As previously announced, eBay received approximately $1.9 billion in cash and a note from the buyer in the principal amount of $125 million. The company also retained an approximately 30 percent equity investment in Skype.

The company also purchased senior debt securities with a face value of $50 million as part of a Skype debt financing.

The news of the completion of the sale of the successful Internet communication company comes two weeks after Skype founders Niklas Zennström and Janus Friis announced that they had reached a settlement with eBay in return for a 14% stake and board seats, clearing the way for the deal to close after some very public legal quarrels.

As you may remember, Andreessen Horowitz partner Marc Andreessen swiftly deemed Skype one of the most important companies on the Internet after the settlement was reached and announced (and made quite a strong case for it).

TechCrunch was first to report the imminent sale of Skype to the investor group back in August 2009 and shortly after confirmed that the deal would value the company at $2.75 billion. As a reminder and just for reference, eBay bought Skype in 2005 for $2.6 billion, although eBay has since written Skype down to $1.7 billion.

You won’t hear me say it was the smartest acquisition eBay ever made – not buying the actual core IP was downright idiotic – but they did kinda ok with it in hindsight. Let’s not forget eBay still owns a little less than one third of the new Skype either.

In the words of Skype CEO Josh Silverman: say hello to the future.

How much bigger can Skype get on its own two feet?

(Thanks to @YarinHochman for the tip)

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They aren’t saying much other than that the Gizmo5 team will join the Google Voice team, and that new Gizmo5 signups will be disabled.

One thing this gives Google – a much needed soft phone on the desktop for users to make calls through Google Voice. And integration with Google Talk is likely as well, which will let users of that service access the normal telephone system for inbound and outbound calls.

All in all this pits Google Voice nicely against Skype, which was also looking to buy the company. From the blog post:

Today we’re pleased to announce we’ve acquired Gizmo5, a company that provides Internet-based calling software for mobile phones and computers. While we don’t have any specific features to announce right now, Gizmo5’s engineers will be joining the Google Voice team to continue improving the Google Voice and Gizmo5 experience. Current Gizmo5 users will still be able to use the service, though we will be suspending new signups for the time being, and existing users will no longer be able to sign up for a call-in number.

We’ve acquired a number of small companies over the past five years, and the people and technology that have come to Google from other places have contributed in many ways, large and small, to all kinds of Google products. Since the GrandCentral team joined Google in 2007, they’ve done incredible things with Google’s technology and resources to launch and improve Google Voice.

We welcome the Gizmo5 team to Google and look forward to working together to bringing more useful features to Google Voice.

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After the Skype settlement, though, Gizmo5’s strategic value to Skype sort of plummeted. In the meantime, Google bought them, say multiple sources with knowledge of the deal, for around $30 million in cash. The deal is done, say our sources, and will be announced shortly.

Gizmo5 is a good fit with a number of Google products. Google Talk allows voice calls between users but has no PSTN link to allow incoming or outbound calls to real phones. Gizmo5 does this well already.

And Google Voice is a great VoIP and phone identity service, but they have no endpoint for calls. Gizmo5, which by the way already integrates with Google Voice, is a soft phone end point for Google phone users. In other words, you will be able to make and receive calls to your Google Voice phone number from your computer.

This looks to me like Gizmo5 will be the glue that puts Google Voice and Google Talk together into a single product. And that product looks a lot like a Skype competitor.

Gizmo5, which was founded in April 2003, has raised $6 million to date, plus an unspecified amount from founder/CEO Michael Robertson. Prior to Gizmo5, Robertson gained notoriety with his founding of MP3.com and later MP3tunes (which has led to big music suing both the company and himself personally).

We’ve reached out to Gizmo5 and Google for comment.

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Earlier this morning, Niklas Zennström and Janus Friis settled their lawsuits with eBay and a syndicate of investors in return for a 14 percent stake in the company they founded. The lawsuits were complicating the spin-off of Skype from eBay because the Skype founders still controlled the service’s underlying peer-to-peer technology.

In an interview with me this morning, Marc Andreessen, one of the investors through his new fund Andreessen Horowitz, told me, “The deal was never held up. The money was in escrow and was going to close” even if the lawsuits weren’t settled. The transaction is on track to close later this quarter. The other investors are Silver Lake Partners and the Canada Pension Plan Investment Board. Index Ventures and Mike Volpi are out of the deal. Josh Silverman will continue to be CEO.

Andreessen is glad that the lawsuits are settled and that the “Joltid IP is now owned by Skype,” but was prepared to litigate if it didn’t work out. He explains: “This was a completely known situation going into it. It was one of the reasons the deal was available, because of the situation. We assumed it would be a good idea to bring the founders on board and resolve all the issues, we are very pro-founder. There was some drama along the way, but we came out with everybody in the same boat rowing in the same direction.”

