Wireless

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Venture capital firm Index Ventures, which had been embroiled in the legal action, has withdrawn from participation in the investor group.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

Updated at 5:10 p.m. PDT with eBay comment.

Joltid, a peer-to-peer software company established by Skype's founders, filed a copyright suit against Skype Wednesday alleging Joltid's technology is being infringed on by Skype users "in the United States at least 100,000 times each day."

Just the latest in an ongoing license dispute between the popular VoIP service and its developers, the lawsuit, filed in Northern California U.S. District Court, seeks an injunction and damages, which Joltid "reasonably believes are amassing at a rate of $75 million daily," according to the suit.

Also listed as defendants are Skype's current owner eBay, as well as investors in a consortium that earlier this month signed a deal with eBay to acquire a 65 percent stake in Skype, with eBay retaining 35 percent.

"Skype has infringed Joltid's copyrights," a company spokesman said in a statement. "Joltid will vigorously enforce its copyrights and other intellectual property rights in all of the technologies it has innovated."

"Their allegations and claims are without merit and are founded on fundamental legal and factual errors," eBay spokesman John Pluhowski said in a statement.

The lawsuit has the potential to at least complicate the ongoing sale of Skype. In the past, however, eBay has said it's working on its own software to replace what it gets from Joltid.

In 2006, eBay bought Skype for $2.6 billion, but co-founders Janus Friis and Niklas Zennstrom retained the rights to Skype's key peer-to-peer technology--Global Index Software--via the Joltid company they formed.

Joltid terminated its license for the software after learning that Skype had allegedly acquired unauthorized versions of the source code, made unauthorized modifications, and disclosed the software to third persons, according to the lawsuit.

The two companies have been involved in a separate lawsuit in the U.K. over that license termination, but the case isn't set to go to trial until June 2010. Referring to that suit, eBay's SEC filing regarding the sale of Skype says "consummation of the deal was subject to 'no settlement of the pending litigation with Joltid Limited having been effected without the consent of the Buyer (subject to certain limitations).'"

The other defendants in the suit filed Wednesday are Silver Lake Partners, Index Ventures Management, Michaelangelo Volpi, Andreessen Horowitz, and the Canada Pension Plan Investment Board. This lawsuit was first reported Wednesday by The Wall Street Journal.

E-commerce giant eBay announced Tuesday that it is selling its Skype unit to an investor group that includes Marc Andreessen's new venture.

Under the deal, eBay will receive approximately $1.9 billion in cash and a note from the buyer in the principal amount of $125 million, for a total of $2.025 billion. The participants expect the deal to close in the fourth quarter.

The investor group, which will take a roughly 65 percent stake in Skype, is led by Silver Lake and includes Index Ventures, Andreessen Horowitz, and the Canada Pension Plan Investment Board. The remaining 35 percent of the Internet telephony service will be retained by eBay.

The parties said the deal values Skype, which is likely to see an IPO in the coming months, at $2.75 billion.

The sale of Skype had been expected for some time. Word of Tuesday's impending sale to the private investor group was first reported late Monday in The New York Times.

The Andreessen Horowitz venture capital group was launched in July by Marc Andreessen, the founder of Netscape and co-founder of Opsware, and Ben Horowitz, also co-founder of Opsware.

With the sale, eBay acknowledged that things hadn't worked out as planned with Skype, which it acquired for $2.6 billion in 2005 with the plans to offer customers the ability to discuss their transactions in real time. Over the course of the four years since then, eBay found that its acquisition failed to provide what it sought.

"Skype is a strong standalone business, but it does not have synergies with our e-commerce and online payments businesses," eBay President and CEO John Donahoe said in a statement Tuesday. "As a separate company, we believe that Skype will have the focus required to compete effectively in online voice and video communications and accelerate its growth momentum."

Lead investment firm Silver Lake echoed the forward-looking sentiments.

"This transaction benefits...will allow Skype the opportunity to accelerate the growth of its business by harnessing the deep technological and company development expertise that resides within the investor group," Egon Durban, managing director at Silver Lake, said in a statement.

In 2007, eBay said it would take a $900 million so-called impairment writedown against the value of Skype, meaning that eBay had been forced to reassess the value of the Internet telephony company relative to its overall business. By recording a charge, the company essentially announced it had taken a loss on its original investment.

When eBay announced Donahoe as its new CEO in 2008, he indicated that the company would take a year to evaluate the future of its online phone and video-conferencing service.

