When a group of investors pooled their resources a few weeks ago to put a bid in to buy Skype from eBay, I thought there was a good chance that Skype’s legal woes were behind them. Apparently, I was wrong, and a new lawsuit makes it clear just how bad the situation is for Skype.
Sure, Skype doesn’t own its core P2P technology, and founders Janus Friis and Niklas Zennstrom were trying to rip that IP out of the service. But that’s all old news from months ago. Surely those new investors wouldn’t have committed to paying $1.9 billion for 65% of a company that didn’t control its IP?
At the time of the deal, people close to the transaction told me that the new investors had a much better relationship with Niklas and Janus than eBay, and the situation would soon be worked out. Our best guess was the two would be given a piece of Skype, and possibly a board seat, and the litigation would be dropped.
But that isn’t the case, it seems. This new intellectual property lawsuit against former Joost CEO Mike Volpi and venture capital firm Index Ventures really has nothing to do with Joost at all. It’s all about control and ownership of Skype, and it’s a signal that the dispute is nowhere near over.
What’s most interesting about the lawsuit is a single disclosure early in the lawsuit complaint. Not only does Skype not own the core P2P technology underlying the service, but they don’t even have access to the source code (emphasis added):
A source code version of the GI Software is licensed by Joltid to Joost, allowing Joost to be the first company to successfully deliver television and other video content in real-time over a peer-to-peer network. 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.
And this bit of information singlehandedly explains possibly the entire history of Skype over the last few years. Want to know why they never opened up to developers in a meaninful way? It’s because they couldn’t. They can’t even tweak their own core source code to allow it. Skype has never disclosed this, but it must be a source of monumental frustration for them.
That frustration boiled over in an interview I did with Skype last week, where they made it very clear that they want to, and plan to, open up widely to developers. But until this litigation is cleared up, and Skype has access to the actual source code that runs its service, that isn’t going to happen.
This new litigation could tank the acquisition. Or it could change it materially. Or it could result in a big compromise where Niklas and Janus take a big role in the new Skype. But whatever happens, it has very little to do with Mike Volpi and Index Ventures. The real story here is that Skype is restrained from innovating because they don’t own their own IP. In fact, they can’t even see the core IP.
Note to self. Next time I spend 2.6 billion on buying a company, I will remember to buy the source code as well.
it should definitely be on the checklist.
Looks like the dynamic duo will get their earnout after all.
I hope gtalk enables calling regular old phone numbers, and forget about skype and these fucking IP trolls. They do deserve the innermost circle of hell.
You never invented anything valuable, right? Or did you?
google talk is exactly the right sort of technology we need. Skype, embrace the open option!
xmpp + jingle and everyone wins.
http://en.wikip...rg/wiki/Jingle_(protocol)
HA HA HA HA
IP trolls. LOL
But if you pay with other people’s money you can get away with a sloppy due diligence.
I remember going through the M&A slide deck. Even then was preposterous – there were good synergies with Paypal but with eBay was a terrible fit. Knowing the state of the ip back then I would a firing of the board and a lawsuit for damages would have been in order imo.
On the other hand this is more information for the residents of California next time they go to the polls.
Would you vote for Meg Whitman for Governor after this FUBAR?
the same holds in the Intuit/mint/yodlee situation.
LOL… Why? because TechCrunch wrote about it?
If that’s the case, all companies owe their success to the cave man that discovered fire.
That’s it. I’m so sick of the friis- zendstrom drama that I’m breaking out the assember and I’m going to reverse engineer the joltid technology. Anyone else interested get started and we’ll colaberate at some point to set the code free into the wild.
so, uh, skype is just a pretty frontend over a licensed backend which they can’t even modify?
nice work there.
its all becoming very clear now.
why didn’t they buy / develop some of their own tech and phase it in?
Who said they weren’t? How’s that labotomy working out?
For sure. But there’s still a very interesting story in just HOW the frack-up happened … who screwed up, when, & how …
Some interesting questions behind the story, each of which could make up at least an article:
1) How do managers ignorant of the fundamentals of software technology get away with spending billions for such technology? Who hires these people?
