Is the Clock Ticking on Skype?

janusniklasIf history is any guide, then recent actions by Skype co-founders Janus Friis and Niklas Zennstrom indicate that they wouldn’t hesitate killing off their own creation, unless eBay settles and pays them a lot of money. Here is why:

Friis and Zennstrom had earlier sued not only eBay but also the investor consortium (which is led by Silver Lake Partners and includes Index Ventures, Andreessen Horowitz) that was looking to acquire about 65 percent of the Internet communications service for about $2 billion.

Today, the Messrs Friis and Zennstrom sued Michael Volpi, who till recently was the CEO of Joost, an online video startup that was started by Skype founders. They also sued Index Ventures. Volpi recently joined Index Ventures, a London-based venture investor that had cashed out big time when eBay snapped up Skype for billions of dollars. As Liz reported earlier:

The gist of the lawsuit is that Volpi learned how to modify Joltid’s proprietary software to run on the web without the aid of a peer-to-peer software when he was transitioning Joost from a peer-to-peer service to a web-based Hulu clone. And with this knowledge, he was able to pitch a version of Skype that buyers could take over from eBay while side-stepping ongoing litigation.

The lawsuit is pretty harsh on Volpi who was once viewed as a savior for Joost.

“Volpi and Index lacked the credibility and financial heft to lead a private equity investment consortium to acquire Skype unless and until they advertised their knowledge of the Confidential Information.”

“In a very short time, Volpi burned through a substantial amount of the working capital available to Joost at the time he became CEO. Moreover, he had removed from Joost a significant portion of Joost’s innovating and market-driving technology, leaving Joost to rely on third-party technology products. Volpi’s overall business strategy failed. Moreover, it was a failure that was extremely expensive, with Joost expending tens of millions of dollars of investors’ capital.”

As I have pointed out in the past, there is no love lost between Skype founders and Index Ventures, and today’s lawsuit is further proof of that. I am not sure where the disagreements lie, but the fact of the matter is that the two groups are major players in Europe’s startup world. Skype founders run Atomico, an investment fund that is aggressively wooing startups in the old continent. And no one is ever going to mistake the Skype founders and eBay management as BFFs.

Whatever the reasons, this battle is going to get very ugly. The fact of the matter is that if you are a major eBay shareholder, you should be worried. I mean, very worried. People are overlooking the fact that eBay is going to have to pay at least half of the damages, whatever they might be. In other words, that cost is going to be borne by eBay shareholders. As I said…don’t just be worried, also be mad. Funnily enough, eBay’s stock is up for the week.

Secondly, the Skype founders are ruthless businessmen who are going to make eBay pay for their stupidity. They are in the catbird seat to basically define the destiny of their creation. Without JoltID’s peer-to-peer technology, Skype will have to reinvent itself as a SIP-based player — as likely as me playing for a minor league baseball club.

Friis and Zennstrom are not above shutting down Skype. Janko Rottegers, over on our sister site, NewTeeVee, recounts the history of JoltId in succinct detail and writes:

Kazaa’s code was developed under contract by a startup in Estonia, with all of the work being coordinated from the Netherlands. Kazaa became Zennström and Friis’ flagship peer-to-peer product, but the idea was always to license the underlying P2P technology through a separate corporate entity called FastTrack BV. FastTrack’s code became part of a number of file-sharing clients such as Grokster, Morpheus and iMesh.

Morpheus proved to be especially successful and eventually managed to get more users than Kazaa itself. Then, out of the blue, the Morpheus client stopped working in early 2002. It quickly became clear that FastTrack had shut down the client by denying it access to its P2P network. Morpheus alleged at the time that this was a ploy to steal its user base and once again make Kazaa the most popular file-sharing client. Friis and Zennström had a different take and argued that Morpheus had failed to pay its licensing dues.

By the way, Meg Whitman, who signed off the biggest corporate mistake in the history of Silicon Valley, is running for the position of the governor of California.


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