In addition to legal avenues, Skype also had the option to try to switch to a different technology, such as SIP-based Internet telephony. “Had this not happened,” says Andreessen, “there were various technological paths that could have been followed. Now that it is settled, it is not necessary to make any changes. The technology is scaling very well.”

Skype is on a $740 million revenue run-rate and boasts 521 million users worldwide. “Skype is gigantic and yet still a relatively small percentage of international call volume,” notes Andreesen. “This is, and ought to be, one of the most important companies on the Internet.”

Now that the deal drama is over, we’ll get to find out.

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Index Ventures, a historical investor in Skype, is not going to be part of that buying party after all, and its partner Mike Volpi is definitely out of the picture (no surprises there). Marc Andreessen, partner of Andreessen Horowitz, tells us: “Everything is settled—all lawsuits, all IP. The Joltid IP is now owned by Skype. The company is free and clear to execute to its full potential.”

The original Skype founders, Niklas Zennström and Janus Friis, are now back in the game. The Scandinavian businessmen are getting 14 percent of Skype back for rights to the Global Index P2P technology their company Joltid controls (which is key to the Skype software) – and not 10% like previously reported by other media. In addition, Friis and Zennström gain representation on the board of the new entity. The two men are also putting in a ’significant amount of capital’ of their own in exchange for the stake in the new company, presumably through their Atomico Ventures fund.

Marc Andreessen, General Partner of Andreessen Horowitz, tells us: “Everything is settled—all lawsuits, all IP. The Joltid IP is now owned by Skype. The company is free and clear to execute to its full potential.”

Update: Andreessen shares more of his thoughts on the deal, saying Skype is one of the most important companies on the Internet.

GigaOM first reported that a settlement might have been in the works earlier this month, a report that was later echoed by the NY Times.

Thus ends the legal kerfuffle surrounding eBay’s sale of Skype to the investor consortium (news we broke last August), which it acquired back in September 2005 for $2.6 billion (written down to $1.2 billion in 2007). Friis and Zennström had accused eBay of breaking a licensing deal and sued the investor group last September, claiming damages were growing by $75 million a day.

The newly structured buyout group is now on track to buy approximately 56% of Skype, with eBay continuing to own 30% and the original founders 14%, in a deal valuing Skype at $2.75 billion. EBay is expected to receive approximately $1.9 billion in cash upon the completion of the sale and a note from the buyer in the principal amount of $125 million. The deal is still expected to close in the fourth quarter of 2009.

Withdrawing party Index Ventures released the following statement:

“We are pleased that Skype will now be able to put litigation behind it, and we wish Josh Silverman, his team and the Skype investors well in continuing to grow a great business. Although Skype has the potential to be a great investment, the deal terms changed for Index such that it no longer matches our investment criteria and thus we have decided not to participate in the transaction.”

Meanwhile, the two ruthless European entrepreneurs who founded Skype walk away with a renewed stake, seats on the company’s board and the smile of victory on their faces.

(Top image via E24)

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The old Skype founders will now have a stake in Skype according to unnamed sources. That makes sense. It was what eBay was negotiating with Skype long before the current buyout offer, and the team has to get something in exchange for dropping the intellectual property litigation.

But Index Ventures, the architect of the deal, is apparently out. For Silverlake Partners and Andreeseen Horowitz to agree to that either means there’s too much money involved for anyone to be worried about business loyalties, or there’s enough of a smoking gun that Index had no choice but to get away from the deal and all that liability.

Whatever the truth, everyone is in for a wild ride. Nobody who does business with the Skype founders ever seems to come out of it happy. Maybe Marc Andreessen has the patience to change all that this time around.

Just one problem, though. No one has ever described Marc Andreessen as a patient man.

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Skype app developer Netralia is bringing high-quality video recording through it’s app, VodBurner. VodBurner lets users create video podcasts directly from Skype calls using webcams, incorporating recording and post-production editing in a single software package.

The app, which is $9.95 per month per computer, is fairly simple. Once downloaded, it will let you record a video and audio conversation via Skype and will then let you edit the final file within its software. What’s interesting about the app is that it actually detects who is talking (using volume) and will record the video of that person during the time. If both people are talking, the app will record video on both individuals in the frame. You can also add graphics and sub-titles to the videos and publish the clips as ASF files suitable for uploading directly to YouTube and other video-hosting services.