In April, eBay announced plans to spin off Skype, with an IPO in the first half of next year.

Along the way, reports had surfaced that Skype founders Niklas Zennstrom and Janus Friis were interested in repurchasing the company.

Clarification at 7:44 a.m. PDT: This story miscast the value of the deal. eBay gets approximately $1.9 billion in cash and a note from the buyer in the principal amount of $125 million, for a total of about $2.025 billion. The companies say the deal values Skype at about $2.75 billion.

The founders of Skype may be trying to repurchase the Internet phone service, The New York Times reported Saturday.

Niklas Zennstrom and Janus Friis sold their company to eBay four years ago for $2.6 billion. Sources told The New York Times the two men have been meeting with private equity firms and gathering their own funds to finance the deal.

Since selling their company, the two have created venture capital firm Atomico.

According to Skype, its service has more than 405 million registered users. The compares with 54 million users when eBay bought it in 2005.

eBay has acknowledged that Skype has few synergies with its core businesses, the Times said. And eBay's chief executive has publicly stated that he's willing to sell it for the right price.

Neither the co-founders nor eBay would comment to the Times about a possible sale. But the Times reported that a source with knowledge of the plans said that Zennstrom and Friis are working toward a deal worth $2 billion.

Skype, the Internet calling service owned by eBay, is expected to announce an application for the iPhone at next week's wireless CTIA tradeshow in Las Vegas, according to tech blogger Om Malik of GigaOM.

(Credit: Apple)

Skype is keeping mum on the announcement and has declined to comment on the rumors. But the company is hosting a press conference Tuesday afternoon in Las Vegas the day before the show kicks off. And it's likely the news will be announced there.

Skype admitted earlier this year that it's working on an application for the iPhone. Scott Durchslag, the company's chief operating officer, said at the Consumer Electronics Show in Las Vegas in January that an iPhone version of the software client would be coming to Apple's App Store.

"We have to make sure the call quality is there and the application works really well before we can announce the software for any device," he said in an interview after the company's press conference. "But we will have something for the iPhone as soon as it's perfect."

Skype sees mobile as the next major growth area for its business. Not only does it expect its more than 405 million registered users to take their Skype experience, which offers free and low-cost calling, with them on-the-go, but the company also believes they will be able to reach new users via mobile devices. By putting the peer-to-peer service, which uses the Internet to carry voice traffic, onto a mobile phone, it becomes very convenient to use. The regular Skype service runs on a computer and requires either a special phone or a headset and microphone to make and receive phone calls.

In the U.S. most cell phone plans include domestic long-distance calling as part of a bundle of minutes, so the Skype service isn't really that appealing. But for subscribers calling outside the U.S., rates can be as much as a $2 a minute if cell phone users don't subscribe to a special monthly plan for making international calls. This makes the Skype mobile client most appealing to users who want to make inexpensive international calls, but don't want to be tied to their computers.

A software version of Skype already exists for Windows Mobile phones. Nokia also plans to embed some of its phones with Skype clients. And Skype has worked with a company called iSkoot to develop a special Skype phone that is sold by the cell phone operator Hutchison 3 U.K. A Skype-lite version of the client is also available on some Java phones.

Now, iPhone users will get to use Skype, too. But before iPhone users get too excited, there's probably a big catch. The new Skype app for the iPhone will likely be restricted to Wi-Fi networks only, as Apple has done to other third-party services like Fring, which offers access to Skype.

If this is the case, it will be a huge limitation to the usefulness of the service. While other mobile phone users can use the Skype service anywhere they can a cell phone signal, iPhone users will be restricted to only using it where they can access Wi-Fi. Most people access Wi-Fi home or in the office, where they're likely to be near a computer anyway.

(Credit: Skype)

BARCELONA--Skype is racking up deals with mobile handset makers here at GSMA Mobile World Congress 2009.

On Tuesday, the company, which is owned by eBay, announced a partnership with Nokia, the largest cell phone maker in the world, to put the Skype Internet calling software onto its phones. Nokia will initially offer Skype on its high-end smartphones, the N-series. The N97, Nokia's flagship device that goes on sale in June, will be the first to have Skype embedded. The Skype feature will start shipping on the device in the third quarter of 2009.

Skype will be integrated into the N97 address book, enabling users to see when Skype contacts are online. It will also let people use Skype's instant-messaging client. Most importantly, N97 users will be able to make free and low-cost phone calls over the Internet whether they are on a 3G cellular network or a Wi-Fi network. The Skype-to-Skype voice calls are free. And the SkypeOut service, which allows calls from Skype to landlines and mobile devices, offers low rates.

