Court Battle May Disconnect Internet Phone System Skype for Good
Skype might have to shut down because of a dispute over the core technology used to make the Internet telephone system work.
EBay, which paid $2.6 for the voice-over-the-Web system in 2005, is facing a court battle with the original founders of the company who retained the rights to the technology at the heart of the system.
EBay admitted in a regulatory filing that it might have to close down the company. It said it was trying to develop alternative software but if that did not work, or if eBay lost the right to the original software: "Skype would be severely and adversely affected and the continued operation of Skype's business as currently conducted would likely not be possible."
The dispute also threatens eBay's plan to spin off Skype, scheduled for next year.
Earlier this year, Skype filed a claim in London against Swedish company Joltid, which is controlled by Skype co-founders Niklas Zennstrom and Janus Friis. Skype is seeking resolution on a dispute over a software licensing agreement between the parties that Joltid was seeking to terminate.
"In particular, Joltid has alleged that Skype should not possess, use or modify certain software source code and that, by doing so, and by disclosing such code in certain U.S. patent cases pursuant to orders from U.S. courts, Skype has breached the license agreement," eBay said in the filing.
Joltid brought a counterclaim, reiterating that it held the rights to the peer-to-peer technology and that Skype was in violation of the original agreement.
A court hearing has been set for June 2010 in London.
In its regulatory filing confirming the parent company's recent quarterly profits, eBay acknowledged that the new software it was working on had no guarantee of success.
"Although Skype is confident of its legal position... Skype has begun to develop alternative software to that licensed through Joltid. However, such software development may not be successful, may result in loss of functionality or customers even if successful, and will in any event be expensive," eBay said.
EBay announced in April that it would spin off Skype through an IPO, saying the timing would depend on market conditions. Executives acknowledged that the unit, while fast-growing, did not mesh well with eBay's core marketplaces division.
Zennstrom and Friis, backed by a number of private equity houses, have been in talks with eBay over the possibility of buying the company back but the negotiations have stalled.
Skype, which started in 2002, allows users to make calls from their computers to landlines, mobile phones and other computers. At its heart is key peer-to-peer technology created by its founders who also created the file-sharing software Kazaa.
The service has continued to grow rapidly. The units revenue increased 25 percent during the second quarter from the previous year to $170 million, according to eBay's results earlier this month. It added 37.3 million users, bringing its total number of registered users to 480.5 million, making it the most widely-used international calling system in the world.
The legal battle over the licensing of the software will need to be resolved before eBay's board, led by chief executive John Donahoe, can move forward with flotation plans for Skype.
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