software and disclosed it to third parties.

Skype has long been attempting to rewrite their P2P engine so that they wouldn’t have to rely on that Joltid code, we’ve heard from former employees, but they’ve been unsuccessful to date. Skype can move away from P2P to a purely SIP based infrastructure, but bandwidth costs would skyrocket. Skype is supposedly 7% of all international long distance minutes today, mostly from Skype to Skype calls that use the P2P backend. Paying bandwidth charges on those calls isn’t attractive, and Skype appears to be unable to develop a P2P based SIP infrastructure that performs well.

Game theory suggests that the multiple parties would work the situation out. Shutting down Skype just doesn’t make sense. But as we said, emotions are running hot right now, and now no one seems to want to back down.

The buyers group has certain protections from the litigation in their purchase agreement. Specifically, they don’t have to close the deal if there are injunctions around the lawsuit (meaning Joltid wins). And if the transaction closes, eBay is on the hook for 50% of any damages.

The likely outcome of all of this remains the same – Joltid will get a stake of some size in Skype. But given the players involved, anything could still happen.

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