Nokia's not the only handset maker to announce a deal with Skype at Mobile World Congress. On Monday, Sony Ericsson announced it would be offering a Skype "panel" on the Windows Mobile Xperia1 device.

Adding Skype to smartphones is a great benefit for consumers, especially people who travel internationally or have friends and family overseas. While pricing on domestic voice services has been dropping like a brick from a third-story window, international rates have remained high.

As a consumer who likes to travel and who happens to be traveling internationally right now for this trade show, I am annoyed and almost angered at the outrageous prices mobile operators charge when customers roam in other countries or make international calls from the U.S. They all try to sell "international" plans to help defray the cost, but the plans themselves cost consumers an extra fee every month regardless of whether they're traveling that month or not.

Skype and other VoIP services offer users a more cost-effective alternative. And Skype on a mobile phone, when accessed on a low-cost data network, could help people who travel frequently or make lots of international calls save tons of money.

Of course, the two smartphone makers Skype has announced as partners here are manufacturers that are already struggling to get their high-end devices on American mobile networks. And my guess is that adding Skype won't do much to convince these operators to offer these phones and subsidize them so that American consumers will buy them.

The reason is pretty simple. AT&T, Verizon Wireless, Sprint Nextel, and T-Mobile USA know that a wide-scale deployment of Skype on their phones could cannibalize their international voice services and potentially hurt their domestic voice service.

So if by chance, Nokia or Sony Ericsson manages to win approval from a U.S. operator to get these phones on their networks, I wouldn't be surprised if the Skype feature is stripped from the device in the U.S. version.

That said, AT&T is allowing some voice over IP applications to appear on Apple's iPhone App Store. And Skype users are able to make free and low-cost calls through applications, such as Truphone. But for now, AT&T and Apple seem hesitant to allow Skype's powerful brand, which has more than 400 million registered users, to make it onto the iPhone.

Comments from eBay's CEO have sparked speculation that the online marketplace may be looking to unload Skype. But any suitor that comes knocking on eBay's door will likely have to pay a hefty price tag for the Internet phone service.

The Times of London reported Monday that John Donahoe, chief executive of eBay, described Skype as a "great standalone business" on a conference call last week with investors after the company reported disappointing fourth-quarter results.

The news has left many in the industry wondering if eBay will put Skype, which it paid a hefty $2.6 billion to buy in 2005, on the auction block. Donahoe had said last year that eBay would consider selling the business unit if it couldn't be integrated with its auction or PayPal payment system.

And according to statements made during the conference call, it looks like Donahoe doesn't think there is much the Skype technology can do to help eBay's other businesses. When asked what eBay was doing to add shareholder value to Skype, Donahoe admitted that "the synergies between Skype and the other parts of our portfolio are minimal," the paper said.

So is eBay looking to unload Skype? The answer is probably yes and no. Because Skype isn't core to eBay's online auction business, experts believe that eBay would be happy to let Skype go, at the right price. But Skype, which just posted a 26 percent gain in revenue for the fourth quarter compared to a year ago, happens to be one of the only bright spots in eBay's overall business, which means that eBay isn't desperate to let it go.

"Skype is not a drag on eBay at all," said Jim Friedland, senior Internet equity analyst for Cowen and Company. "In fact, it's one of the fastest-growing assets the company has right now. But I'm sure the company would sell it if they could get a hefty premium for it."

Indeed, eBay reported that its overall net income for the fourth quarter fell more than 30 percent compared to the same period last year, marking the first time ever that the company has seen its year-over-year earnings drop. It was also the second quarter in a row that the company saw the total value of all goods sold on the site fall, suggesting that the company's core business is struggling.

Meanwhile, PayPal and Skype, eBay's other two main business units, grew during the fourth quarter. PayPal revenues were up 11 percent to $623 million. And Skype's revenue grew 26 percent to $145 million.

Skype has also been adding new subscribers at a rapid pace. Scott Durchslag, the company's chief operating officer, told reporters at the Consumer Electronics Show this month that it's been adding about 30 million subscribers a quarter. It now has 370 million registered users worldwide. And these users are making lots of phones calls. Today, about 8 percent of the world's voice minutes originate from a Skype call, he said.

