Digital Media

Online auction giant eBay announced Friday that its sale of a controlling interest in its Skype unit will proceed, following the settlement of litigation over the proposed transaction.

The settlement restructures the deal with an investor group led by Silver Lake and puts an end to a dispute with software maker Joltid over the licensing of software that underlies Skype's Internet telephony service.

In addition, the settlement brings Skype and Joltid founders Niklas Zennström and Janus Friis, into the investor group. The duo will take a 14 percent stake in Skype in exchange for contributing Joltid software and a "significant capital investment."

Silver Lake and other investors will now hold 56 percent of Skype, and eBay will retain 30 percent. Those other investors include the venture capital firm Andreessen Horowitz--started by Marc Andreessen, the man behind the early Web browser Netscape--and the Canada Pension Plan Investment Board.

Venture capital firm Index Ventures, which had been embroiled in the legal action, has withdrawn from participation in the investor group.

As in the initial agreement, eBay will receive approximately $1.9 billion in cash when the sale is completed, along with a note from the buyer in the principal amount of $125 million.

The deal, which eBay says puts Skype's value at $2.75 billion, is expected to close during the current quarter.

Under the settlement agreement, which involves the Silver Lake investor group, Joltid, and online video company Joost, Skype will have ownership over all software previously licensed from Joltid. All related litigation now pending against the investor group and eBay will cease at the closing of the acquisition.

Zennström and Friis had sold Skype to eBay for $2.6 billion in 2006, but they had also retained the rights to Skype's peer-to-peer technology via Joltid, a separate company that they had also founded. In its lawsuit filed in September of this year, Joltid raised charges of copyright infringement, alleging that Skype had acquired unauthorized versions of the source code, made unauthorized modifications, and disclosed the software to third persons.

Also in September, Joost--yet another company started by Zennström and Friis--filed a lawsuit against former Joost CEO Mike Volpi, who two months earlier had become partner at Index Ventures, which also was named in the lawsuit. Joost claimed that Volpi, who had done a stint on Skype's board of directors, had used confidential information as part of Index Ventures' participation in the Silver Lake-led effort to buy a majority share in Skype.

In the third quarter, Skype contributed $185 million in revenue to eBay, up nearly 30 percent from the year-earlier period. It has more than 520 million registered users.

Update at 8:10 a.m. PST: More details of the settlement have been added.

In Barry Diller's paleontological view of the Internet, we're still just coming out of the primordial ooze and slouching toward the "click to buy" button.

The IAC/InterActiveCorp CEO and self-professed opportunist, rather impatiently told CBS News' Katie Couric earlier this week that the day is coming when people will regularly pay for content. As he has before, he trotted out the example of Apple, which has managed turn its iTunes store into a "multimillion-dollar business" based on the once-heretical notion of asking people to spend money on digital music and video.

"We're still so young at this," Diller said of where the world is on the Internet timeline. "We don't even have, really, a first real generation. We're just kinda getting one."

In due time, he said, content companies will be unburdened of "this mythology of 'the Internet is free,'" which was perpetrated by a seemingly prehistoric tribe that cared only about bandwidth and availability.

"The Internet, you have to remember, was started by tech people," Diller said.

For more from Couric's joint interview of Diller and Tina Brown, who is editor in chief of IAC's The Daily Beast, see "@KatieCouric: Tina Brown and Barry Diller."

Spending on Internet advertising took a big drop in the first quarter of 2009 as troubles across the broader economy took their toll.

For the three-month period, Internet advertising revenue in the U.S. was $5.5 billion, down a notable 5 percent from the $6.1 billion for the fourth quarter of 2008, according to a report Friday from the Interactive Advertising Bureau and PricewaterhouseCoopers.

(Credit: Interactive Advertising Bureau/PricewaterhouseCoopers)

Aside from a handful of smaller quarterly declines, Internet advertising revenue has risen steadily since the middle of 2002, as the sector began to recover from the dot-com bust.

