EBay, then under Meg Whitman’s rule, apparently failed to buy or properly license a piece of software that’s essential for Skype’s operations when it purchased the Internet telephony service for $3 billion in 2005.
Originally called FastTrack and now called GI (for Global Index), it’s owned by Joltid, which Skype founders Niklas Zennstrom and Janus Friis control. Several years back, Brilliant Digital, a then LA-based marketing company that the Australian Kevin Bermeister controlled, also owned a piece of Joltid, but that may or may not still be the case. Bermeister owned a controlling interest in Sharman Networks, notorious for operating Kazaa.com, the world’s largest P2P piracy site, which used Joltid’s FastTrack to foster trade of illegally pirated music. Joltid is based in the British Virgin Islands where many believe the master servers for the GI software are located.
Joltid’s Global Index is at the heart of three lawsuits. It is based on peer-to-peer [PC to PC] technology rather than client server [server to PC] technology.
It utilizes users’ PCs to distribute data such as music files or phone calls, reducing the number of servers the company needs and increasing response times. It “creates a self-organizing and self-healing distributed storage [by using users’ PCs], transportation [users’ broadband connections] and a data object management system that eliminates the costs of traditional datacenter solutions [lots of pricey servers and technical staff] and enables a range of applications from communications to broadcasting and beyond [including enabling the piracy of music, movies and TV shows].” It can reportedly handle upwards of 16 million phone calls over the Net simultaneously.
An Estonian company, Bluemoon Interactive, wrote the GI software under Zennstrom’s and Friis’ supervision. Bluemoon Interactive’s perhaps outdated Web site says its most widely known and used development is the FastTrack P2P Stack that powers file-sharing applications such as Kazaa, Grokster and iMesh. It said it’s currently, participating in several technology projects at Joltid.
Here in a nutshell is the tangled legal dispute:
– We have not seen the contract but evidently the license that eBay agreed to in its purchase of Skype was highly restrictive. Earlier this year Joltid said it discovered that eBay/Skype had obtained illegally a copy of Global Index, perhaps from ex-Venture Index partner Michelangelo (Mike) Volpi, who was then running the rapidly failing online video service Joost for Zennstrom and Friis. As a result, Joltid told eBay/Skype it could no longer use GI.
– EBay/Skype filed suit in March in the UK, seeking to force Joltid to allow it to use GI. It said Skype could not function without GI and was not optimistic it could develop replacement software. The trial won’t go to court until May 2010 at the earliest.
– Zennstrom and Friis expressed interest in buying Skype back from eBay. Instead, eBay decided to sell 65% of Skype to a group of investors, one of which was Index Ventures.
– Zennstrom and Friis swung into legal mode and sued in the US eBay/Skype and the investor group that had agreed to buy Skype from eBay (Netscape founder Marc Andreessen’s Andreessen Horowitz, venture firm Index Ventures, private equity firm Silver Lake and the Canada Pension Plan Investment Board). Joltid accused eBay/Skype of using the GI technology without authorization. They asked for $75,000 a day in damages, an amount that would total $27.375 million in a year. Skype has continued to use the GI software. They said eBay/Skype had “acquired unauthorized versions of the GI software source code” (possibly from Volpi) and had “created unauthorized modifications” to use with new Skype versions and had also disclosed it to “third persons.”
– Having been forced to close Joost as an online service, Zennstrom and Friis had kicked Volpi out. They filed a UK suit against Volpi, now back as a partner at Index Ventures, accusing him of fraud for stealing their trade secrets to help facilitate eBay’s sale of Skype to the group of investors. They also accused him of incompetence and profligacy while running Joost.
A Possible Solution
The best solution, as in all lawsuits, is for the parties to settle. It’s going to be months and months, perhaps several years before the three cases go to court and even then there’s no certainty how the court will rule.
In the meantime, Skype needs more investment to keep improving the product and marketing it, particularly making it more appealing for small and medium-sized businesses. If eBay has doubts about Skype’s future, it will reduce any such investments.
It would be helpful to see details in the contract in which eBay bought Skype. It appears, however, that Joltid’s hold on the GI software is very strong. eBay may well have been specifically restricted from getting the GI software code, modifying it and showing it to anyone. If that’s correct, then Whitman and her lieutenants should be ashamed for relying on the two pirates Zennstrom and Friis to provide the technology that is essential for Skype to function. And California voters should be aware of Whitman’s failure, which may cost eBay upwards of $3 billion. Whitman is running for governor in the 2010 election.
The best solution may be for eBay to buy Joltid in cash and Skype shares, which would give Zennstrom and Friis a stake in making Skype successful.
Such a move would give eBay ownership of the GI software, something Zennstrom and Friis may be reluctant to do. On the other hand, they may accept such a deal, realizing that the other two companies that use the software have failed. An Australian court closed down Sharman and its Kazaa.com because it was found guilty of illegal piracy. Joost failed because the streaming video quality that GI provided was not acceptable to consumers. Joost was also hindered by the studios’ refusal to give Joost “must-see” content, probably because of Zennstrom’s and Friis’ prior pirate activities with the record companies’ intellectual property.