The end video is of course not pristine because users are often using webcams and the editing features are fairly basic (though Vodburner plans to release for advanced editing features in teh next release of the app), but the file can easily be produced into a nifty podcast. Ecamm and SuperTinTin do similar things with recording conversations, but VodBurner’s founder Jeremy Hague says that the app’s beauty is in it’s easy-to-use editing and production tools.

Netalia has also created other popular Skype apps including Skylook and Callburner. There’s been an uproar around Skype axing it’s “Extras” developers program, with many saying that Skype is out of touch with its developer community. But Hague said the Extras program was lacking in execution and is hopeful that Skype will launch a new and improved program for developers. And until then, says Hague, Netralia will continue to make apps that are useful to Skype users.

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Voxbone will be transcoding between Skype’s wideband SILK codec and the HD codec G.722, with support for additional codes planned for the future. In the end, Voxbone says it wants to turn the technology into the sound quality standard for VoIP and “eventually all telephony”.

For your background: iNum is short for “international Number”. Think of it as a geographically-independent phone number that lets you use the same number all around the word, instead of needing to switch to a new number from a new supplier in case you move to a new country or stay in one for a long period of time. Here’s a list of current providers.

iNum makes use of the +883 global country code newly created by the ITU (International Telecommunication Union). The startup received a first allocation of 100 million numbers from the organization last year.

Because iNum numbers can be dialed from PSTN phones (aka via the ‘plain old telephone system’) as well as IP endpoints, Voxbone’s move enables conference calls with attendees on conventional phones, who will hear within the PSTN’s audio constraints, and others with HD IP endpoints, who should enjoy a richer sound. Skype made its SILK super-wideband audio codec freely available last March.

We should note there is some industry criticism around the concept of ‘HD calling’, which at times gets billed as a fancy new term that doesn’t describe anything earth-shatteringly new or innovative and something which there is no demand for.

Any specialists who want to weigh in on this discussion?

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Even though it is embroiled in a nasty legal battle with its founders over its future, Skype continues to rack up impressive numbers. In today’s third quarter earnings from eBay (which still owns Skype, but is preparing to unload it), the company breaks out Skype’s performance (see slide above).

Skype’s registered users grew 41 percent to 521 million people. That’s a stunning 40 million new registered users in the past three months. Revenues grew 29 percent to $185 million. Free Skype-to-Skype minutes grew 74 percent to 27.7 billion minutes, whereas SkypeOut minutes (which is what members pay for) grew 44 percent to 3.1 billion minutes.

All of those SkypeOut calls translated to a healthy $185 million in revenues, up 29 percent from a year ago. If it keeps up at this pace, it should easily be able to exceed its $1 billion annual revenue goal by 2011.

Skype was one of the few bright spots in eBay’s earnings, along with Paypal, which brought in $688 million in revenues (up 15 percent). eBay’s bread-and-butter marketplaces business was down 1 percent to $1.365 billion.

eBay Q309EarningsSlides FINAL

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After adding essential features like video chat and screensharing options to the application back in May, Tinychat has recently leveraged P2P technology to enhance the service (see p2p.tinychat.com) and added embed capabilities that basically enable anyone with a website to integrate a robust, 100% peer-to-peer enabled video chat system by simply embedding some code and fiddling with some of the variables. (Skype, you listening?)

Tinychat has just been given a new lick of paint, with new controls and a slicker design that’s much more inviting. Also, you can now enter chatrooms and start conversations with multiple people – whether using text, video, audio or a combination thereof – by connecting to your Facebook or Twitter account, eliminating the need to register.

I think this service is awesome, and I consider it to be closest to being the “Skype for the web” (which someday, Skype will introduce, let there be no doubt) than anything else I’ve tried in the past. You go to the Tinychat website, pick a name for your conversation room at hand and bang, you get an instantly shareable, dedicated web-based chat location where you can initiate video or audio chats with decent quality, share your desktop view with others and soon also a way to exchange files from computer to computer.

I’m seemingly not the only one who digs it either. Here’s a quick and dirty comparison based on Compete traffic estimates for TokBox, which developed a similar application with $14 million in VC funding behind them, and Tinychat.com. Alexa shows even more growth for the bootstrapped initiative.

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There are loads of interesting nuggets in the documents, which are well worth a read if you’re as fascinated by the whole thing as we are. For instance, would you have guessed both Facebook and multiple members of the Apache Software Foundation played an interesting role in this particular part of the story?

To understand why, you need to understand what the lawsuit against Volpi, brought on by Joost and Skype’s initial founders Janus Friis and Niklas Zennström, is actually about.

According to the two European entrepreneurs / enfants terribles, Volpi (pictured) has systematically breached his fiduciary duties at Joost to become the next Chairman of Skype if it were to be effectively sold to the new investor group that has agreed to acquire the company from current owner eBay.