The IAB put a positive spin on the first quarter's downward motion.

"Consumers are spending more and more time with interactive media. For this, and other reasons, interactive media continues to gain share of marketing spend." Randall Rothenberg, president and CEO of the IAB, said in a statement. "We're confident that growth will resume as the U.S. economic climate improves. Interactive advertising is the most accountable way to reach consumers--and in this economy, digital media will be a core component of any successful marketing campaign."

Internet companies such as Yahoo are banking on businesses continuing to migrate to online advertising.

"Your brand is not defined by 20 keywords. You have to put a persona out there," Yahoo CEO Carol Bartz said Wednesday at a luncheon with Wall Street analysts, talking about the potential allure of online display or video advertising to businesses used to buying ad time on television. But, she said, Internet ad sales forces need to get rid of some of the friction in their line of work that isn't there on the TV side.

Update at 6:54 a.m. PDT: Added Time Warner's stock movement for Thursday morning, along with background on the history of AOL and Time Warner.

Media giant Time Warner announced Thursday morning that it will cast off its AOL division to become a standalone company.

Before that separation can take place, Time Warner will buy the 5 percent of AOL owned by Google so that it will have 100 percent control of AOL. Time Warner expects the transaction with Google to take place in the third quarter and the final AOL spinoff around the end of the year.

As an independent, publicly traded company, AOL will focus on growing its Web brands and services, as well as its advertising business, according to Time Warner.

Time Warner CEO Jeff Bewkes said in a statement:

We believe that a separation will be the best outcome for both Time Warner and AOL. The separation will be another critical step in the reshaping of Time Warner that we started at the beginning of last year, enabling us to focus to an even greater degree on our core content businesses. The separation will also provide both companies with greater operational and strategic flexibility. We believe AOL will then have a better opportunity to achieve its full potential as a leading independent Internet company.

The separation of AOL from Time Warner will put a final nail in the coffin of one of the emblematic mergers of the dot-com boom and bust. Brimming with the abundant funds and hyper-optimism of the Web's go-go years, AOL--then known as America Online--acquired Time Warner in January 2001 to create the world's largest media company. Within a year, however, it was already apparent that the union of new and old media was not as "supercharged" as its backers had promised.

By September 2003, things had gone so poorly with the merger, and specifically with AOL's dwindling dominance as an online portal, that AOL Time Warner dropped "AOL" from its name, and became just Time Warner.

In subsequent years, AOL has continued to struggle. Consumers have dropped their dial-up subscriptions in droves as broadband access became more widely available and they became more comfortable navigating the Internet on their own.

The first quarter of 2009, like other quarters before it, showed just how much of a burden AOL had become on Time Warner. For that three-month period, AOL's revenue dropped 23 percent from the year-earlier quarter, and Time Warner CEO Jeff Bewkes emphasized at the time that the company was seeking "the right ownership structure for AOL."

In March, several weeks ahead of that earnings announcement, Time Warner appointed a new chief executive for AOL, Tim Armstrong, calling him "the right executive to move AOL into the next phase of its evolution." Armstrong had previously been a leader of Google's advertising sales operations.

Time Warner shares began trading up slightly Thursday morning following the AOL news, starting the day at $23.34 after closing Wednesday at $23.

This post has been updated. See below for details.

Craigslist said Wednesday it is suing South Carolina's attorney general over the threat of criminal charges against the Web site and its executives.

In the lawsuit filed in federal court, Craigslist says it is "seeking declaratory relief and a restraining order" connected to accusations by Henry McMaster, the state's attorney general, that the classified ad site has not adequately removed "advertisements for prostitution and graphic pornographic material."

In a blog post Wednesday morning, Craigslist CEO Jim Buckmaster said that the charges are egregious:

In addition to being unwarranted by the facts, legal experts agree that the charges threatened represent an unconstitutional prior restraint on free speech, and are clearly barred by federal law (sec 230 CDA).

