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Skype Founders Sue eBay — Big Surprise

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Skype co-founders Niklas Zennstrom and Janus Friis have sued eBay (s EBAY), the company that acquired their Internet telephony startup and turned them into billionaires. The lawsuit was filed by their company Joltid, which controls the core technology that powers Skype, in U.S. district court in Northern California. A similar battle is going on in a court in London.

The lawsuit clouds the agreed-upon $2 billion sale of Skype that values the Internet communications service at $2.75 billion and is being led by by private equity firm Silver Lake Partners as in addition to eBay, it targets Silver Lake, Index Ventures, Andreessen Horowitz and other investors in the deal. And as The New York Times’ Joe Nocera noted in an article earlier this month, eBay is on the hook for half the damages from any legal trouble.

And then, a few months ago, out of the blue, came the $2 billion bid from the Silver Lake consortium. One way it has dealt with the litigation risk is by persuading eBay to assume 50 percent of any losses resulting from the lawsuit. But that still doesn’t mitigate against the possibility that the founders could win the lawsuit — and put their creation, Skype, out of business.

This suit comes as no surprise to either myself or readers of this blog; I’ve been consistently pointing to this elephant in the room. I’ve heard from various sources of mine from across the pond that there is no love lost among eBay management, the Skype founders and some of the investors in the consortium that’s trying to acquire it.

Zennstrom and Friis were rebuffed by eBay management when they expressed interest in buying back Skype. In a clear breakdown of relations, last week, Joost, a company that was co-founded by Zennstrom and Friis, started an inquiry into the activities of its former CEO, Mike Volpi, currently a partner at Index Ventures. That action alone was a sign that the Skype co-founders aren’t going anywhere without a fight.

When eBay bought Skype in 2005, it didn’t acquire Joltid — a major corporate blunder by then-eBay management. Many of the guys who spearheaded the acquisition (and overlooked the fact that they needed to buy the core technology) long ago left the company. Still, as I’ve said before, eBay needs to be held responsible for this clear negligence of its duties.

So back in 2005, eBay paid billions for Skype but didn’t get the crown jewels, aka the technology. I reported this oversight back in 2005. How then-CEO Meg Whitman signed off on the deal, I still can’t understand. I mean, even a lemonade stand owner who can’t tie his shoelaces wouldn’t overlook something as simple as that. And what about the eBay executives who were shepherding that deal?

Photo courtesy of Casey Serin via Flickr

15 Responses to “Skype Founders Sue eBay — Big Surprise”

  1. Anonymous

    This is juicy. Skipe got eBay to sign the dummy contract that they would sell them everything exepct the main techonogy. Now Skipe is going after eBay for using its technology. In the process the people at Skipe are picking up the doe. And is Skipe or any of these other web 2.0 services really worth $2 billion? Hardly.

  2. well, they thought that just because they were famous they could make fly and then flog a lemon like Joost. Now, they realise nobody is as idiotic as ebay was when buying Skype and they need to recoup the money they sank in Joost in one way or the other. Of course, they are thinking that ebay may once again prove the easiest target for that. Who can blame them.

  3. “even a lemonade stand owner who can’t tie his shoelaces wouldn’t overlook something as simple as that”

    hahaha this sums up the article for me :)
    all that the skype founders must be thinking right now is we need to find bigger suckers then ebay for our next deal ;)

  4. However big an oversight (cock-up) E-bay management may have made over the Skype deal, there is also the aspect of greed on behalf of the Skype founders. They got their cake by making billions out of the sale and now they want more. Somehow the Skype founders need to take a long look in the mirror or not have sold in the first place. Moral to this story, money isn’t everything either.

    • So you’re saying Joltid should hand over an asset that they own to ebay for free? A contract was signed to license the technology and that contract expired. Ebay is entitled to nothing.

      • The reason for skype success is builtin NAT/Firewall traversal compared to SIP. SIP requires additional gears at Operator side for this called “Session Border Controllers”. Companies like Acme Packets, Nextone Networks and several other are having hendres million dollers business to target NAT/Firewal traversal SIP. SIP is good for peering (operator-to-operator) but not for access (user) side. Most of the internationl calls are transported now with SIP peering. Basically SIP is good for existing operators but not for start-ups that are trying to target access side.

      • If my understanding is correct, GI is needed to locate the called user’s supernode. There are other proven techniques that scale well. Given the reliable userbase, it is not risky to deploy owned supernodes instead of conscripted ones. Once roughly estimate that a standard Amazon EC2 instance can support 1000 users. In other words, it will cost $300K to service 1M users (24x365x$.03). These days Skype registers about 13M concurrent users. So the operational cost is around $5M per year. Thus I feel, the technology is readily available and the cost is manageable.