2) How does a company without its own core source code nonetheless become worth billions?
3) How could this story have remained a secret for so many years? What happened to real investigative journalism?
Dude, don’t you understand? No one really has any idea what anything is actually worth. It’s all bluster.
Everyone has been in on the take. Journalists don’t do much other than read press releases. They are easier to mislead than your average German circa 1939.
Exactly. It’s mass media culture. No one knows what will be the next hit song or what makes a movie star who can capture the attention of millions. But, everyone can see when the snowball is starting to roll, and then the money runs after it. What the Internet industry hasn’t quite figured out is most of the “hits” will have a limited life span. The notion that you can lose money through the growth (aka fad) phase to make it up when you are established will be proven false for all but a handful of companies.
“they are easier to mislead than your average german circa 1939″
Or, your average American circa 2008. You obviously don’t know the facts about german history if you think Germans circa 1939 weren’t completely duped by a group of clever, manipulative, deceivers. Much like what is currently being perpetrated here in the good old USA.
Regarding lack of investigative journalism, in 2005 there was one article which touched on and warned of all of this but no one really paid it much attention at the time: http://www.redo...tory/index.html
Was there any actual due diligence done during the original acquisition? Was the whole thing for a customer list? It seems like this would open up the possibility of an eBay shareholder lawsuit.
Whoever did the negotiation for the deal should be barred from working in any Silicon Valley company ever again.
In fact whoever came up with the idea to acquire Skype should suffer the same fate.
eBay buying Skype was dumb. Negotiating such a dumbass deal was dumber.
Mike
I was sure that Friis and Zennstrom would have had some part of the new purchasers crew, maybe in the background or something but I appear to be wrong here.
I really can’t see a solution to this, the processing power needed to switch Skype to a new sip based protocol just isn’t possible in the time needed in my opinion and in my opinion would be a bridge too far to run for almost 20 million users.
To me this seems to be a ploy to get Skype back and on the cheap at that.
Who on earth ran legals at Ebay, not securing the IP at purchase time was criminal.
there’s a new data field for crunchbase: corporate counsel at time of acquisition
so, your telling me I have a chance?
at what, owning a sweet logo?
DEAL!
Be interesting to know which law firms were involved in the diligence when EBay bought Skype and what advice they provided regarding a deal structure that enabled the founders of the company to hold onto any rights in the code, that’s a pretty unusual structure. For the billions eBay paid, they should have walked away with clear title or at least clearly drafted licenses that gave them freedom to run the business and allow for any future innovation.
Likewise, I’d be interested to know who was advising the group buying Skype from eBay. I’m guessing a closing condition is getting this whole mess sorted out.
as i have money ( me as skype ) i would try to build a new core P2P
that would solve the problem , if they dnt want to give me the code 
that’s what this lawsuit is about Volpi apparently had access to the source code, so he’s instrumental in building a new P2P engine. it’s a mess.
don’t forget at the heart of this fiasco remains the then-CEO and team at ebay who were such incompetent in doing that deal … and now that then-CEO wants to run CA government … scary.
Meg wants to know:
What’s this “source code” thing you all talk about? I wuz just buying a “verb”. Anyways Barbie is more interesting than complicated words like “source code”. I be next guvner, please vote for me.
This is very disappointing. :-\
Thanks for the updates on this.
Interesting story !
Of course the biggest losers in this are going to be the users… and the thousands of people that have come to rely on Skype for their businesses.
I really hope this gets sorted out, because at the moment it just looks like everyone involved is in it purely out of greed.
skype isn’t going anywhere. this is just about who owns it.
Stranger things have happened. No company is too big to fail.
This kind of thing doesn’t give me much confidence that anyone involved in the current management or acquisition has much in the way of common sense.
“No company is too big to fail.”
Tell that to Bush and Obama
That explains why Ebay sold it in the first place! It looks like the only solution is to bring the founders onboard?
Srikanth
http://www.arktan.com
Great breaking story, who would have known.
So, the woman, Meg Whitman, who made this REALLY STUPID agreement now wants us to vote for her for governor?
