Ebay may replace or shut down Skype

Chicago (IL) – There is a new and rather dramatic development surrounding the dispute between between Ebay and the founders of Skype. Ebay announced that it has begun developing at least some code that could replace code within the Skype communication software. This new code may or may not work, may impact the functionality of Skype and, in a worst case scenario, may force Ebay to pull Skype altogether.

Ebay unveiled the new developments within a 10-Q regulatory filing yesterday, providing new information about claims filed by Skype Technologies S.A. and Joltid Limited, a company owned by the Skype founders, who still own the rights to certain critical code of the Skype application. Ebay said that Skype filed a claim for those rights against Joltid in the English High Court in March 2009, which prompted Joltid to threaten that it would terminate the license agreement with Ebay.

Ebay said that Joltid wants to prevent Ebay from owning, using or modifying certain software source code and since Ebay had done that already, the license agreement between the two parties has been breached. Joltid then filed a counterclaim against Ebay’s Skype alleging that Skype has repudiated the license agreement, infringed Joltid’s copyright and misused confidential information.

In turn, Skype asked the court “for declaratory relief, including findings that Skype is not in breach of the license agreement, that Joltid’s notice of breach and subsequent notice of termination are invalid, and that Joltid has certain indemnity obligations in relation to the U.S. patent proceedings.” The parties may resolve the issue by themselves, but the problem is that trial is set for June 2010, which means this whole mess could interfere with Ebay’s plans to take Skype public in 2010.

Ebay said that it is looking for alternative ways to resolve the matter, including the development of code that would replace the code licensed from Joltid. Ebay said that Skype “is confident of its legal position”, but it concedes that its alternative software “development may not be successful, may result in loss of functionality or customers even if successful, and will in any event be expensive.” Even worse, if “Skype was to lose the right to use the Joltid software as the result of the litigation, and if alternative software was not available, Skype would be severely and adversely affected and the continued operation of Skype’s business as currently conducted would likely not be possible.”    

Meanwhile, Skype keeps growing at a fast pace and the Skype founders are surely aware of it, and may try to squeeze extra money out of Ebay for Skype – especially since the Skype founder’s Internet TV application Joost is everything else but successful. Ebay said that Skype Out minutes climbed from about 1.9 billion in the first quarter of 2008 to 3.0 billion in Q1 2009. Revenue climbed from about $5.7 million to $14.3 million in the same period. Skype had 480.5 million registered users on June 30, 2009, up from 338.2 million the year before.