IP ownership issues not just for Skype and eBay

by Andrew Watson on 27 August 2009

The recent Skype / eBay story around ownership flags up all sorts of things in what we see in our line of work around IP strategy: IP ownership issues as a rule are always present, and can be very, very costly to fix (but very cheap to fix if caught early).

A short Timeline

2001Kazaa, a p2p filesharing technology, released (which went on to some IP legal problems of its own).

2002 – Skype founded by Kazaa creators

2003 – initial release of Skype

2005 – eBay buys Skype in a $2.6bn deal (totaling 3.1bn through to today)

2009 – eBay announces that Skype will IPO and be valued at over $2bn. Joltid, a company set up by Skype founders claims that eBay/Skype only has a license to a core technology used by Skype to work. eBay must pay money for a continuing license or face rewriting its core code while keeping its millions of users happy (no small task).

The stakes

Skype has 480 million registered users its revenues in the last quarter were $170m. eBay was thought to be able to use Skype to produce gains with its auction site on high end items, but any added benefits to the eBay site have not materialized.

The Guardian states that the Joltid/eBay dispute is driven by Niklas Zennström – one of Skype’s creators and owner of Joltid – as a negotiation strategy in an effort to buy the company back.

The technology

Skype’s founders and key developers know p2p. They helped develop Kazaa before tackling VoIP with Skype and then went on to found Joost. The core piece of code at stake between Skype and Joltid is a product called Global Index:

Global Index™. Global Index is the world’s most technologically advanced, scalable and field-tested peer-to-peer technology. Global Index creates a self-organizing and self-healing distributed storage, transport and data object management system that does away with the costs of traditional datacenter solutions and enables a range of applications from communications to broadcasting and beyond.

The biggest implementation of Global Index to date has been Skype where Global Index enables peer-to-peer voice, video and chat communications.

They are also patent holders as well:

Joltid also holds a comprehensive portfolio of intellectual property including US patent 7,480,658, covering distributed database systems and co-ordinated decentralized peer-to-peer computing.

I did a quick search of esp@cenet and the USPTO website (including assignments database) but only found one Joltid patent, which is the 7,480,658 patent mentioned above. It was granted in January of 2009, and if that’s the core of their litigation on the patent side of things, they should hope it’s a good one.

The dispute

Joltid claim that they only licensed their technology to Skype, and that the license has terminated.  This means that eBay paid billions for Skype without sorting out the licensing issues or having any sort of strategy around re-writing the core Skype code. The funny thing is that this is not the first time that there has been an ownership dispute over this same technology.

The end result is that eBay is stuck litigating in the English courts while it scrambles around for a solution to this ownership problem. It is much like facing down a patent troll or a competitor when going to IPO. The immediate parallel that comes to mind is Wolfson.

Edinburgh based Wolfson Electronics was set to go for IPO in 2003 in the middle of a down market for tech stocks. The previous year it posted £20.2m in turnover, with £2.4m coming from the US and expected to float for £213 million. Only days before Wolfson prepared to go public with its CEO book-building across Europe, Wolfson’s competitor in the US, Cirrus Logic, files a patent infringement suit. The suit delays the IPO, but only slightly as a result of a quick response and a clear presentation of the IP risks by Wolfson. They achieve a high price despite a tough climate for tech stocks.

It seems to me that even if eBay found out they made a mistake after their initial purchase of Skype by not securing a formal license and ownership of the relevant IP, they should have at least been planning quite heavily for a dispute later on, particularly at IPO. Like Wolfson, they should have had an answer waiting.

{ 5 comments… read them below or add one }

andrew watson 08.27.09 at 1:02 pm


This is a great post.

On the specifics of this dispute the thing that intrigues me is why EBay did not understand that the P2P code was only licensed. And either make the license whole, and irrevocable as part of the acquisition or buy the ownership to the code and license it back to the Skype founders for their other business interests? This seems simple in retrospect. And whoever represented EBay on the purchase must be feeling a little twitchy right now.

andrew watson 08.27.09 at 1:09 pm

As a follow on you’re right that amazingly to us issues around ip ownership come up in just about every project and diligence we do. Systematically. A couple have taken months and tens of thousands of pounds to resolve. One killed a transaction.

I’m hoping that Skype serves as a wake up call. Just imagine being EBay having to negotiate with the former Skype owners because of this apparent error. Its good fodder for us at least.

Andrew Watson 09.02.09 at 9:35 am

That was a short lived post. With eBay agreeing yesterday to sell Skype to a team including one of the former management team and a group of investors including Index which was one of Skype’s original investors and Silver Lake. I noticed that eBay will keep a 35% stake in the new Skype and that the valuation of Skype for the purpose of the transaction is $2.75bn, not too far out of line with what eBay originally paid.

Skype’s subscriber numbers are also very impressive, up from 53mn at the time of acquisition to 403mn now. How many telecos can claim that sort of subscriber base, albeit that many of the calls are still FOC Skype to Skype calls? Mightily impressive.

A few IP hangovers though:

1. I wonder what the agreements say about the Joltid claim? the purchase is not due to close for several months which suggests some pre closing conditions. With Index on board, having backed Skype and Joost, is should be right to assume that Index can or has already solved the Joltid claim?

2. I wonder if the two former Skype founders will have a role in the new Skype. These are two very impressive technology and service visionaries. I could see that eBay may not want to be seen to sell Skype back for less than it paid to the original sellers (that’s not good PR) but wonder if the original founders will play roles going forward;

3. I wonder what the agreements say about patent and IP infringement risks. I do wonder how Skype has escaped unscathed whilst Vonage has fought through patent battles. I’d be a little cautious if I were the new owners about how much of this risk I agreed to take on. eBay knows this itself well enough from its battles with Mercexchange and as an IV investor.

The main theme for us at ipVA still stands. One of our aims is still to define THE standard for IP diligence. In doing so IP ownership and licensing rights is one, if not the main, area for big errors. All it needs is a small part of legal doubt and the deal terms can quickly swing in favour of the acquirer or investor, or worst still, the deal will fall over.


Andrew Watson 09.21.09 at 7:55 am

A quick update. Of course most of this is guesswork so please nobody rely on it.

So eBay agrees to sell Skype to a group of investors. The group includes Index, who have backed the Skype founders twice in Skype and Joost.

Joltid has said that its claim will remain in place. And as far as we can see the deal terms with the new investors require the ownership/licensingdispute to be settled somehow.

As a guess as to what is going on here, is it fair to assume that eBay would refuse to sell Skype to the two founders, particularly with the litigation ongoing? So a deal is struck where eBay saves face (a good valuation, close to the purchase price) and the new investors can try to negotiate a settlement with Joltid in the coming months (using the strength of relations between them to find a middle ground).

Worth watching but as a prediction, expect the Joltid action to settle and the two Skype founders to be found roles in the new entity post closing.


Andrew Watson 09.21.09 at 9:31 am

…the story gets more interesting minute by minute. So now the Joltid team are suing a former Skype employee personally for using confidential information to craft the bid for Skype by the investor group?

Intriguing. More to follow.


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