McMaster responded later Wednesday morning with a statement, given here in full:

The defensive legal action craigslist has taken against the solicitors and my office is good news. It shows that craigslist is taking the matter seriously for the first time.

More importantly, overnight they have removed the erotic services section from their website, as we asked them to do. And they are now taking responsibility for the content of their future advertisements. If they keep their word, this is a victory for law enforcement and for the people of South Carolina.

Unfortunately, we had to inform them of possible state criminal violations concerning their past practices to produce a serious response. We trust they will now adhere to the higher standards they have promised. This office and the law enforcement agencies of South Carolina will continue to monitor the site to make certain that our laws are respected.

In recent weeks, Craigslist has worked to remove its erotic ads section in response to demands from a number of state attorneys general and to replace it with a new, more closely monitored adult section. A check of the site earlier this week by CNET News, however, showed that Craigslist had not been able to completely prevent people from posting solicitations for sex. In addition, similar content can be found on other classified-ad sites serving South Carolina locales.

Buckmaster said in his blog post Wednesday that the only way to fully comply with the attorney general's "ultimatum" to remove the portions of Craigslist containing erotically charged material "is to take down the craigslist sites for South Carolina in their entirety." On Monday, Buckmaster had demanded an apology from McMaster.

The attorney general, Buckmaster said, "has persisted with his threats despite the fact that craigslist:"

• is operating in full compliance with all applicable laws
• has earned a reputation for being unusually responsive to requests from law enforcement
• has eliminated its "erotic services" category for all US cities
• has adopted screening measures far stricter than those Mr McMaster himself personally endorsed with his signature just 6 months ago
• has far fewer and far tamer adult service ads than many mainstream print and online venues operating in South Carolina
• has made its representatives available to hear Mr McMaster's concerns in person
• has politely asked Mr McMaster to retract and apologize for his unreasonable threats

Update at 8:01 a.m. PDT: Background information and more details from the Craigslist blog were added.

Update at 8:58 a.m. PDT: Response from the South Carolina attorney general's office was added.

The attorney general of South Carolina is ready to launch a criminal investigation of Craigslist in connection with erotic ads appearing on the classified ads Web site.

South Carolina Attorney General Henry McMaster

(Credit: South Carolina Attorney General's office)

Attorney General Henry McMaster had given Craigslist until Friday afternoon to remove erotically charged material from its South Carolina listings. The AG's Web site now has this statement posted:

As of 5:00 p.m. this afternoon, the craigslist South Carolina site continues to display advertisements for prostitution and graphic pornographic material. This content was not removed as we requested. We have no alternative but to move forward with criminal investigation and potential prosecution.

Craigslist responded Saturday with a blog post voicing exasperation with the attorney general's statement, comparing the "adult services" listings on Craigslist with the adult section of a Greenville, S.C., Web site and others like it elsewhere in the state, along with telephone yellow page listings and print publications.

Seriously? The CL "adult services" section for Greenville, SC has a total of 1 ad for the last 3 days, featuring a photograph of a fully clothed person. The "erotic services" section for Greenville, recently closed, has 8 ads total, images and text all quite tame.

Meanwhile, the "adult entertainment" section of greenville.backpage.com (careful with link, NSFW), owned by Village Voice Media, has over 60 ads for the last 3 days, and about 250 in total. In sharp contrast with craigslist, many of these ads are quite explicit, quoting prices for specific sex acts, featuring close-ups of bare genitalia, etc.

Craigslist views itself as unfairly targeted by the attorney general's office.

Of course, no one in mainstream legal circles thinks either company should be subject to civil suit, let alone a criminal investigation. But if for whatever reason you were so motivated, would you target a venue with 9 PG-13 rated ads, or one with 250 XXX rated ones?

The South Carolina Attorney General's office was not immediately available for comment.

