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Skype, Founders Settlement in the Works

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The ongoing legal scuffle between Skype, a division of eBay (s EBAY), and its founders, Janus Friis and Niklas Zennstrom, may soon see a resolution, according to someone familiar with the situation. The parties are in discussions to resolve the various issues. The talks are described to be at a sensitive stage and can break down without any conclusion. If the founders and the company can come to an agreement, Skype will be able continue to use JoltID’s technology to power Skype and not disrupt the service that is currently used by hundreds of millions consumers.

The Skype Timeline
Sept. 11, 2005: eBay buys Skype for $4.1 billion.
Oct. 1, 2007: Zennstrom quits Skype.
June 4, 2007: Mike Volpi joins Joost as CEO
Nov. 19, 2007: Skype may be for sale, with Google as a likely buyer.
Feb. 25, 2008: Josh Silverman takes over as CEO of Skype.
April 1, 2009: JoltID sues eBay, Skype in UK.
April 6, 2008: Joost cuts jobs, shifts focus to web-based video delivery to compete better with Hulu.
April 13, 2009: Skype founders rumored to be talking to private equity groups for Skype buyout.
May 7, 2009: ebay CEO thinks $2 billion is low price for Skype.
June 30, 2009: Joost starts to unwind.
July 6, 2009: Mike Volpi joins Index Ventures
Sept. 1, 2009: 65 percent of Skype to be sold for $2 billion.
Sept. 16, 2009: Skype founders sue eBay.
Sept. 18, 2009: Joost sues Volpi, Index.
Oct. 14, 2009: Skype founders file injunction against Volpi, Index Ventures.

I have some further information on the talks, but I am currently trying to pin down the details, as well as waiting to hear back from Skype and other parties involved in the deal, including the Skype co-founders.  It was pretty evident from the get-go that Skype didn’t have any other option but to come to some sort of an understanding with the founders.

About two months ago, eBay announced that it was spinning out Skype, and the deal valued the Internet telephony division at $2.75 billion. Skype founders had been trying to find a way to buy back their startup, but instead, eBay decided to sell 65 percent of the company for nearly $2 billion to a group of investors led by Silver Lake Partners, Canada Pension Plan, Index Ventures and Andreessen Horowitz. (Marc Andreessen declined to comment on the deal.)

Skype’s co-founders sued eBay, Skype, and pending investors for using Global Index, a core technology held by their company, JoltID. eBay, at the time it purchased Skype, didn’t buy the JoltID technology and instead opted for a long-term contract. The end of that contract has led to the current legal mess of suits and countersuits between eBay, new investors and Skype founders.

One of the key people in this deal was Mike Volpi, once regarded as the heir apparent at Cisco Systems (s CSCO). In his column today, San Jose Mercury News’ Chris O’Brien has more details about Volpi’s current spate of legal troubles. Volpi helped put together a deal that essentially made Skype founders sue him and the venture firm he joined in July of 2009, Index Ventures. If you read through the various emails exchanged between Volpi and Danny Rimer, a principal at Index Ventures, you can understand why the Skype founders are angry, especially since he was the CEO of Joost, a failed video startup founded by Skype’s  co-founders. Volpi was sued by Joost because, he “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.”

In October 2009, the two co-founders filed an injunction that made it virtually impossible for Skype to continue its spin-out. Stacey summed it up nicely:

In addition to preventing Volpi and Index from using confidential information in general, the injunction specifically asks that the judge keep Volpi and Index from using such information to operate Skype or engage in any strategic planning for the service; from talking about that info with the other members attempting to purchase Skype from eBay; from soliciting employees of Joost and Joltid with offers to join Skype; from communicating with current or former employees of Joost or Joltid regarding the companies’ confidential information; and from further participating in the Skype acquisition or assuming any position with Skype until a final adjudication of the merits of the case.

What that means is that in order for Skype to exist it had two options: Do a deal with the Skype founders, or switch to SIP-based architecture. The latter may be an expensive and difficult option. Skype faces various challenges if it tries to switch to using a SIP-based architecture, Ian Bell outlined in his post earlier today. Jeff Bonforte, former CEO of Gizmo5, disagrees and believes that challenges are not unsurmountable, as he outlines in a comment to Ian’s post.

I guess Skype’s buyers and current management might be going with option No. 1. I will be back with more details soon.

