Lawsuits Hold Key to Skype’s Future

October 20, 2009 Updated: October 1, 2015

eBay bought and then sold a little more than half of Skype, the Internet chat service, for a little less than half the purchase price. (Mario Tama/Getty Images)
eBay bought and then sold a little more than half of Skype, the Internet chat service, for a little less than half the purchase price. (Mario Tama/Getty Images)
EBay Inc.’s 2005 Skype acquisition has officially gone down in the annals of business infamy.

The Internet auction giant bought the Web chat company for $4 billion in 2005. After failing to properly integrate the chat service into its auction platform, eBay finally sold off 65 percent of its ownership to three investor groups for $1.9 billion last month.

“Although Skype wasn’t eBay’s best acquisition—that would be its 2002 PayPal purchase—both companies have emerged relatively unscathed,” said Saikat Chauduri, professor at the University of Pennsylvania, in a Knowledge @ Wharton (KW) report.

EBay “got away with a black eye,” Chauduri said in the KW report “Skype’s Life after eBay: Free in More Ways Than One.”

At fiscal year-end 2008, Skype contributed $551 million to eBay’s total revenues. Registered users increased to 480.5 million, an increase of 37 percent during the second quarter of 2009, highlighting that Skype’s popularity continues to grow.

“This deal achieves our goal of delivering short- and long-term value to eBay and its stockholders, without the possible delays and market risk of an IPO,” John Donahoe, president and CEO of eBay, said in a statement.

Looming Problems

Communications experts claim that eBay blundered by acquiring Skype without acquiring Joltid Ltd., or at least the peer-to-peer (P2P) software Global Index, the key intellectual properties that run the inner workings of Skype.

Joltid is the owner of the Global Index Software code, as well as all intellectual property inherent in Skype, including copyrights and patents. The eBay/Joltid licensing agreements hold that no modification is permissible without Joltid’s express permission.

“Peer-to-peer technology pools individual PCs connected over the Internet to share computing power and data resources,” according to the KW article.

Skype filed a lawsuit with the English High Court of Justice in London against Joltid, as Joltid was pulling the plug by terminating the licensing agreement allowing Skype to use its software.

Without the software, Skype would cease to exist.

In short, Joltid claims that Skype is in breach of eBay’s licensing agreement. Joltid claims that Skype obtained an illegally distributed version of its software code and modified it, which is ample reason to terminate the licensing agreement.

“The License Agreement between Joltid and Skype licensed Skype to use the object code of the Copyrighted Works in executable form only,” according to the court brief.

In explaining to the court the technical term “executable form,” Joltid argued that Skype “could only create software that uses the Joltid’s Copyrighted Works, in its existing form, much like a software developer can obtain permission to write [a] program that run[s] on the Microsoft Windows platform without receiving the right to change the Windows application.”

“Joltid seeks actual and statutory damages for infringement (which Joltid reasonably believes are amassing at a rate of more than $75 million daily) and an injunction to stop the infringement,” Joltid stated in the court brief.

In layman’s terms, Joltid considers each download of Skype as a copyright infringement.

Joltid filed another copyright lawsuit in the United States District Court of the Northern District of California against not just Skype and eBay, but also the investor group—led by Silver Lake Partners—that acquired the majority ownership of Skype. This lawsuit could derail the acquisition agreement between eBay and the investor group.

In a recent SEC filing, Skype did disclose certain caveats that could spoil its agreement with the investor group.

Competitors Ready to Pounce

But if Skype ceases to exist due to the pending lawsuits, there are alternatives waiting in the wings.

“Skype has pushed other players to innovate … Google, Microsoft and Yahoo now offer voice for free in their instant messaging systems. When Skype came on the scene, that wasn't the case,” said Professor Andrea Matwyshyn in the KW article.

To survive, Skype has to be one step ahead of competitors who provide messaging, conferencing, and communications, as well as fixed-line voice service providers and long-distance carriers, according to Hoovers Inc., a business research organization.

Potential competitors to Skype include those who provide free video chat, video conferencing, Internet calls, messaging, and fee-based global phone-to-phone calls, such as TokBox Inc., ooVoo LLC, Telcentris, Gizmo5, TelTel, Jaxtr (Sabse Technologies Inc.) and JaJah Inc., according to VentureBeat Profiles, a Web site that provides business profiles.

At this time, giants like Microsoft Corp., Yahoo Inc., AOL LLC, and Google Inc. haven’t taken much notice of Skype, but if it continues to grow at an accelerated rate, Skype’s honeymoon may be over.

Google Voice, although not yet in direct competition with Skype, could most likely mirror Skype’s services in the future and make a run for Skype customers. Microsoft, by acquiring the voice service provider Tellme in 2007, is hoping to close the competitive gap with Skype as well. But none have yet come close to Skype’s customer base.

Litigation aside, eBay’s sale is a brilliant move for Skype, experts argue.

“With Skype being set free, the future is arguably even brighter today than when it was a hot startup in 2003. But while it has the most subscribers of any telecom provider in the world, Skype still needs to hone its growth strategy,” KW noted.

As a startup, Skype was in dire need of a partner to make it a viable and profitable business, and eBay truly succeeded in that, the professors argued. It has succeeded where many other technological innovative companies have failed.

“Certainly Skype has a huge audience and a lot of happy users in addition to its strong brand recognition … that's a good place to start from,” Said Kendall Whitehouse, media director at the Wharton School of Business.