I guess she could do a bang-up job of sending California down the toilet as well!
Only a non-tech CEO would have agreed to an acquisition deal that excluded the core technology- esp. given the high price. It’s even worse when you think about all the incredible innovation that could happen if there was a solid API.
Regarding Ebay’s acquisition of Skype and that it didn’t include the source code it’s like this:
1. At that time all record labels and movie companies were suing Kaaza’s a** for billions of dollars at their prime target was of course Joltid. Ebay of course didn’t want to have that asset on its balance sheet risking the whole company’s existence in case the copyright owners had won
2. What’s bothering though is that Ebay didn’t include a call option for Joltid to buy it (for nothing) once all the legal problems were over
At least you seem to provide a different perspective from the rest.
Having a perpetual source code license to Joltid’s GI would not have opened eBay up to any liability. It’s the difference between buying a company (including its liabilities) and buying a company’s assets.
Right! One of the biggest mistakes and oversights in tech history. I guess Meg is NOT detail oriented… just interested in the Big Picture… right?? No vote of confidence for her here!
The very first thing you need to know is that Meg was able to grab some personal cash herself on this deal with a little back door dealing, Do you think she just woke up one day & said Humm, I think we need a communications company to help ebay along??? Or do you think she maybe thought to herself “Humm, I wonder how I can scam some more cash out of eBay for myself?? That’s why she wasn’t so worried about small details like codes & petty things like that!! .. You don’t think that she just handed that kind of $$ over with out siphoning a little (or lot) out for herself .. LOL
So who was the law firm for ebay that worked on this? They have some “splanin” to do.
They didn’t sign the check. Follow the money.
I’m embedding some of the internal yammer chat we’ve had yesterday and today on this story. I think it gives more insight on how we’re thinking of it, and I like showing readers our sausage making process. Nik may write on techcrunchIT going into more technical detail:
@arrington why are you not following @Nik on Yammer?
i just watch the whole stream, it’s not like we have a ton of employees.
or…there’s a darker reason. conspiracy? maybe.
because we are actually the same person.
keyword here is the “flash thing”.. keep going..
you dont need p2p for VOIP to work thru firewalls.
No kidding – can’t you just implement STUN and TURN in conjunction w/SIP and UDP?
Wow. You should do that more often. I learned a lot from that internal discussion.
The reason Skype couldn’t build the core technology is simple – the P2P overlay network, the NAT traversal mechanisms and disruption tolerance algorithms had been perfected over time – namely Kazaa and until Skype was sold over to e-bay.
ICE or even STUN, techniques developed inside of the IETF with consensus has taken many years already to standardize… and the complexity and the unpredictable behavior of NATs and Firewalls is so well known that it has taken up a whole new WG in the IETF called “Behavior Engineering for Hindrance Avoidance” or simply BEHAVE. So if I were, Niklas and Janus, and seeing how well their proprietary algorithm works for them -I too would license the technology and let others (ebay, Joost etc) use it.
I’m not sure why ebay bought skype in the first place… buy an internet phone company with 100+ million users so that they can convert them into potential ebay customers? call ebay merchant at low costs? what?
No. Janus and Niklas could not code if their lives depended on it. They didn’t “develop” Skype any more than they “developed” Kazaa. Instead they outsourced it to four of the smartest Estonians in the country.
The code was developed by Jann Tallinn and Toivo Annus. Indeed, the main idea for Skype was Toivo’s. They know exactly how the code works, and they know how to get around it. And, get this … they still work for Skype.
So if Index clowns had half a brain, they would have just made sure that they pay enough to Jann and Toivo to keep them happy and still working at Skype (albiet hard to do since they all made over 100 million on the original deal).
Damn this is controversial.
Ebay = Morons
This is just unbielievable. The entire Ebay’s board at the time of the acquisition should be sued by the shareholders.
I don’t think Janus and Niklas can stop Volpi to get the code rewrititten so not sure what they are trying to get with the lawsuit but they are right in trying.
It’d be probably easier for them to build a new front end called ’skype2′ or something and restart the business and try and delay skipe1 for as long as they can.