All told, Durchslag said Skype has been growing about 50 percent compared to the previous year in almost every metric--from minutes used to new subscribers to revenues. He also said the company just had its seventh straight quarter of profitability.

Because of this growth in Skype, eBay has little reason to sell Skype at this point. It could hold onto the service and run it as a separate business and still generate revenue.

But, of course, any business or asset is for sale for the right price. But the price that a potential suitor would have to pay for Skype is probably too high.

Three years ago, eBay paid $2.6 billion for Skype. There's no question now that the price tag was too high. In 2007, eBay said it would take a $900 million so-called impairment write-down against the value of Skype. This means that eBay has been forced to reassess the value of the Internet telephony company relative to its overall business today. By recording a charge, the company is essentially saying that it has taken a loss on its original investment.

A "peak" in value?
Based on its current financials, the highest price that eBay could hope to get for Skype is about $1.6 billion, Friedland said. And he said that would be a generous offer. eBay itself has valued the Skype assets on its balance sheet at $2 billion, so it's unlikely the company would accept a lower figure, Friedland surmised.

Friedland also said the inflated price tag that eBay paid for Skype is already built into eBay's stock price, which means the company is under no pressure to sell off a bad asset.

"I'm sure eBay's shareholders probably think that money could have been better spent on something else, like paying them dividends," he said. "But that's water under the bridge at this point. Going forward, Skype doesn't really hurt the value of eBay."

In addition to the slumping economy, there are other reasons why potential suitors would likely not be willing to pay a premium for Skype.

For one, the strategic value of Skype today is not what it was three and a half years ago when eBay bought it. Today, the three major Internet and search companies that might be interested in Skype--Microsoft, Google, and Yahoo--already have comparable messaging services, including instant messaging and voice and video calling. So from a technology standpoint, Skype doesn't offer anything that the other companies don't already have. Even phone companies AT&T and Verizon Communications already have their own flavors of voice over IP technology.

So an acquirer would likely be buying Skype for its 370 million registered users, which is nothing to sneeze at. But the big question is how much money can be made from these users? Sure, people love using Skype's free services, but most of its revenue is made from a small portion of its users. Skype generates most of its revenue from its SkypeOut service, which charges users to make calls from the Skype service to regular landline phones and cell phones.

The SkypeOut revenue stream is sufficient to sustain Skype's business model today, but as IP networks are deployed throughout the world and all communications becomes IP-enabled, there will be fewer opportunities to make money from connecting Skype calls to the regular phone network. What's more, as Skype adds more subscribers, those users are more likely to talk to one another over the free Skype-to-Skype network rather than paying to call these friends and family on regular phones. Of course, it will likely take years for this scenario to play out, but this fact could color a potential acquirer's willingness to pay a premium for the service.

"As more people adopt Skype, there's potential for the asset to peak in value," Friedland said. "It won't likely happen for another five to eight years. And unless Skype comes up with a new meaningful revenue driver, it could start to decline."

Skype doesn't plan to sit around waiting for its business model to wither. The company sees mobile phone applications and video as big components of its future strategy. But again the question remains: How will Skype monetize these services?

Skype is also looking to make a push into the business market.

"We're seeing a whole new opportunity in the business market, as companies that I'd never have thought would be a target for Skype are proactively coming to us and asking for a solution," Durchslag said at CES earlier this month.

Most likely suitor: Microsoft
Despite all these factors, there is still a possibility that a company or two might be interested in buying Skype. Friedland said it wouldn't surprise him if Microsoft made a play for Skype.

"We view Microsoft as the most likely candidate to acquire the Skype assets," he said. "Microsoft would probably be doing this to strengthen its Internet position and to buy market share."

He pointed to other deals that Microsoft has done lately that are geared more at grabbing market share than scoring profits. He used the recent mobile search deal with Verizon Wireless as a prime example. Microsoft has signed a deal with Verizon to become the default search engine on all Verizon Wireless phones. As part of the deal, Verizon agreed to pay a minimum of $400 million. But Friedland said he doesn't think Microsoft will make much more than the minimum revenue on this deal.

"Microsoft has been very aggressive about making deals," he said. "So for them it might be all about buying market share."

One thing is clear: Skype has already won substantial name recognition. Even Oprah Winfrey is a fan of the technology and uses the video service often on her talk show to interact with guests who can't be in her studio. She also uses it to connect her book club members with authors and to facilitate chats. And as we've seen in the past, Winfrey's endorsements carry a lot of weight. Just ask Barack Obama.