Insight

The valuable IP lessons to be learned from eight years of Skype

Microsoft has announced Instead, the rights were in the eBay and Skype’s would-be exploitation and value creation. that it plans to pay US$8.5 possession of Joltid, a holding purchaser, claiming that An essential part of the job is to billion to acquire internet company established by Janus copyrights relating to key be involved at an early stage communications company Friis and Niklas Zennström, the software had been infringed. when deals are being negotiated, Skype. Had previous owners men who had founded Skype in In short, it was all a so that any potential issues can been as zealous in assessing 2003 and sold it to eBay in complete mess: at least as far as be flagged and sorted out before Skype’s IP position as 2005 for US$2.6 billion. Joltid eBay was concerned. And it gave they turn into problems further Microsoft doubtless will be, it licensed the patents, trade every indication of being a self- down the line. Issues such as is unlikely that the deal would secrets and copyrights to Skype, inflicted wound. How eBay ensuring that, as an acquirer, ever have been done which meant that the company ended up spending over US$2.5 the CIPO’s company has never had full control over or billion on acquiring a business complete access to and/or “The real story here is that access to them; something that, without ensuring that it owned, control over all IP that is related Skype is restrained from as Arrington made clear in his or at least had full and to, or could relate to, the innovating because they don’t article, severely restricted unimpeded access to, all the acquisition. A CIPO would own their own IP. In fact, they Skype’s ability to develop new intellectual property required to understand that without this, can’t even see the core IP.” So products and services. run it has never been explained; the reasons for the acquisition wrote journalist Michael With Joltid claiming that but it is difficult to escape the may not be as compelling as Arrington of the Washington eBay had failed to comply with conclusion that some key issues they otherwise would be. The Post in an article dated 18th terms in some of the patent were overlooked when the CIPO would be able to flag such September 2009. licensing agreements that Skype original purchase went through. a situation as a potential deal- Arrington put his piece depended on, and eBay counter- Indeed, if ever the role of chief breaker. together just as eBay’s plans to suing in the UK courts, the IPO intellectual property officer It would be interesting to spin out Skype via an initial was untenable. Instead, eBay (CIPO) needed a justification, know at what stage the IP public offering (IPO) were agreed a sale with a consortium then this case must be it. involved in eBay’s original abandoned. This was after it of private equity investors led purchase of Skype was became apparent that an IPO by a firm called Silver Lake. The It’s CIPO time discussed, who was involved in would be impossible because price paid for the 70% stake, The CIPO role is one which the discussions and what advice the internet communications US$2.5 billion, reflected the risk gives a single individual the the eBay board was given. It is company that eBay had acquired that the consortium was taking. ultimate responsibility for all difficult to believe that had a four years earlier did not own It was a risk that became even areas of IP inside an powerful CIPO with a direct line many of the key intellectual more apparent when Joltid organisation – from strategic into the board been involved property rights that opened proceedings in a development and prosecution, underpinned its offering. California court against both through to litigation, continued on page 8

Skype timeline

Spring 2003: Niklas Zennström and Janus Friis found Skype, a offering. Joltid, a holding company established by Zennström and Friis, company that offers a free piece of software allowing people to make claims ownership of key patents, copyrights and trade secrets that had voice calls over the internet. been licensed to Skype. eBay sells a majority stake in the company to April 2005: Skype hits the 100 million downloads mark, fuelled by a consortium of private equity investors for US$2.5 billion. rapid take-up of broadband. November 2009: As part of a settlement agreement designed to end September 2005: eBay agrees a deal to buy Skype for US$2.6 billion the ongoing litigation, Joltid pays to take a 14% share in Skype, while for a mix of cash and shares. Zennström and Friis join the company’s board. October 2007: eBay’s CEO Meg Whitman states that the company’s 10th May 2011: Microsoft Corp and Skype announce that they have handling of the Skype buy-out had been a “mistake”. eBay takes a entered into a definitive agreement under which Microsoft will acquire US$900 million write-down on its investment. Skype for US$8.5 billion in cash. “The acquisition will increase the April 2009: eBay announces that it plans to float Skype. CEO John accessibility of real-time video and voice communications, bringing Donahoe, who succeeded Whitman in March 2008, explains that benefits to both consumers and enterprise users and generating although it “is a great standalone business … Skype has limited significant new business and revenue opportunities. The combination synergies with eBay”. will extend Skype’s world-class brand and the reach of its networked September 2009: The planned IPO is abandoned after a series of legal platform, while enhancing Microsoft’s existing portfolio of real-time spats in the UK and the US relating to IP that underpins the Skype communications products and services,” says a Microsoft press release.

