Disruptive Tendencies

Skype - Joltid Licensing Dispute: Epic M&A Screw-up?

eBay must be ruing the day that it signed the M&A deal to buy Skype for $2.6b, in addition to an additional $530m as part of the earn-out provisions. Its original vision of incorporating Skype functionality into its auctions never happened. Despite that, Skype has proven itself to be quite interesting as a standalone entity, with some value potentially to be recouped via a spin-out IPO. However based on an eBay 10-Q form filed with the SEC on 7/30/2009, this is now at risk over a dispute over a license.

It seems that some of the core functionality within Skype is based on peer-to-peer software licensed from Joltid, a company also controlled by the founders of Skype, Niklas Zennstrom and Janus Friis. So if I get this right, Joltid entered into a non-arm’s length license with Skype (pre-acquisition), a company that Zennstrom and Friis also controlled. When eBay acquired Skype, it would have known that while it was “buying” Skype, it wasn’t buying Skype source code, it was licensing it from Joltid. Given the amount of money involved in the deal, and the fact that the principals were the same, insisting on a perpetual, fully paid up license, in some Field of Use (voice, IM and video applications) with rights to derivatives would seem to have been very do-able.

Instead, it appears that Zennstrom and Friis pocketed a boatload of eBay cash, and retained control of Skype’s destiny via a licensing agreement. Now with the M&A (and liquidity) at risk, eBay is now over a barrel. Negotiate and pay for that fully paid up license, re-write everything, or write it all off as the worst deal of the century. OK, maybe that’s overstating it, the Time Warner-AOL deal sucked pretty badly too.

I’ve been involved with transactions that have nearly fallen apart at the eleventh hour because of legacy tech transfer licenses. “What do you mean we’ll have to pay 4% royalties ad infinitum? We’re buying the company!” When it gets to this stage and a deal’s at risk, the original licensor has all of the leverage, and will often be “bought off”, at the expense of the shareholders, to make the issue go away so the deal can get done.

Having negotiated multiple technology transfer and M&A deals, I have learned that it is imperative to construct the tech transfer deal with M&A in mind. Exclusivity in a well-defined Field, rights to Derivative Works, Non-Assertion of IP rights, a built-in cap or royalty buy-out to convert to a license in perpetuity, are all essential. Of course, in a non-arm’s length licensing agreement, like that between Joltid and Skype, the license terms would have been very different, but in this case it is incumbent on the acquirer to recognise this and force the issue while they have the leverage.

In hindsight, many would agree, this acquisition missed the mark strategically, resulting in a $1.43b writedown. But it’s hard to fault big, bold plays with the potential to break new ground. I have a deep admiration for those involved in transactions like that. But a key takeaway is the tactical execution by eBay’s M&A team appears to have missed the inherent conflicts of interest and let slide the licensing agreement with Joltid. Now, with no leverage, it’s biting them hard. Caveat emptor!

That’s my .02!

Martin Suter

(martin.suter at iplicensing.net)

Mobile Internet Genie is Out of the Bottle

(Originally posted at http://www.von.com/blogs/guest/2009/04/mobile-internet-genie-is-out-of-bottle.aspx)

And it’s not going back...

What a week it’s been!

After blogging last month about the market disruption being caused by the combination of Wi-Fi and unlicensed spectrum, the industry reeled as it grappled with the implications of the release of Skype on the iPhone and iPod.

The buzz at CTIA was polarized around two ends of the spectrum — the incumbent wireless carriers, especially Verizon and its LTE plans, and the disruptors, led by Skype.

One of the characteristics of the climb to the “Peak of Inflated Expectations,” as articulated by Gartner, is that the only enterprises making money are conference organizers and magazine publishers. The ascent of LTE and the noise floor created by the buzz at CTIA certainly bears this out!

But LTE is just another technology. It has the potential to expand the adoption of the mobile Internet, but unlike Wi-Fi, spectrum owners that have a history of tightly controlled walled gardens will roll it out. The question is whether companies will continue to propagate a closed, walled garden approach or recognize this as the mobile Internet. There are interesting analogs in the fixed Internet that bear considering. AOL tried, for far too long, to contain its subscribers within the AOL controlled portion of the Web, and look at what’s happened to them. Does anybody remember CompuServe? Could the same thing happen to Verizon or Deutsche Telekom? Only time will tell.

The Internet has proven itself to be fertile ground for disruption. Look at how it has changed the music industry, newspapers, advertising, retailing, travel, residential voice and long distance service, and even the OS and office suite. ... Companies that “got it” on the fixed side have thrived, while those that resisted it have withered and died. Why should we expect the mobile Internet to be any different?

The availability of Skype on iPhones and iPods has, once again, brought the opposing forces into sharp contrast. Now faced with the potential loss of voice minutes, the wireless carriers are reacting in the only way they know how, by locking it out. AT&T is at least to be commended for allowing Skype traffic on its Wi-Fi network, while Deutsche Telekom companies are saying they will even restrict its use across the company’s Wi-Fi hot spots.

The battle is moving to the FCC in the U.S. where lobby groups are saying that blocking applications such as Skype is in violation of net neutrality regulations. While this argument may take years to resolve in this forum, I would bet that the consumer will decide which approach they favor, long before the courts do, and thus which companies they will continue to support as subscribers.

