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eBay’s big mistake; Why the JoltID license was inevitable.

Yesterday the end came to the Skype / JoltID lawsuit.   Skype co-founders Janus Friis and Niklas Zennström have taken a 14% stake in the company, Index Ventures and Mike Volpi got the boot, and Skype users all across the world breathed a sigh of relief.

One thing that was never in doubt was that Skype would take a license from Friis and Zennström.  Despite all of the breathless speculation that the company might buy Michael Robertson’s SipPhone and Gizmo5, it simply wasn’t going to happen.  One doesn’t swap protocols for a half billion installed client applications at the drop of a hat.  What was it worth to Skype to not have to do that? The deal values the JoltID license at $275 million, and the rumour mill pegged the price of the SipPhone deal at $50 million.  Ergo, the cost of disrupting the Skype business by swapping out JoltID for SIP is at minimum $225 million.  The disruptions to the business and to Skype’s enormous install base might have been far larger, however. A license was the only way to manage that risk. Skype knew it, Friis and Zennström knew it, and eBay knew it. 

Exposed as rank neophytes in the world of software licensing, Meg Whitman’s acquisition team at eBay committed a costly error in buying Skype – not acquiring control of the entire asset. Even if the Skype founders had not wished to sell the Jolt-ID technology to eBay at the time of acquisition, a “paid-up royalty-free license in perpetuity” could have been made a condition of the deal.  Licensing deals with these kinds of terms in them are common, and it’s unlikely that Friis and Zennström would have balked given the billions of dollars that eBay was already offering. 

The lesson in all this? Deals involving technology licenses and acquisitions are common in business. When acquiring a technology asset, buyers must acquire the necessary control needed in order to protect the business.  Either buy, or license in perpetuity, what you need to prosper. Unless your intent is to immediately begin work on a substitute technology, a license for core technology that needs renewal is a sure way to find yourself caught by the short-hairs in a future negotiation.

Om Malik said it best — “If my previous employer, Business 2.0, was still publishing the 101 Dumbest Things list, I would make eBay’s original Skype deal as the No. 1 dumbest thing…ever!”

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