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)

What have you done with your cognitive surplus today?

Recently a colleague of mine and I had a fascinating discussion over drinks one night about a concept that Clay Shirky refers to as “cognitive surplus”. He then sent me a link to a speech Clay gave at the Web 2.0 Conference in April of this year, called “Gin, Television, and Social Surplus” (video).

I love reading something that really makes you think, and Shirky nails it. Effectively he describes the cyclical anaesthetization and awakening of Western society, and suggests that we’re in the middle of that cycle currently. I can’t speak to the historical accuracy of his description of the pre-Industrial Revolution gin carts helping everyone in London to dull their senses, but I can totally relate to his modern day example: the sitcom. He refers to Desperate Housewives as “a cognitive heat sink, dissipating thinking…” I love that line!

Obviously, Shirky is a fan of wikis, and uses Wikipedia as a unit of measure for productivity of the collective against which he compares non-productive activity, most notably the watching of television. He estimates that there’s 100 million hours of collective human thought in “all of Wikipedia, the whole project--every page, every edit, every talk page, every line of code, in every language that Wikipedia exists in.” He doesn’t share his calculations, but he seems like a smart guy, so I’ll take that number at its face.

He then cites statistics on the amount of time spent watching TV per year – 200 billion hours in the US alone, or as he equates it to “two thousand Wikipedia projects a year”. Therein lies his “cognitive surplus”. People sitting on their couches as passive recipients of brain candy, rather than being active producers…Doing nothing as opposed to doing something.

Where we diverge is probably in our views on profiting from this cognitive surplus. While he doesn’t come out and say it, my guess is that he believes that society as a whole will benefit from contributions made from this cognitive surplus and the collective sharing of knowledge. That’s a little too warm and fuzzy for me. I’d take a slightly different view. If we were to look at this through an economic lens, then tapping into this cognitive surplus could grow our GDP at Chinese-like rates!

There is not a shortage of time, there’s a shortage of intellectual activity.

That’s my .02 (with much inspiration from Mr. Shirky)!

Martin Suter

(martin.suter@iplicensing.net)

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