Joltid transaction a hangman's noose around Skype's neck?
Mon, 10/11/10 - 6:49pm View comments
Earlier this month real-time communications vendor - Skype released good news, it hired Cisco star Tony Bates to be its new CEO which is similar to other good news in Skype's past, for example, on November 6, 2009 Skype ballyhooed:
"eBay Inc. (NASDAQ: EBAY) today announced that the investor group led by Silver Lake, which had previously entered into a definitive agreement to acquire a majority stake in Skype from the company, has reached a settlement agreement with Joltid Limited and Joost N.V. that gives Skype ownership over all software previously licensed from Joltid and ends all litigation currently pending against the investor group and eBay at the closing of the acquisition."
However revealingly, almost 2 months ago Skype filed a Form S-1 with the U.S. Securities and Exchange Commission (page 195) which described in more detail the above "settlement agreement" with Joltid(which in my personal opinion is now a hangman's noose around Skype's neck):
The Joltid Transaction
On November 1, 2009, prior to the completion of the Skype Acquisition, we entered into a transaction with Joltid Limited ("Joltid") which comprised three components: we and eBay reached a settlement of outstanding litigation with Joltid, we acquired intellectual property rights to the "Global Index" technology from Joltid and Joltid made an $80 million equity investment in us. We collectively refer to these matters as the "Joltid Transaction." The Joltid Transaction centered on Skype's acquisition of intellectual property rights in the Global Index software technology that we had originally licensed from Joltid in connection with the founding of Skype. Global Index is software that, among other functionality, facilitates communication in a peer-to-peer network of Skype users. We describe the main terms of the Joltid Transaction below:
Settlement and non-assertion. Skype and Joltid and all other related parties settled all outstanding litigation and claims between them, and each party agreed not to assert any claims against the other party and its customers and distributors under any patents with an application date prior to the fifth anniversary of the Skype Acquisition, which closed on November 19, 2009.
Equity Consideration.Joltid received an approximate 10% share in the share capital of the Company (valued at the time at $224.0 million) and a cash payment of $85.0 million. In addition, Joltid received warrants to purchase an additional 98,680 Skype Global shares, equivalent to a 1% equity stake at such time, exercisable until the earlier of November 19, 2019 or the closing of a reorganization event, as defined in the warrant agreement. The warrant has since been transferred to SEP Investments Pty Limited, an entity unaffiliated with Joltid; for more information on the terms of the warrant, see "Capitalization-Warrants."
Joltid Investment.Joltid also made an investment in us by investing $80.0 million in cash for an additional approximate 3.4% of our ordinary shares.
Acquisition of Intellectual Property Rights. We acquired from Joltid (a) ownership of Joltid's intellectual property rights in the Global Index software provided to Skype, subject to the license-back to Joltid of certain rights described in the next bullet point, and (b) co-ownership with Joltid of patents covering database systems that are distributed across multiple computers for enhanced data storage and retrieval, which is a technology that we use in connection with the peer-to-peer architecture enabled by our software. We have the exclusive right to use and enforce these patents in the areas of (i) telephony and/or video communications between end users, and (ii) file transfer functionality, instant messaging and e-mail, when used as an ancillary service or application to telephony and/or video communications between end users, in each case, regardless of the form or method of communication or access thereto. We refer to these areas as the "Skype Exclusive Field."
License-back to Joltid.We granted to Joltid a non-exclusive, perpetual, royalty-free license to use, distribute, sublicense and otherwise exploit, solely outside the Skype Exclusive Field, the Global Index software that we acquired from Joltid. We retained our rights to use the Global Index software ourselves in any field of use, including outside of the Skype Exclusive Field. In addition, we remain free to license others to use the Global Index software on or in connection with (a) our platform, or publicly available products and services, or (b) the content, products or services of any third party that are enabled by or available through our platform and client or publicly available products and services. However, apart from these uses, we agreed not to license others to use the Global Index software outside of the Skype Exclusive Field.
