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Summary:

Waiting for eBay to spin off Skype into the stock market? Don’t hold your breath. A legal battle with a company controlled by Skype’s founders could delay the move until at least the second half of next year — and possibly put the entire offering into […]

skype_logoWaiting for eBay to spin off Skype into the stock market? Don’t hold your breath. A legal battle with a company controlled by Skype’s founders could delay the move until at least the second half of next year — and possibly put the entire offering into jeopardy.

eBay said back in April that it intends to separate Skype from its core operations by spinning it out via an initial public offering in the first half of 2010, a plan CEO John Donahoe called “the best path” for Skype. Just last week, he reaffirmed that point, adding that the “synergies between Skype and the other parts of our portfolio are minimal.” The specific timing of the IPO, according to eBay, would depend on market conditions.

But according to the company’s 10-Q filing with the Securities and Exchange Commission filed Wednesday, a legal dispute over the licensing of Skype’s peer-to-peer technology from Joltid Ltd., which is controlled by Skype’s founders, could complicate those plans. eBay is in the midst of a slow turnaround and could use the cash a Skype IPO would bring to lay the groundwork for its future growth.

In March — a month before it announced plans for the Skype IPO — eBay filed a claim against Joltid related to the license in the English High Court of Justice. Joltid responded by terminating the license agreement between the two companies. According to eBay’s claim:

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.

The usual legal snipes ensued, with Joltid alleging in a counterclaim that eBay and Skype were infringing its copyright. Skype, meanwhile, asked the court to declare that it’s not in breach of the licensing agreement. The outcome is unclear, but without a resolution with Joltid the whole dispute won’t go to court until June of next year. That will delay a Skype IPO by months at best and, depending on the outcome, could hurt its chances of ever seeing the light of day.

In the filing, after noting that it’s confident of its legal position, eBay said ominously:

[T]here 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.

Although Skype hasn’t been integrated into eBay’s e-commerce business, as the company hoped it would be when the acquisition was announced, it has been an area of growth for eBay. Skype’s revenue grew 26 percent in the second quarter of 2009 to $145 million as registered users increased by 47 percent to 405 million.

Skype has to be one of the most expensive albatrosses to ever hang from the neck of a Silicon Valley company. After spending $2.6 billion to buy it in 2005, eBay later wrote down the value to $1.7 billion. Skype has grown while under eBay’s control, but continues to stand apart from its parent’s other operations, like an unwanted stepchild.

And yet eBay still licenses the peer-to-peer technology from the company’s founders. How could eBay spend billions on a company and not have control over the technology behind it?

  1. “and not have control over the technology behind it” – Amazing!!!!
    And the person responsible is thinking of running for office, that’s even more amazing.

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    1. Hey, she made her m(b)illions!!!

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    2. You are absolutely right. An she is considered a hero among some politicians. It’s hard to believe.

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  2. Every other VOIP service seems to do just fine without JoltId’s technology. In fact, Skype’s call quality is probably the worse. A move to a new technology is long overdue.

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    1. I’ve have Comcast VoIP and Vonage, and Skype is actually much better quality than both, not to mention having way more features.

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  3. Amazingly epic M&A fail.

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  4. I am not happy that they will devide the Skype. Skype exellent voice chat.

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  5. Seriously? Who cares? Google voice is free acct to acct (like skype) and I can buy minutes too. VoIP telcos are all trying to reach the desktop. The shelf life is reaching it’s end for skype in it’s current format, a license agreement isn’t going to save them, some new inovative thinking and real direction might.

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    1. Free account to account? I haven’t discovered that one yet on Google Voice?? Where did you find that?

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  6. good riddance, maybe their users will jump to Google Talk or other standards-based services.

    This should serve as a cautionary tale to any company who relies on licensing proprietary technology in spite of emergent open standards.

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  7. It would be well worthwhile for someone to look at the details of Skype’s original financing and just why it was that EBay agreed to such an outrageous price. Was there an management pool or insider investors that made it lucrative for Ebay management to push the deal through?

    Just where did that money go? And why was no one held responsible for the later $1BILLION write down on Skype’s value a year later?

    Seems to me someone rigged a game and walked off with $1B inprofits at EBay shareholder expense.

    The current predicament woudl never have happened had there been adequate due diligence on the part of Ebay’s management, acquisition advisors and legal counsel. So why was the due diligence not done?

    IMHO that usually happens when the parties have reason other than those stated to do a deal. This story is much bigger than a legal dispute.

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  8. [...] The hitch sent tremors through the tech world, not least because eBay was reportedly considering letting Skype go public. “Waiting for eBay to spin off Skype into the stock market? Don’t hold your breath,” Kevin Kelleher wrote on GigaOm. The legal battle “could delay the move until at least the second half of next year — and possibly put the entire offering into jeopardy,” Kelleher wrote. [...]

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  9. David is right, this is an acquisition which hasn’t worked as originally conceived. The synergies with eBay’s business did not materialize and performance benchmarks on which original deal was priced were not met.

    If eBay indeed wants to take Skype public, why the seemingly negative talk on its unwanted stepchild? For all the resources they put into it, it is strange they do not show more confidence in being able to dispense with the Joltid technology and develop their own before an IPO or going to court in 2010. Perhaps eBay just wants Skype out of the house.

    In the meantime new VOIP services are lining up to replace Skype. I have recently found one which extends beyond Skype to allow free global calling from your mobile and frees you from being tied to your headset and PC. It is called Zenring and it provides free international calls for Mobile-2-Mobile, Mobile-2-PC, PC-2-Mobile, and PC-2-PC without the need to buy credits like Skype or Google Talk minutes. Please take a look.

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  10. This was planned by Niklas Zennström prior to the acquisition. He also used this same technique with Grokster via a similar licensing scam. Here is a fact: I have worked with these dictators and therefore I am in a position to know certain facts. I have seen the code that keeps his monopoly over ebay going. I warned ebay before the acquisition that this exact event was going to unfold. At the time I was a conspiracy theorist and now I a trend forecaster? In the end I guess it’s good the IETF is making progress to fill this technological gap where autonomous scalability beats managed systems. In this case VoIP over SIP via an Overlay abstraction of the physical underlay network.

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