This group also includes Volpi’s current employer Index Ventures by the way, which is being sued by the Skype founders separately.

The allegations span three core issues: the misappropriate use of confidential information gained at Joost in an effort to entice the buy-out group to join Index Investors in a play for Skype, a misuse of the same confidential information for plans to revamp Skype’s technology in the long run, and the attempts made by Volpi to lure key Joost engineers with knowledge of JoltId’s intellectual property (GI or Global Index, the peer-to-peer protocol technology developed and owned by Friis and Zennström) to the new Skype.

The third part is where Facebook comes in, albeit indirectly.

In July 2009, then-CEO of Joost Mike Volpi according to the court documents – which includes evidence in the form of e-mail communications and more – arranged a meeting between Index Ventures’ Danny Rimer and Joost Chief Architect Justin Erenkrantz (pictured) to offer him a potential job at the new Skype.

Erenkrantz was deemed one of the online video startup’s “most valued engineers” by the company’s founders in the case.

Just for your reference, Erenkrantz is an ex-Google engineer, current President of the Apache Software Foundation and former treasurer of the association.

In addition to Erenkrantz, Volpi allegedly undertook attempts to poach Sander Striker, Director of Engineering at Joost and also a member of the ASF.

The goal of the meeting with Erenkrantz, held at an industry conference, was to have him take a look at the current endeavors within eBay to develop a technology work-around for the P2P technology intellectually owned by JoltId and get his feedback, and to assess if he would be a good new member of the Skype diligence team (pending acquisition) and the new company’s technical team after the deal was done. Soon after, an official offer to Erenkrantz was made by Volpi.

The reason why that irked Friis and Zennström tremendously, the court docs show, was because they went to great lengths to retain Erenkrantz at Joost when Facebook – after Amazon – offered the man an engineering position at the social networking company, costing Joost a lot of money. They had managed to keep him from taking a job as software developer at Google after two internships there when they first hired him, and he was clearly a very valuable asset for the company.

Straight from the docs (also embedded below):

Although Volpi’s efforts to poach both of these Joost employees were equally unlawful, his overtures to Mr. Erenkrantz were particularly threatening. As Volpi was aware, Joost had recently expended significant effort and company resources to retain him – in the face of an offer for Mr. Erenkrantz to join Facebook.

As Joost founder Janus Friis write in a June 5, 2009 e-mail to Volpi: “I spoke to Justin Erenkrantz yesterday. Given the concerns about loosing [sic] him and the signficant ripple effects it could case,” Mr. Friis sought Volpi’s approval in paying him a substantial retention bonus, increasing his salary, and offering him a position as a part-time technical consultant for Joltid. Volpi concurred in these retention efforts, and having supported Joost’s bid to keep Mr. Erenkrantz from joining Facebook, nonethless attempted to lure Mr. Erenkrantz away from Joost a month later.

For what it’s worth: Friis and Zennström, who are still eager to buy back Skype themselves, seem to have Erenkrantz on their side in this matter. This is unsurprising, because he doubles as a consultant for Joltid at the moment, but it doesn’t bode well for Volpi in this case. In a declaration, Erenkrantz unambiguously supports the Skype founders’ motion for preliminary injunction (also embedded below).

Business, egos, lawsuits and emotions. It’s like watching Dallas!

PI Brief – PUBLIC –

Declaration of Justin Erenkrantz In Support of PI –

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Little is known about the ’secretive’ startup, and its website reveals nothing but the logo at this point. NYT reporter Brad Stone writes that the upstart boasts offices in both Los Angeles and San Francisco and that it’s going to offer a paid subscription-based music consumption and purchasing platform for both PCs and mobile phones, starting early next year.

Like other startups in this field (MOG, Spotify, Deezer and many others), the main challenge for Rdio will be to get the major players from the recording industry on board to supply music to its online catalog without fear of copyright infringement litigation. Needless to say, that’s a hard and expensive nut to crack, and any executive from the labels who hasn’t forgotten and/or forgiven Friis and Zennström for creating Kazaa will be wary before signing any type of agreement with Rdio. Nevertheless, Rdio CEO Drew Larner tells the NYT that talks with music labels are “continuing and confidential”, which an exec at EMI for one confirmed.

A quick Internet search appears to identify Larner as former director at Zoo Entertainment, and before that a Managing Director of Europlay Capital Advisors and Executive VP at Spyglass Entertainment Group. A search on LinkedIn only turns up Malthe Sigurdsson, a London-based designer who used to be creative director at Skype. Another interesting tidbit: they seem to own the domain name rd.io as well.