“It’s” is not a possessive pronoun, it’s always a contraction. Think of it like this: “If Skype doesn’t possess its core source code, it’s pretty much fucked.”
(Para 2: “Surely those new investors wouldn’t have committed to paying $1.9 billion for 65% of a company that didn’t control it’s IP?”)
Adam, I need to cut and paste your first sentence for pretty much every other post on TC. Can’t believe so many smart people don’t know basic fourth grade grammar.
I.
“I can’t believe…”
“… it’s not butter.”
if they lose, skype might be shutdown as it will probably take some time to develop replacement technology. plus they would have to serve their user base with buggy beta software for a while as you cannot create test lab for problems encountered on real live networks/firewalls.
The skype is falling! The skype is falling! This all looks awful for ebay if you only read one side of the story. For an acquisition of this size, there were plenty of corp dev people and attorneys combing through this deal. Is it possible that many intelligent people screwed the pooch and paid $2.6B for a company with technology they knew they could never control? Yes, but Occam’s razor suggests there’s another side to this story that makes more sense from ebay’s perspective.
People – you have to read the complaint, it reads like a Michael Lewis book. Basically says that Volpi, while he was Joost CEO, was secretly plotting to kill off Joost AND steal Skype from his bosses using information they gave him. That dude has balls. Would be funny if it didn’t hurt so many people (employees, investors, users).
How does this playout for Andreessen Horowitz and their new fund? This is one of their first investments, regardless of size it doesnt help with their image.
It will be interesting to see how it impacts their wide investment style.
One wonders what the eBay board were thinking.
I find it hard to believe the due diligence team in any M&A acquisition of this size didn’t spot this.
From what I’ve read, the outside team hired to do due diligence raised numerous red flags to the then eBay exec mgmt team about the rationale to spend billions without securing the IP underlying the technology. Despite their warnings, the exec mgmt. team was keen on purchasing Skype. It’s a good lesson learned no doubt. Don’t disregard your 3rd party counselors who are providing advise that shouldn’t be cast aside. Now look at the mess that has come back to haunt them.
where have you read that?
I’d be curious to read that. Have a source?
They were to worried about filtering cash into their own pockets on the deal to deal with cody things & thingies like that .. follow the money for sure & look how much Meg & her minions put into their own pockets on the deal.. This has many twist & turns you haven’t even been close to seeing yet .. Ethics & integrity are not some of Megs strong suit .. Look back at the IPO of eBay & other businesses she has been involved with & look how much cream she has skimmed off .. I’m shocked at how shocked everybody is … Meg wishes it would go away now with her run for office .. LOL
I bet they dont own the PSD for their logo either which is why the damn thing is so frickin ugly
i’d love to be a fly in the ebay/skype conference… aehm… war-room right now! that’d sure be entertaining
this mess will go into textbooks on how ‘not to do an acquisition’ under the keywords: clusterfuck, avoid…
who were ebays lawyers? laurel & hardy?
Emphasis added? What about the spelling mistakes? Did you add those on purpose too?
missing one key ingredient – it’s personal!
Niklas/Janus were obviously interested in buying skype, using the lawsuit to drive down the price which was effective… then Volpi who they hired to run joost teams up with Index who they let invest in skype, and Volpie/Index go on to steal skype from under Niklas/Janus without including them in the deal…
…that’s why this is getting uglier by the minute
Exactly! Of all the things in the whole wide world Volpi could have chosen to go on to do after Joost – he choose this deal. Why?!?!
Uhh, because maybe he failed with Joost, and was essentially unemployable, and the ony asset he had was his understanding of the P2P code?
Well done, my apprentice.
Wait a minute, I’m confused. I thought one of the complaints against eBay by the Skype authors was that eBay was in violation of the source code non-disclosure because they opened up the source code for review during patent suits thereby breaching that agreement of confidentiality. How could they do that if they *don’t* have the source code? (Scratching head).
Surely those new investors wouldn’t have committed to paying $1.9 billion for 65% of a company that didn’t control it’s IP?