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in order to “to reduce backlogs in The charitable may be They should hang their processing patent applications by inclined to the second spurring innovation and explanation. But that does not let reforming US Patent and any of those who passed the heads in shame … Trademark Office operations to budget off the hook. What it make them more effective”. means is that they care so little In February 2011, the US Senate’s process and, ultimately, reduce A few days after the vote, for the innovation process that Judiciary Committee voted the quality of issued patents. USPTO Director David Kappos alarm bells did not ring when unanimously in favour of the Those who suffer are innovators outlined the consequences of the they inspected the proposed America Invents Act. When the looking for certainty as they seek budget approved not just by the legislation. For a relatively paltry legislation went to the full to develop products and services, President and the Senate, but by US$100 million, this lack of Senate, it was passed by 95 votes grow companies, hire staff and the House of Representatives too. oversight could cause more to five. Among the act’s most build revenues. They were: no overtime; a hiring damage to the US economy than significant sections is one ending On 15th April, the US Senate freeze; all except mandatory countless other minor cuts or tax fee diversion from the self- was required to approve a federal training cut; severe cuts in PCT rises would ever have done. funding US Patent and budget that, among other things, search funding; the creation of a Of course, the final budget Trademark Office (USPTO). diverted US$100 million from satellite office in Detroit proposal was the result of Fee diversion – the process the USPTO to other parts of the postponed; no IT infrastructure painstaking, controversial and by which money raised and government. When it came to the investments except those deemed protracted negotiations; a deal collected by the USPTO is vote, 13 of the 18 members of the “mission-critical”; the indefinite had to be done to keep the allocated to other parts of the Senate Judiciary Committee were postponement of the expedited government going. But it seems federal government – has been a in favour. Overall, 81 out of 100 examination programme; and that no one even gave the longstanding bugbear of the US senators gave their approval. The mandatory expenses reductions. diverted money a moment's IP community. It has prevented budget was then signed into law Any reasonable person thought. That speaks volumes successive USPTO directors from by President Obama, who had surveying all this would about the difference between instituting long-term plans to previously described the IT conclude one of two things: political words and action when recruit new patent examiners, system at the USPTO as either the president and it comes to innovation. retain existing ones and invest in “embarrassing”. Less than a year legislators do not mean it when The simple truth is that 15th a top- class IT infrastructure. before, he had written to the- they talk about the importance April was a terrible day for the The overall effect of fee then speaker of the House of of US innovation; or they took US. The country’s political diversion is to increase the Representatives, Nancy Pelosi, their eyes off the ball and did leaders – Democrat and backlog of patent applications, asking her to support proposals not notice what they were Republican – should hang their slow down the examination to allow the USPTO extra funds approving. heads in shame.

Skype, continued from page 6 important patents, copyrights communications so people can involved in what comes next. and trade secrets underpinning easily stay connected to family, They will check every patent, Skype, the two men guaranteed friends, clients and colleagues copyright, trade secret and other early on, events would ever have themselves an important and anywhere in the world.” right to make sure that Microsoft proceeded in the way that they potentially valuable stake in the Joltid and Silver Lake stand to is getting exactly what it believes did; if they had, of course, it company’s future for as long as make their money back many it is paying for. If eBay had done would have been completely they wanted it. times over. the same thing in 2005, it may clear who was to blame. They used that position to have been in a much stronger maximum effect. Late in 2009, all Money’s worth position to develop Skype Getting it the IP litigation relating to Skype Inevitably, some have asked internally, to take it to IPO or, In seeming contrast to eBay, Friis was dropped after a settlement whether Microsoft is paying too failing that, to charge the 2009 and Zennström did have a full was agreed between the parties. much for Skype. More pertinent, consortium a much higher price. appreciation of the importance Among other things, this perhaps, is whether eBay sold for As for Friis and Zennström, of IP to Skype’s future. Prior to involved Joltid buying a 14% too little. Unlike eBay, Microsoft they have each made hundreds of developing the online telephony stake in Skype, with Friis and does have a chief IP officer. millions of dollars directly as a technology on which Skype is Zennström joining the company’s Given the company’s clear result of creating, and then based, Friis and Zennstrom had board. Less than two years later, commitment to IP creation, ensuring ownership of, valuable established KaZaA, the music in May 2011, Microsoft management and exploitation, it IP. They are individuals who had file sharing company. This was announced that it had agreed to is to be expected that Horacio an idea and, thanks to patents eventually shut down after a pay US$8.5 billion to acquire the Gutierrez and his team have been and copyrights, have been able to series of run-ins with the company . “Skype is a phenomenal heavily involved in the due develop it to create a product recording industry over service that is loved by millions diligence that would already have used by tens of millions of copyright infringement, but the of people around the world,” said taken place in the lead-up to the people around the world. And two men obviously learned a lot Microsoft CEO Steve Ballmer. announcement of the proposed they have monetised it not once, of lessons. In setting up Joltid “Together we will create the purchase; there is little doubt but twice. Don’t tell them that IP and giving it ownership of the future of real-time that they will also be heavily is only for big corporations.

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