Friis and Zennström have been keeping busy starting lawsuits lately: first they sued Skype owner eBay over core technology used in the VoIP service that they own, then they filed a copyright suit against eBay and the investor group that is going to buy Skype from them, and then they went on to sue former Joost chairman and CEO Mike Volpi.

You have to wonder where they find the time to set up and back new startups in between.

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Skype, which is being sold from eBay to a new investor group, doesn’t have control over it’s core P2P technology, and that intellectual property is now the subject of two lawsuits – one against Skype and one against Mike Volpi and Index Ventures, who are part of the buyout group.

That puts Skype at significant risk. Without the technology Skype can’t make Skype to Skype calls, the core of its service. And those lawsuits don’t appear to be close to settlement – some people close to Skype saw that there is a good chance the cases will actually end up being tried in a court.

We’ve heard Joltid wants as much as half of Skype Unless Skype makes huge concessions to plaintiff Joltid and settle the case, they have two backup plans.

The first is to rebuild the back end themselves. The second is to acquire someone who they can plug in in lieu of Joltid. Skype is doing both.

They have an internal project called Gecko to build a SIP based P2P back end for Skype. And they’re hiring like crazy. Theo Zourzouvillys, Bruce Lowekamp and Jason Fischl are just a few of the senior VoIP/SIP experts they’ve brought in recently to work on the Gecko project within Skype Labs.

But Gecko may not be progressing as quickly as Skype needs it to. That’s where Gizmo5 comes in.

Gizmo5 is a solid Skype-like service. With just 6 million registered users, it’s far from a competitive threat. But Gizmo5 is a tested, partially scaled SIP P2P VoIP system with a team of engineers that understand the issues Skype is facing.

Unlike Skype, Gizmo5 isn’t able to do all calls over P2P. Server nodes are still used for NAT and Firewall traversal. But bandwidth prices have dropped substantially over the years, and the cost savings from Skype’s architecture may no longer be necessary for the business to remain profitable.

More on this as it develops.

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Each Skype call will take place this week in the buildup to the Stand Up events that will take place around the world this weekend as citizens urge their governments to strive to reach the Millennium Development Goals.

The Millennium campaign looks to help the world reach the eight Millennium Development Goals developed by the United Nations in 2000, with the target of having each of them fulfilled by 2015. The goals focus on ending poverty and the root causes behind it, as well as furthering education, promoting gender equality, reducing child mortality, improving health care and more (you can see the full list here).

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Negotiations continue, say multiple sources, between eBay, the new proposed Skype owner group, and the original founders Janus Friis and Niklas Zennstrom, via their company Joltd, in what is turning into a very high stakes and very emotional game of poker.

Joltid first sued eBay/Skype in July 2009, claiming breach of a license agreement that granted Skype the use of key technology.

Multiple sources have confirmed to us that settlement negotiations were underway with Joltid to give the company a percentage of Skype to drop the litigation. Joltid was to receive “between 5% and 15% of Skype” to settle.

But the announcement of an agreement to sell most of Skype to a new investor group scuttled the settlement, say our sources, because of the massive debt that the company would be burdened with following the closing. Part of the purchase price for Skype is lender financed, and the debt would be on Skype’s books.

The breakdown in negotiations led to the second Joltid lawsuit. Our sources say that a settlement should be possible, but that emotions are keeping the parties apart. “We’re talking about some very rich, very emotionally immature people here. On both sides of the table. It’s not about money, it’s about saving face.” The fact that so much of the conflict is playing out in the press is evidence of this as well.

There’s another odd issue here as well. In the first lawsuit, Joltid claimed that Skype misused Joltid source code: “In particular, 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.”

But the second lawsuit by Joltid claims that Skype never had the source code to begin with. The lawsuit’s goal is to prevent them from getting it. From the lawsuit: “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.”

Our sources say that Skype does indeed have the GI software source code, although it isn’t clear if they have a right to it or not. The key issue seems to be that they modified that software and disclosed it to third parties.

Skype has long been attempting to rewrite their P2P engine so that they wouldn’t have to rely on that Joltid code, we’ve heard from former employees, but they’ve been unsuccessful to date. Skype can move away from P2P to a purely SIP based infrastructure, but bandwidth costs would skyrocket. Skype is supposedly 7% of all international long distance minutes today, mostly from Skype to Skype calls that use the P2P backend. Paying bandwidth charges on those calls isn’t attractive, and Skype appears to be unable to develop a P2P based SIP infrastructure that performs well.

Game theory suggests that the multiple parties would work the situation out. Shutting down Skype just doesn’t make sense. But as we said, emotions are running hot right now, and now no one seems to want to back down.