The Internet is kryptonite to a walled garden. Those incumbent carriers that don’t understand this and continue to try and force a controlled, mobile walled garden experience on their subscribers will ultimately lose.

That’s my .02!

Martin Suter is vice president of business development at BelAir Networks, a provider of broadband mesh solutions for Wi-Fi, WiMAX, 4.9 GHz Public Safety and 5.9 GHz ITS networks. Previously, Martin was the CEO at Cohda Wireless, where he raised the company’s profile and negotiated a licensing deal with a Fortune 100 vendor in its core franchise. Prior to Cohda, he was vice president of business development at MeshNetworks Inc., a classic tech transfer/disruptive technology success story that achieved a major liquidity event for its investors in Q4/2004 with its acquisition by Motorola. Martin also was responsible for building several high profile alliances with and for leading technology companies, including Fujitsu, Microsoft, Netscape, Sun Microsystems, and Teradata. Additionally, Martin has successfully negotiated technology transfer, distribution and/or licensing deals with companies like 3Com, BioChem Pharma, Dow Chemical, Exodus, Fujitsu, IBM, Microsoft, Motorola, Netscape and Sun.

Facebook - UC for the Web 2.0 Crowd?

Some days I feel old. I can still remember getting excited about the move up to an IBM Selectric (with AutoCorrect!) from my first Brother manual typewriter. I remember standing in line at school in 1980 to run my punch cards through the reader and being handed inches of paper to parse through. I remember receiving my first fax, a handwritten letter from my father, and being blown away. None of these were seminal moments, except perhaps for me personally, but then as I began my career in technology, I’ve been fortunate to be on the bleeding edge of some major disruptions.

The first time I experienced the Web, with Netscape Navigator 1.0, was one of those moments. “How can you build a business model on ‘free’?” was a question that most of us in application software were asking ourselves when Navigator shipped, but then Google figured it out, in spades.

The first time I heard Scott McNealy describe how the network is the computer in 1995, and I spoke with James Gosling at the first JavaOne conference about the implications of Java were two of those moments.

The first time that I spoke with Peter Stanforth in 1990 about the implications for wireless mesh networking was yet another.

But this week, I had a doozy. In fact, I would dare label it an epiphany. But you’ll have to read on to find out what it is.

In 1996, Sun brought a guest speaker into its sales conference in Key West. Unfortunately, I can’t recall his name or title, but he was from a group within Nike that was focused on observing inner city kids, whom they considered to be the alpha trendsetters in fashion and function. The lesson I think we can all take away is that watching how kids use technology today can give us clues about what we (as mature, responsible adults) can expect to be doing in the future. Isn’t it amazing to watch people’s behaviors on planes? The first thing everyone does as soon as the plane lands is turn on their “cell phones” (multi-modal communicators would be more accurate), and begin texting. Irrespective of age, or the limitations imposed by SMS, “Generation Text” showed all of us that you can communicate effectively using a telephone keypad, abbreviations and your thumbs. Who would have thought that 30, 40 or 50-somethings would be typing away on their phones? In fact, I’m ROTFL just thinking about it.

I’m lucky to have two siblings in their early twenties to help me understand how to be relevant with my two teenage sons. I was introduced to Facebook in the early days by my kid brother and sister, and am amazed at what appears to be exponential growth. Notwithstanding the business model uncertainty, look at Facebook through the lens of a kid today. What is it?

Isn’t Facebook really the communications portal for kids today? I’m guessing most kids today have never used Outlook, and why would they?

Facebook contains their contacts, admittedly the “social” subset of what would be in my Outlook contact cards, but it is moving towards providing different views/access levels by categories. It offers “Presence”, rudimentary today, but that will change. Kids don’t use email anymore, they send Messages in Facebook. It’s similar to email but different, with real time notification (find me, follow me) and with the ability to respond via SMS. It has asynchronous chat via Wall postings and video communications (non-real time) through SuperWall. It allows me to stay on top of my communications via RSS feeds and SMS notifications.

Facebook is a social unified communications platform. Maybe this is what Microsoft saw when it recently made a half billion dollar investment in the company.

However, for all of its considerable strengths, Facebook’s biggest shortcoming today is real time, or synchronous communications, which is where my epiphany comes in.

Facebook should buy Skype.

Tomorrow.

I recently re-installed Skype (after taking a year break following the purchase of a new laptop), and am amazed at how it has stealthily and totally taken over my Web experience, including password protected applications like SharePoint. It’s not intrusive, it’s simply there. Everywhere. On every Web page with a phone number, Skype has found it, and turned that static number into an immediate click-to-call opportunity. Skype also has IM, Conference calling, Voice mail, Call forwarding. Now if you could tightly couple these features with the evolving capabilities of Facebook, what more would kids today need?

Email is dead.

Telephony is dead.

The transport layer is irrelevant.

Facebook + Skype is UC for Web 2.0.

Those of us who rely on UC today know that Facebook is not CEPB for the enterprise, but we can do much worse than to watch and learn from our kids.

That my .02! Be careful out there…

Martin Suter

martin.suter (at) iplicensing.net