On Wednesday, Craigslist bowed to pressure from authorities in a number of states and said that it would remove its "erotic services" section, replacing it with a more closely monitored "adult services" section for legal enterprises.

CEO Jim Buckmaster said at the time that Craigslist would be on the lookout for sex workers trying to outmaneuver the new restrictions. "We have blocking and filtering technologies in place site wide. And of course our flagging system remains fully in effect across all the categories, but we will be monitoring that situation," Buckmaster told CNET News.

On top of ongoing allegations that Craigslist--which runs a wide variety of classified ads, including job and apartment listings--had become an outsized Internet bordello, the company's image recently was tarnished by news stories about a so-called "Craigslist killer" in connection with a murder investigation in Boston.

Writing a term paper and thinking about borrowing one that already got someone else an A, or at least is geared to deliver a mere passing grade?

For some California high school students, that dodgy maneuver now means reckoning not just with the sharp (or tired) eyes of the teacher, but also the algorithms of a Web-based plagiarism sniffer.

San Mateo High School is trying out the services of Oakland-based Turnitin.com, according to a report from CBS station KOVR-TV in Sacramento. (Note: CNET News is a unit of CBS Interactive.) Students are asked to submit their essays online, and their work is then compared with what's on the Internet.

"It's a good way to kinda catch kids who use their brother's papers from previous years. That's the best resource. Or maybe someone had a similar assignment in another class," English teacher Nels Johnson told KOVR.

Colleges including the Cal State system have been using antiplagiarism tools for years, but high schools are just starting to use it, KOVR reports. How long San Mateo High uses Turnitin remains up in the air--it had to pay $9,000 for the service this year, and in a recession-weary economy, that may simply prove too pricey.

When Amazon.com hosts its anticipated Monday morning e-book event, one of the highlights could be an exclusive deal for the Kindle with horror story master Stephen King.

The Amazon event, taking place at the Morgan Library and Museum in New York, is widely expected to feature the unveiling of a next-generation Kindle e-book reader. On Monday, The Wall Street Journal reported that Amazon also will say it has acquired a new work by King that would be exclusively for the Kindle.

The Journal says a Kindle-like device is a factor in the story. The work by King might later be published in physical book form by Scribner, King's current publisher. (Scribner is an imprint of Simon & Schuster, which is owned by CBS, whose CBS Interactive unit is the publisher of CNET News.)

This wouldn't be King's first tech-related effort. During the dot-com boom, the best-selling author posted chapters of a serial novel, The Plant, on the Internet in a bid to see if readers would pay voluntarily for what they were reading. He suspended the work in late 2000 after the sixth installment.

An earlier Internet-publishing foray by King, Riding the Bullet, was a case study in Internet piracy.

Click here for more stories on Amazon's Kindle.

RealNetworks said Tuesday that it now expects fourth-quarter revenue of between $151 million and $153 million.

In October, RealNetworks had said it expected fourth-quarter revenue in the range of $150 million to $157 million. Analysts on average have been expecting revenue of about $153.8 million, according to Yahoo Finance.

The revised figure compares with the $157 million in revenue that the digital music company reported in the year-earlier period and would be roughly even with the $152 million logged in the third quarter of 2008.

RealNetworks also expects to report fourth-quarter charges of $227 million to $249 million, about $6 million of which is related to a workforce reduction and plans to spin off a games company. In December, Real said it would lay off about 130 employees, or 7.5 percent of its staff, along with cutting 30 contract positions.

Regarding the games spin-off, the company said Tuesday: "While Real still intends to create a separate games company, there is no visibility as to when conditions will support separation. As a result, the company has postponed work with outside advisors, has stopped external spending on the transaction and will write off the capitalized costs in the fourth quarter."

The bulk of the fourth-quarter charges--$185 million to $200 million--reflect the impairment of goodwill and acquired intangible assets, Real said.

RealNetworks plans to report actual fourth-quarter earnings February 12.