The buyers group has certain protections from the litigation in their purchase agreement. Specifically, they don’t have to close the deal if there are injunctions around the lawsuit (meaning Joltid wins). And if the transaction closes, eBay is on the hook for 50% of any damages.

The likely outcome of all of this remains the same – Joltid will get a stake of some size in Skype. But given the players involved, anything could still happen.

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Acacia Research’s subisidiaries are in the business (PDF) of acquiring, developing, licensing and enforcing patents, according to its website.

One of those subsidiaries, Peer Communications, filed the patent case in August 2006 in U.S. District Court for the Eastern District of Texas. The court ruled in favor of Skype and eBay swiftly, but the case then went on to the U.S. Court of Appeals for the Federal Circuit, which has now affirmed the lower court’s decision.

The two patents are somewhat related, to be fair. They deal with “a uniform user interface for network access that can enable a network agent to access multiple discrete network services,” according to court filing documents. The technology contributes to a system that allows groups of loosely interconnected agents to communicate contemporaneously without intermediaries such as a servers and to exchange data. A quick Web search reveals that the actual patent holder is most likely Miami-based Sociocybernetics, which has held such a patent in the U.S. since November 2005.

It’s a small victory for Skype/eBay, who is neck deep in far more serious litigation than this patent case. More on that later.

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Over the past few months, Skype has been testing click-to-call ads on the Web, partnering with local-business directories who pay for the calls. Tomorrow, Skype is set to announce the official roll-out of its click-to-call advertising service with European Directories, one of the largest local business directory services in Europe.

Part of Skype’s latest version for Windows (Skype 4.1) comes with a browser plug-in that lights up phone numbers on Web pages. Users can click on the numbers to automatically launch a Skype call, but they pay for the SkypeOut minutes. Skype is taking the same functionality and making those calls free to consumers by partnering with directory listing services who pay for them instead.

Initially, European Directories will pass along the calls for no additional charge to its business customers. Eventually, it hopes to demonstrate the value of the calls and charge for them on a click-per-call basis. As I explained back in April:

Click-to-call ads have been tried before, but this turns the actual phone number into an ad. Click it, and you call the business you were looking for, and the call is paid for by either the business or the Yellow Pages partner. The $32 billion Yellow Pages industry is quickly moving to the Web and Skype has the ability to light up any business phone number found on the Web.

Presumably, the Yellow Pages partners would only pay for numbers in their directories, so Skype would have to come up with a way to indicate which calls are free and which ones are not.

And that is exactly what it has done. Free calls, paid for by partners, are highlighted in blue when encountered on a Webpage, while regular SkypeOut calls are highlighted in gray.

Turning phone numbers found on the Web into ads could help Skype open up a significant new line of revenue. But already Skype is playing catch-up against younger rivals. Yext, one of this year’s TechCrunch50 crop which just raised $25 million in new funding, has been turning online directory listings into click-to-call leads for years.

Now, Yext is moving beyond simple click-to-call ads to pay-per-action ads based on what people actually say in the call and monitored by sophisticated speech-to-text software. Skype has “no plans to do anything based on what someone is saying on the call,” says Don Albert, Skype’s Vice President of Advertising. And it might not have to. If it can get just a small portion of its 480 million users worldwide to start clicking on those free calls, its advertising business will do just fine.

Of course, that is assuming it settles those pesky lawsuits with the Skype founders about its continued access to the basic technology that Skype runs on.

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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.

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The Skype-eBay plot thickens. Joost and Joltid, both companies owned by Skype’s founders, have filed a lawsuit against former Joost chairman and CEO, Mike Volpi. The suit also names Index Ventures, the VC firm where Volpi is a partner. In a nutshell, the legal documents say that Volpi obtained confidential information in his role as CEO of Joost about how to circumvent Joltid’s IP. We’ve embedded the legal document that appears to have been filed this morning, below.

Earlier this week, Joltid, the Swedish firm owned by founders of Skype sued eBay and recent Skype buyer Silver Lake Partners and its partners in the buyout, Index Ventures, Andreessen Horowitz and the Canada Pension Plan Investment Board; accusing them of copyright violations. The twist: Skype founders Janus Friis and Niklas Zennstrom also founded Joost and Volpi, Joost’s former chairman and CEO who left the imploding company in June to become a partner at Index Ventures, has been rumored to be a contender for Skype’s CEO position.

While Friis and Zennstrom named Volpi as a defendant in the earlier suit against eBay, it appears that the new suit against Volpi alleges leaking of trade secrets from Joost, breach of contract and “civil conspiracy.”