28 Responses to “Skype, Founders Settlement in the Works”

  1. Firstly, we replaced most of Jeff Bonforte’s code/work at Gizmo5. Also he is naive if he thinks that the cost savings of an autonomous distributed system isn’t a magnitude. Gizmo5(SIPphone) had during Jeff’s tenure a mere ~4K simultaneous users “in call”. As far as I know Jeff hasn’t worked on p2p overlay networks in the past, merely SIP and is in no position to make these claims. I have worked in both fields for over a decade now. If SIP could scale without adding new hardware, man hours, bandwidth, etc we(the p2psip WG) would not be drafting this: and Skype would NOT be the leading VoIP provider.

    Secondly, why leave the readers thinking that SIP is an option? This is false as it stands today with Skype. Skype is settling behind closed doors and will keep “renting” the GI stack. Rent is to be paid as ownership in Skype to N/J.

    Good Day.

  2. There are other business and technical choices than switching to SIP, with or without Gizmo5.

    The investor group could compel Index Ventures to keep Volpi and their Skype alumni at arms’ length, or fire them; better insulating themselves from the Joost suit.

    The investor group could replace Index Ventures; it’s only contributing 5% or so to the purchase price.

    The investor group and eBay could let the founders buy Index Ventures’ share, a minority stake that will net to about 2.4% equity post deal.

    Skype can buy existing “global index”-like technologies from other companies.

    Skype can build its own; they’ve been acquiring p2p talent in this area, talent that’s working feverishly to make it work as well as the Joltid.

    Skype still has more than seven months before a UK court rules that Joltid’s technology wasn’t patentable or protected, that Joltid and the founders were in breach of their contract to support Skype, that Skype was not in breach of their contract with Joltid.

    Skype could demonstrate the “secrets” were moot.

    Perhaps eBay could even sue the founders directly for abandoning their leadership responsibilities at Skype to work on their Joost side project. The founders didn’t get their billion dollar payout because they were unable or unwilling to meet goals to which they’d committed. You could cite that as evidence that their hearts and minds and best efforts were no longer on Skype while still at Skype’s helm.

    It’s always worth something to make predatory and nuisance lawsuits vanish for good. What’s the right number for this situation? What number makes the thieves stay away without killing the goose that lays the golden eggs?

    Skype/eBay may even show that Volpi, a suit who hasn’t touched code in a long time (since college?) couldn’t know any secrets with enough specificity to effectively transfer knowledge between Joost and Skype engineers.

  3. We are the team of inventors behind US Patent 7,089,319 issued in 2006 titled “Method and system for instantaneous on-demand delivery of multimedia content over a communication network with aid of content capturing component, delivery-on-demand client and dynamically mapped resource locator server”.
    We introduce “Skype-killer” application, with new innovative “Internet broadcasting” functionality, as well as unmatched web browser centric cross-platform, cross-device reach. We will be able to compete on VoIP signal quality, innovative “Orbing” (P2P live and pre-recorded video broadcasts by individuals), as well as lower cost base. Skype is facing multiple litigations and is about to either be shut down permanently, or enter very expensive settlement arrangements. Plus, Skype is not in control or ownership of Global Index technology, the node forming augmentation of delivery system which they push to each user computer.
    We are actively pursuing venture capital. Please visit for more detail.

  4. The most amazing thing about this story is that eBay bought Skype for multiple billions of dollars and that STILL didn’t include this core technology. Perhaps the most overvalued acquisition of all time…

  5. Hey Om:

    Glad you caught my comments. I might also add there are tons of advantages to making part or all of the backend SIP compatible:

    (1) you can work cleanly with all the hardware out there from Cisco, Avaya, et al. in the enterprise market. Skype is certainly SMB, but there are tons of advantages for them if they can do deals and interconnects with that market to further push into the business market.

    (2) server-side infrastructure makes mobile interconnections much more scalable. Historically, the Skype client had to be virtualized in the cloud to interconnect with mobile phones in a mass-scale way. The best at doing that would be iSkoot (see Mark and Jakob and all the work they have done there). But even then, iSkoot is moving beyond that as it has issues/limitations (props to them).

    (3) all the stuff that Skype wants to do better is easier…voicemail in the cloud, conferencing in the cloud, etc. which is part of going “upstream” in the business market. By moving away from P2P, all this becomes more straightforward and faster to deploy an innovate.

    Anyway, there are cost savings with P2P, but certainly there are many, many other advantages to doing a blended or server-side model, like SIP. And even the cost savings are modest or exaggerated as much of the media still moves P2P.

    Good stories today on Gigaom! Nice work to you and Ian.