Other commitments. In addition, we made payments or commitments to pay or invest an additional $32.3 million to or in affiliated parties of Joltid and to reimburse $20.0 million to cover expenses incurred by Joltid. The aggregate settlement of $378.4 million resulted in a net charge of $343.8 million recorded in the Predecessor statement of operations for 2009 and reflects the estimated fair value of the equity relinquished in the settlement, less the estimated fair value of intellectual property received from Joltid.
In connection with the Joltid Transaction, we also entered into a number of related agreements:
Agreements with Rdio, Inc. We invested $6.0 million in Rdio, Inc a new social music service founded by Janus Friis with Niklas Zennstrom, Skype's founders, who are indirect beneficial owners, among others, of Rdio, Inc., pursuant to a convertible note instrument. We have agreed that for a period extending until November 19, 2011, we will not provide, other than with Rdio, or engage others to provide, services for the broadcast of professionally-produced music that is accessible by computer, mobile device, television set-top box, or other device that is capable of accessing the Internet. These restrictions are subject to certain exceptions that allow us to engage in our communications business in the ordinary course. We are free to publish a generally available application programming interface enabling third parties to provide, embed or link our products, services, software clients, or platform through third party websites, software clients, product or services. We are also able to publish a generally available application programming interface enabling third parties to provide, embed, link or otherwise expose third party software, clients, products or services on our products, services, software clients, website or platform.
Agreement with Baaima N.V. (formerly Joost N.V.) We entered into an agreement with Joltid and Joost N.V., an affiliate of Joltid, which is now called Baaima, N.V. Skype's founders, Janus Friis and Niklas Zennstrom, are indirect beneficial owners, among others, of part of Baaima. We agreed that, until May 19, 2012, we would use commercially reasonable efforts to prominently promote a new video service under development by Baaima, on our website, in marketing e-mails and through in-client dynamic content, provided the video service was of sufficient quality. In return, we are entitled to receive 50% of the adjusted gross margin resulting from the revenue generated by Baaima from the video service on our platform. We have agreed that, until May 19, 2012, we will not provide, or engage others to provide, services for the broadcast of professionally-produced cable television, network television, feature films and similar content, in each case, that is accessible by computer, mobile device, television set-top box or other device that is capable of accessing the Internet. These restrictions are subject to certain exceptions to enable us to engage in our voice communications business in the ordinary course. In particular, we are free to publish a generally available application programming interface enabling third parties to provide, embed or link our products, services, software clients, or platform through third party websites, software clients, product or services. We are also free to publish a generally available application programming interface enabling third parties to provide, embed, link or otherwise expose third party software, clients, products or services on our products, services, software clients, website or platform.
Euroskoon Patent License and Purchase Agreement. We entered into an agreement with Euroskoon, LLC pursuant to which Euroskoon granted us a non-exclusive, irrevocable license to a number of patents. These patents cover programming for peer-to-peer technology. Under the terms of the agreement, we may sublicense these patents to (a) Joltid, (b) end users and third parties in connection with the software based products and services that we and, to the extent they interface with our products and services, our licensees make commercially available and (c) our affiliates. In return, we agreed to make an initial payment of $2.5 million and an annual royalty payment of $1.5 million. Between September 1, 2010 and September 30, 2010, we have the option to purchase the licensed patents for $9.0 million. If we do not exercise this option, Euroskoon has the option between April 1, 2011 and April 30, 2011 to obligate us to purchase the licensed patents for $7.5 million. In connection with our agreement with Euroskoon, we entered into a sublicense agreement with Joltid whereby we granted to Joltid a non-exclusive, perpetual, royalty-free sublicense to the Euroskoon patents described above. Under the terms of the sublicense agreement, Joltid may sublicense these patents to (a) end users and (b) third parties to use, distribute, sublicense and otherwise exploit, in both cases only in connection with the software-based products and services that Joltid and, to the extent they interface with Joltid's products and services, Joltid's licensees make commercially available for use by or on behalf of Joltid.
Investment in Atomico. We also agreed to invest $10.0 million in Atomico Ventures II, LLP (which we refer to as Atomico), an Internet, technology and telecommunication venture capital fund. Skype's founder, Niklas Zennstrom, is a general partner of Atomico, and with Janus Friis, among the most substantial investors in Atomico.
