When eBay bought Skype for $2.6-billion in 2005, it seemed like a marriage made in heaven, at least for Janus Friis and Niklas Zennstrom, co-founders of the free phone-calling app. But there was trouble in paradise from the beginning, trouble that included the Skype duo’s dodgy track record (they co-founded Kazaa, a quasi-legal music sharing network) and a conspicuous lack of synergies between the two companies. Over the past year or so, however, the relationship has gone from merely troubled to outright toxic.
Friis and Zennstrom left the company in 2007, right around the time that eBay took an almost $1-billion writedown on the price it paid for Skype. Although there were no concrete reports at the time of any trouble between the two companies – the Skype founders had by this time launched a new Web-based TV venture called Joost, which has also run into difficulty – the peace and quiet didn’t last long. In March, a company owned by Friis and Zennstrom stopped licensing its peer-to-peer technology (which powers Skype) to eBay. The auction company sued, and the two have been locked in a court battle ever since.
That battle, not surprisingly, has complicated the sale of Skype, which eBay has been trying to unload for some time now. Several months ago, it announced that it had sold 65 per cent of the company for $1.9-billion to a consortium of investors, including several U.S.-based private equity firms – Silver Lake, Index Ventures and Andreessen Horowitz – as well as the Canada Pension Plan Investment Board. All of the prospective buyers have been named in the Skype suit, which according to a statement of claim is accumulating damages at the rate of $75-million every day.
In an interesting twist, the lawsuit also mentions Mike Volpi, a general partner at Index Ventures who was previously the chief executive officer of Joost and until recently was a member of its board of directors. He has since been removed from the board, and the company said last week that it is conducting an investigation into his actions while he was CEO.
With the launch of the Skype founders’ lawsuit, more than just the sale of Skype is in jeopardy. eBay admitted in a securities filing that the claims could leave it unable to operate the free phone-calling service, although it has said in the past that it is working on its own peer-to-peer networking system to replace the one that Skype’s founders still own the rights to. Even if it does create its own version of Skype’s peer-to-peer technology, however, it’s possible that Friis and Zennstrom could argue that it is an unlicensed copy of their software and keep eBay tied up in court for months, if not years.
The irony, of course, is that the money the Skype co-founders are using to fight this epic legal battle – over technology that eBay arguably should have locked up in the first place – is coming from the bags of loot they got from eBay four years ago.