How The Joltid Suit Is a Ploy to Buy Back Skype

By Clint Boulton  |  Posted 2009-09-17

How The Joltid Suit Is a Ploy to Buy Back Skype

An analyst from Bernstein Research said new litigation filed by Joltid against eBay, Skype and its pending investors stems from the Joltid owners' failure to buy back Skype from eBay.

Joltid, the peer-to-peer software company owned by Skype co-founders Janus Friis and Niklas Zennstrom, sued Skype, eBay and erstwhile investors in the company for copyright infringement in California district court Sept. 16. The startup asked the court for an injunction and for infringement damages north of $75 million per day.

The new suit builds on litigation in the United Kingdom going back to March 2009. eBay licenses P2P software from Joltid called the "global index," which enables Skype to let users make voice calls from their computers to other computers, landline and mobile phones.

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.

The new suit is a reaffirmation of Joltid's claims in the United Kingdom.

"Each day that the Skype Companies continue to make available its Internet telephone software for download, Skype users download Joltid's copyrighted works approximately six times per second," Joltid claimed in its suit. "Based on conservative estimates, Joltid believes that its copyrighted works are infringed in the United States at least 100,000 times a day through defendants' unauthorized actions."

The new suit also seems intended to head off the current blockbuster deal to make Skype an independent company, according to Bernstein analyst Jeffrey Lindsay. In that deal, eBay plans to sell 65 percent of Skype to Silver Lake and other investors, valuing Skype at $2.75 billion. eBay, which stands to retain 35 percent of Skype, hopes to close the deal in the fourth quarter, but the pending lawsuit could threaten that target.  

"We see the lawsuit as self-interested because the owners of Joltid tried to buy Skype themselves earlier this year," wrote Lindsay in a research note Sept. 17. "We doubt therefore that their objective is to have the business permanently shut down - which we estimate would cost eBay shareholders up to $2.12 per share worst case. Instead we think they are likely to be seeking either a financial settlement or the opportunity to buy the business back themselves at a lower price than Silver Lake, et al are offering."  

Zennstrom and Friis Angle for Skype

Joltid's Zennstrom and Friis earlier this year tried to buy back Skype but balked at what they believed was too high a price from eBay. eBay, which acquired Skype in 2005, has long been trying to sell the company. Though Skype sales rose 25 percent to $170 million in the second quarter this year, eBay took close to a $1 billion write-down on it in 2007.

While Joltid's initial suit named eBay the defendant as the proprietor of Skype, Joltid's new claim includes Silver Lake, eBay board member Marc Andreessen, who is also part of the investment group through Andreessen Horowitz, and former Skype board members Danny Rimer and Mike Volpi, among others.

Volpi was removed as chairman from Web TV firm Joost, which is also owned by Zennstrom and Friis, who have cultivated a reputation of being litigious. Bernstein's Lindsay said the lawsuit has been timed to maximize damage to eBay's deal with investors, but that the Joltid owners aren't looking to put Skype down for good:

"We doubt very much that the owners of Joltid are seeking to achieve a permanent shut-down of Skype - that would have no financial benefit to them- and so we discount the worst possible case. We think any settlement would amount to considerably less than the maximum possible scenario and if the judge does not grant an immediate injunction to shut down Skype we think eBay will very likely fight the case and could win without loss."

eBay remains confident in its case. eBay spokesman John Pluhowski told eWEEK: "Their allegations and claims are without merit and are founded on fundamental legal and factual errors. "We remain on track to close the transaction in the fourth quarter of 2009."

Even so, the company is preparing for the worst by developing alternative VOIP software in case the U.K. court sides with Joltid and grants it an injunction preventing Skype from operating.

Lindsay said eBay is likely looking at moving Skype to a SIP protocol, or licensing an alternative VOIP technology, such as Google Voice or AOL's IM technology, which is voice-capable. "Success with any of these alternatives would likely undermine Joltid's case considerably and accelerate a settlement or a dismissal," he wrote.

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