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Skype Software Flap Threatens Its Future

When eBay bought Skype for $2.6 billion in 2005, eBay neglected to obtain rights to some crucial underlying software for the VoIP provider and now that software -- still owned by the founders of Skype -- is threatening eBay's plans to spin off Skype in an IPO.

In a Securities and Exchange filing made public this week, eBay said that if the situation isn't remedied, "Skype would be severely and adversely affected and the continued operation of Skype's business as currently conducted would likely not be possible." Later, Skype said its plans for the IPO are still going forward.

At the heart of the issue is Joltid, a company owned by Skype's founders, Niklas Zennstrom and Janus Friis. Its peer-to-peer technology has been licensed to Skype and Joltid is seeking to terminate an agreement with eBay to use the software. eBay has asked a U.K. court to block Joltid's efforts to terminate the licensing agreement.

Behind the scenes, Zennstrom and Friis have expressed an interest in buying Skype back from eBay -- presumably for far less than they sold it -- and have approached several private equity firms to help supply funding for a takeover, according to several media reports last April. The Joltid-eBay agreement represents a strong bargaining chip in the hands of the Skype founders.

In 2007, after Skype failed to grow as rapidly as expected and didn't meld smoothly with eBay's auction technology, eBay took a $1.4 billion charge on the Skype business. At the time, Zennstrom noted that eBay had paid too much for Skype.

Since then, however, Skype has grown as a profitable and independent unit and eBay's chief executive, John Donahoe, has pushed for an IPO next year with eBay to remain a major shareholder in an independent Skype.

eBay's SEC filing gives additional information on the dispute in its licensing agreement with Joltid. "In March 2009, Skype Technologies S.A. filed a claim in the English High Court of Justice against Joltid Limited," according to the SEC Filing. "Following the filing of the claim, Joltid purported to terminate the license agreement between the parties."

The SEC filing went on to state that Joltid maintains that Skype should not be able to use the Joltid software and that Skype has "begun to develop alternative software." If the software development isn't successful, eBay added that there could be "loss of functionality or customers even if successful and will in any event be expensive."

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