So what does this all mean? It’s a little complicated and slightly twisted. Yesterday, TechCrunch’s Robin Wauter’s reported that Skype is actively shopping around for companies that provide web-based communication services such as browser-based calling and video chats to add this functionality to the product. What the complaint basically implies is that at Joost, Volpi had access and knowledge of information regarding the ability for the peer-to-peer technology to go to the web. In his role at Joost, Volpi knew how it could be possible to make the switch to a web-based communication service within the source code. This source code is intellectual property owned by Joltid. The reason the bid from the consortium of bidders was so high, was because they all has knowledge (from Volpi and participant Index Ventures) that its possible for Skype to go web-based.

The complaint goes on to say that Google and Microsoft were considering buying Skype and were both aware of the ability for Skype to possibly add web-based functionality but didn’t want to touch it because of the complicated IP situation, since Joltid owns the code. All of that said, the complaint doesn’t have any affidavits or direct evidence that Volpi used this info in the bid to buy Skype.

eBay sold Skype in a deal valuing the peer-to-peer telephony service at $2.75 billion a few weeks ago, with the new investors owning approximately 65% of Skype, with eBay continuing to own 35%. Several months ago, Skype’s founders made their intentions public by announcing they wanted to buy Skype back from eBay. Shortly after this announcement, eBay announced that Skype was to be spun off as a separate company and then IPO.

From a press release issued by Joost/Joltid this morning:

The lawsuit alleges breach of fiduciary duty against Volpi, aiding and abetting breach of fiduciary duty against Index, interference with prospective business advantage, misappropriation of trade secrets, breach of contract against Index, breach of confidence, and civil conspiracy. The suit seeks an injunction requiring the defendants to return to the plaintiffs all documents and files containing confidential information that the lawsuit alleges was misappropriated from Joost, and enjoining the defendants from making any use of the alleged misappropriated trade secrets, among other things.

Update: More TechCrunch commentary on this story here.

Joost –

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The rumors just won’t stop.

This time, however, it’s about the company’s product strategy rather than its general fate. A well-placed source tells me Skype management is actively shopping around for companies that provide web-based communication services such as browser-based calling and video chats.

To date, Skype has focused on desktop and mobile software to handle peer-to-peer based calling over the Internet. This is not surprising, because when Skype first started back in 2003 bandwidth costs were a an order of magnitude higher than they are today and desktop apps were the only way to go if they were ever going to make a decent profit from Internet-based telephony. But with bandwidth prices decreasing worldwide at a fast rate, it makes a lot of sense for Skype to at least consider moving into web applications and claim their ground. The fastest way to do that would be to pick up a startup with proven technology and early traction in that field, like TokBox, PalTalk or Tinychat.

Here’s another reason Skype might be looking at web-based communication service providers. What if eBay/Skype cannot develop a workaround that would allow them to continue the service without using the Joltid-owned source code powering its core peer-to-peer engine? It’s conceivable that might drive the company to consider purchasing companies with similar or related Web-based technology to speed up its move away from the litigation threat hanging over them.

Of course, companies talk to one another all the time and as far as we know there haven’t been any official acquisition offers from Skype at this point. But they’re definitely looking.

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As an aside, one of those conversations was extraordinary from a technical perspective. Jonathan called me via Skype, which forwarded via Skype Out to my mobile phone when I didn’t pick up. Since Google now controls my mobile number, it rang my cell and my home Vonage line per my rules. I picked up the vonage line and I had a crystal clear connection with no lag.

Christensen says that the Extras announcement is not about Skype backing away from a robust developer platform. Rather, he says, Skype is focusing on a next generation platform that will hopefully address the deficiencies of the old program and open many more opportunities for developers to build on Skype services.

Vague? Somewhat. But it’s a heck of a lot more information than we’ve ever gotten out of Skype before.

Eventually, we suspect, Skype will release a SDK that allows developers to integrate deep into Skype and make calls over the Skype service without opening the Skype client. In other words, people may start to think of Skype (voice, video, chat) as a service rather than a client that must be installed and used to communicate. Today’s tools, which include a public API and the now defunct Extras program, require developers to open the Skype client to make a call.

In the future we’ll see other third party desktop applications be able to make Skype calls directly, and possibly share in the growing Skype-out per minute charges that make up the bulk of Skype revenues. And sometime after that, we will see web applications leveraging Skype as a service, too.

A couple of things have to happen first, though. There are two reasons Skype has to run on a client today. The first is audio/video encoding at the client level that ensure high quality calls with low latency and minimal configuration. There’s a reason calls on Skype tend to sound good. The second is the p2p architecture of Skype, which also affects latency and cost.