Spelling counts.
If TC wanted to do investigative journalism than be a blogging tabloid, it would seek out the people who did the original deal, find out who counseled eBay on the IP rights, what the rationale was and if there was full disclosure of the distinction between the client and the network, etc.
It would also verify that SIP indeed works with NAT and Firewalls but just as getting a piece of standard software to work on multiple NAT and firewall configuration and realize the advantage of Skype was not because of its P2P vs SIP but rather with the time Skype has had to work out these problems in its proprietary network.
Good case study of the difference between MSM and blogosphere. The latter may ‘discover’ news especially if it falls into their lap but we need the latter to seek out the stories and do in-depth investigations. Too bad the business model is broken for MSM to do that anymore.
Speechless……Wow!
Morgan Stanley usually handled due diligence for eBay. Very few eBay staff were involved in any of the negotiations or due diligence because of the secrecy and speed of the deal. Primarily on VP and above level were involved. eBay was worried Google and Microsoft were also bidding so they wanted to act quickly. People knew about the ip issues with Joltid and Skype but didn’t let it stop them.
Don’t forget that Zenstrom and Friis were shady, law breaking outlaws who had created the illegal p2p music sharing service Kazaa. They had arrest warrants out for them at the time and the duo could not even set foot in the US without being arrested on the spot.
Unfortunately, investment bankers are very vested in making the M&A happen for the fee and they can feed the egos of the CEO and others to make it happen. They don’t have a fiduciary responsibility to the acquirer’s shareholders.
There is a very good recent article from David Wiedner of MarketWatch in Wall Street Journal on M&A as the biggest con from Wall Street.
http://online.w...3615316747.html
Looks like Morgan Stanley helped sell the Brooklyn Bridge to Ebay. Those two may be shady law-dodgers but the fact that they suckered one of the largest technology companies is unbelievable.
Never trust an old pirate! Yarr!
BTW, the Joltid software (Global Index) has nothing to do with VOIP really. Skype’s proprietary VOIP service runs on a layer that sits on top of the Joltid code. The Joltid code is what handles the P2P and tunneling aspects of the service (which is why the same code was previously used in Kazaa). Global Index manages how the peers find each other and how the infomation about the peers is communicated and stored throughout the network.
Meg and John Donahoe knew exactly what they were buying and what they weren’t. They are smart people who made some really bad decisions because the eBay auction business was slowing and they needed a growth engine. Skype was the hottest startup in the world at the time. Who cared if the service was free and the more users who actually had the Skype client meant less revenue from the Skype In/Out services that connect it to regular and mobile phones?
The execs deluded themselves about synergies because all they saw was the incredible growth of Skype. Just get big enough and then figure out how to monetize it later was the real thinking. Sound familiar (Google / YouTube … cough)?
eBay missed the boat on the real potential synergy though – leveraging the P2P software and expertise to build a fault tolerant, distributed version of eBay that runs on the network instead of costing hundreds of millions of dollars to run in eBay datacenters.
Yeah, the last paragraph was also my kind interpretation at the time of why eBay bought Skype in the first place. But now knowing the licensing terms of what they bought, they didn’t get anything they could use without breaking the licensing arrangement for creating that distributed version of eBay… unless they wanted to run that entire infrastructure on a third-party owned platform.
..aside from Meg Whitman/Ebay, what does this say about Marc Andreeson–the poster child for all things web? Surely someone with his ‘pedigree’ would be savvy enough to do due diligence before investing such large sums of $$.
or perhaps his success was simply a fluke and largely due to being at the right place at the right time…
“or perhaps his success was simply a fluke and largely due to being at the right place at the right time…”
Frankly, that goes for MANY so-called “visionaries” in the computing landscape. Even Bill Gates! You have to repeat your victories to prove it’s not a fluke (e.g., Steve Jobs).
All the other VOIP services get superior results without the Jolt code. This is one big non-issue.
Smart guys :
When you sell your two bit web startup, I presume you expect that you will sell them the source for the Oracle you use. Of course you won’t because you license it.
When you license something you also commit not to re-engineer it.