It’s relatively straightforward for Skype to allow third parties to build both functions into their apps via a SDK, which is why we’ll see desktop applications integrate Skype as a service first.

But the real win is when you can initiate skype voice and video calls via web applications. It’s not clear that we’re anywhere near that being possible with today’s browsers, say experts we’ve spoken with. There will likely always need to be some desktop software to assist with at least audio/video encoding. But it’s possible this could be done via browser plugins, or even in Flash.

Anyway, we’re looking a ways into the future with all of this. But one thing seems clear – Skype, which is happily soon to be under new management, will someday open its doors widely to developers.

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Om Malik goes on a justifiable rant, arguing that Skype doesn’t understand developers, never understood developers, and shouldn’t be trusted by developers. For the record, I agree. Skype has not been much of a team player when it comes to community over the years.

And they’re right, the Extras program was a dud. But only because developers didn’t have any real ability to do deep integrations. For all the pomp, third party developers have never been able to do much more than skim the surface of Skype functionality. No wonder the program never took off.

What developers need to really integrate with Skype is the ability to treat the call function as a service, and build it directly into other applications. Today, almost without exception, to make a Skype call requires the Skype client to be opened.

Skype has made a very few exceptions to this rule. iSkoot for example, runs the heavy part of Skype on a server so that mobile users could get the functionality on their devices. But these were one-off deals, not via an API or developer program.

What developers need is the ability to build the core Skype functionality directly into applications. Like Outlook. Or Facebook. And give those developers a revenue share from paid Skype-out calls, supposedly Skype’s biggest and fast growing revenue source.

It’s not clear Skype is going to go in that direction, although the new buyers have said quietly that they’re going to look hard at skype-as-a-service. and some Skype employees I’ve spoken with have said much the same – at some point, expect developers to be able to do deep integrations with the Skype service, not just launch the Skype client.

We’re all waiting for that day. And when it comes Skype will win, too. Skype-out calls will absolutely skyrocket, and the revenue will pour in. But for now, Skype, you’re going in the wrong direction. Instead of killing your limited APIs and tools, you should be expanding them dramatically.

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Skype, which was recently sold by eBay to VC firms Silver Lake Partners, Andreessen Horowitz and Index Ventures, has announced that it is killing its Developer Program. The program, called “Extras,” allows third-party developers to build applications, both hardware and software, on top of Skype.

The company, which was valued at $2.75 billion during the deal, says that the program wasn’t gaining much traction amongst the developer community to maintain the “Extras” platform, which was launched in June of 2007. According to a blog post on the company’s site, Skype will no longer certify new applications but existing applications will be able to work until their expiration dates.

Skype also said that it will continue to support accessories via its public API, and the Skype shop will feature existing “Extras.” It’s always a sad day when a tech company as large as Skype cuts out the developer ecosystem. Third-party developers are a crucial part of any product, and it’s a shame that Skype couldn’t figure out a efficient way to engage developers. However, there is a small light at the end of the tunnel. Skype ended the announcement with this line: “We still believe there are opportunities for third-party developers to enhance the Skype experience. We’ll keep you posted.”

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I’m not going to argue with the fact that eBay was negligent in buying a company without taking control of its core intellectual property. But when I look at this deal, and how the market has changed in the last four years, it looks to me like eBay made out ok. Or even more than ok.

First of all, eBay never paid the full $4.1 billion for skype. 2/3 of a $1.5 billion earnout wasn’t paid, so the total purchase price was around $3.1 billion. After the write-downs, eBay was carrying Skype on its books at a value below $2 billion dollars.

Skype is projected to make $200 million of so in EBITDA in 2010, so today’s acquisition implies a 14x multiple on that EBITDA (thanks to Mark Mahaney at Citi Investment Research for the quick financial analysis). Mahaney says “From a non-strategic buyer, that would seem to be a high multiple.” Clearly, ebay got more for Skype than they thought they would.

Also, the market (and eBay) hasn’t done too well over the last few years. Half of the original purchase price was paid in eBay stock, which has declined by more than 50% since late 2005.

Finally, Skype has been profitable, and eBay has taken those profits off the table. Skype was likely breakeven in 2006, says Mahaney. But he estimates they generated $44 million in cash flow in 2007, $116 million in 2008 and projected $164 million in 2009. That’s $324 million eBay has taken off the table in aggregate.

The market is way, way down and Skype is a somewhat damaged asset with the IP litigation ongoing. The fact that eBay is getting most of its purchase price back, in cash, is a big win for them. And they still own 35% of the company and can get additional gains in a later IPO or sale. And the best news is that Skype is finally free of the dragging effect of a huge corporate parent. They can now move forward and find their destiny.

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