You license Oracle, you re-engineer it, you make money on this re-engineered product, you get sued. Of course
Skype license Joltid, re-engineer it, they get sued.
Easy really.
This case, hopefully cements the rights of inventors.
The question is why eBay didn’t realize that the “Oracle in Skype” was central to the product and that any future development to extend Skype would require modifications to it. No web startup would be bought if it had that kind of a dependence on Oracle.
<>
…cough…Mint…cough
If Joltid had been a sexy TC50 company, whose tech was licensed to big bad MSFT, and MSFT had hacked it, used it and sold the company for even more, with no benefit to the sexy TC50 company, who would TC be defending ?
The problem isnt the licensing, Ebay probably had a fine license to use this stuff, and their counsel was fine. They just broke the license agreement. That’s not Meg, their counsel or anyone’s fault. The buck stops at the CEO of Skype. He’s the one who breaks commercial agreements.
How is it not “Meg, their counsel, or anyone’s fault” for paying $2.6 BILLION for a product without getting any of the actual IP rights to it?
And spare me the “that was the dotcom era” argument. Even back then people were wondering wtf they were doing spending that kind of money, and that was with the assumption they GOT ownership of everything with the purchase.
Trying to defend Whitman for this is hilarious, unless, of course, you are supporting her governor run here :p
One of the arguments in the SCO-Novell-IBM sue-fest is “how on earth could it be that SCO would be stupid enough to buy everything from Novell *except* the copyrights to UNIX?”. The problem being, the actual contract very clearly says that the copyrights remained with Novell.
That eBay should pay such a large amount of money to Skype’s founders and still not secure access to the source code powering the product just goes to show that its not such a far-fetched thing. Monumentally stupid, yes. Unimaginable, no.
I’m hoping Skype gets bought by a liberal, forward thinking company, unlike Ebay.
How about ACORN?
There might be more egregious examples, but from my perspective this was perhaps the poorest executed, most ill-conceived acquisition in the history of the computer industry. I can’t think of anything that comes even close. Meg Whitman is going to be haunted by this deal for a very, very long time.
On the source code issue again, since the main article post indicates that they (Skype) may not even have the source code. From this article on Skype Journal:
http://www.ewee...pe-Back-133177/
“Earlier this year, Skype and Joltid became embroiled in a dispute about that technology. In March, Skype and Joltid sued each other over Skype’s right to use the technology. Joltid alleged Skype not only unlawfully modified its global index source code but made it available to third parties. Trial is scheduled for June 2010.”
So there are two assertions here that indicate that Skype does indeed have the source code in contention. The first is the modification claim and the second is the reveal to 3rd parties claim (patent litigation discovery).
The correct attribution for that article is SkypeJournal via eWeek.
Some of you are forgetting that Zennstrom and Friiss founded Joltid AND Skype. They purposely kept their own Joltid intellectual property separate from their own Skype IP. They kneecapped Kazaa and Joost in the same way.
They could have given Skype (their own company!) a perpetual irrevocable license and even the source code but they didn’t. Why? So they could always have something to hold over whoever buys any of their companies?
One note: Whoever buys a company from these guys in the future needs to read the fine print. I do no understand how ebay let this pass.
There’s no possible way Skype could of grown from ~50 million users when acquired by eBay in 2005, to the ~450 million users it has in 2009, without the source code to it’s peer-to-peer technology layer.
I think the key here is the wording:
“Skype did not obtain a license to the GI Software source code”.
That doesn’t mean they didn’t have the source code.
What’s skype web-based ?
Actually, its competitor, headcall, a advanced p2p voip operator based on china, has already gone to the web. For example, you can click the following link to make a free call to me
http://www.head...lto=10010012302
If the phone number is replaced to your headcall number, any body on the web can make a call to you.
The caller on the web doesn’t need any more than a computer headset. You need the voip software and a headcall number, they are both free from headcall website ( http://www.headcall.com )
You can alse use a headcall ip-phone instead of the computer.
When you are outside, the call from web will be forwarded to your cell phone if configured.
Would it be possible for Skype to acquire Joost…