Background
Mike Volpi was the executive at Cisco who ran M&A for John Chambers. His recommendations made millions for others (whose companies Cisco acquired) and helped make Chambers more and more powerful. Over time, he was asked by the founders of Skype, Janus Friis and Niklas Zennstrom, to sit on their board.
Then, Skype is acquired by eBay for over $2B in 2005, Friis and Zennstrom retain the underlying P2P platform, called Global Index, through their ownership of Joltid. In the sale to eBay, investors Index Partners and partner Danny Rimer make a killing.
Joost is Hatched, and Flops
Friis and Zennstrom launch Joost, a video P2P platform, using the same Global Index platform. Company raises $45M from a blue-chip roster of investors including CBS, Viacom, and many others.
Eventually, they recruit Volpi to become the CEO of the fledging video startup. Volpi, Friis and Zennstrom realize that the NBC/News Corp.-backed hulu has stolen their thunder and try to right the ship, by dumping the software client distribution model and adopting a browser strategy. By then, Joost hits considerable headwinds and decides to dump the consumer strategy and focus on white label licensing.
Back to Skype, but How?
Friis and Zennstrom wonder what to do next. Their focus shifts to their one main hit: Skype, currently in eBay’s hands. Volpi, meanwhile, wonders if he did the right thing by leaving the friendly confines of corporate life for the rough and tumble world of startups.
All equally troubled by the turning of events, they meet to explore their options. How crazy would it be for them to hatch a plan to reclaim their crown jewel Skype… but how to do without triggering a bidding war with corporate and private equity giants?
The Plan?
Since Joltid retained the source code for Skype, eBay only had access to an executable program. They probably ask Joltid for the right to tweak the software, Joltid ignores their request or outright denies it. Fearing the worst, eBay starts to tinker with the code, Joltid jumps on opportunity to claim that eBay is violating the terms of the license, they sue to prevent eBay from both tweaking the license AND from selling Skype to anyone else (Google, MSFT, etc.).
Fearing that they might lose the case to eBay, how crazy would it be for Friis and Zennstrom to offer Volpi an offer he could not refuse:
Use confidential material information to sell Skype to a third party by convincing them that he had the secret formula to get around the technical challenges posed by relying on the Global Index, but leave enough of a trail so that Joltid could pursue Volpi and the new buyers Volpi shepherded to ultimately force eBay to instead sell Skype at a steep discount to them as part of a settlement?
This way, Friis and Zennstrom did not have to enter into a bidding war against the much deeper pocketed Google and Microsoft, and private equity players that would underwrite this plan would be once bitten, twice shy about pursuing Skype as well?
You could argue, would Volpi do this?
Honestly, I don’t think so. I also don’t think - judging from the legal documents that Friis and Zennstrom unleashed on Volpi - that this is a case of three buddies hatching a grand scheme, but it does make for a great movie script, doesn’t it?
- Volpi stinks just as much as Friis and Zennstrom.
- Skype Founders Are Destroying Their Reputation and Ability to Recruit and Invest in Talent.
- Joltid jilted eBay, Twice?
Yesterday I suggested that Janus Friis and Niklas Zennstrom are better off letting bygones be bygones, but today the Skype saga got juicier and Mike Volpi is painted as the main culprit.
From GigaOm:
The gist of the lawsuit is that Volpi learned how to modify Joltid’s proprietary software to run on the web without the aid of a peer-to-peer software when he was transitioning Joost from a peer-to-peer service to a web-based Hulu clone. And with this knowledge, he was able to pitch a version of Skype that buyers could take over from eBay while side-stepping ongoing litigation.
(…)
“Volpi and Index lacked the credibility and financial heft to lead a private equity investment consortium to acquire Skype unless and until they advertised their knowledge of the Confidential Information.”
“In a very short time, Volpi burned through a substantial amount of the working capital available to Joost at the time he became CEO. Moreover, he had removed from Joost a significant portion of Joost’s innovating and market-driving technology, leaving Joost to rely on third-party technology products. Volpi’s overall business strategy failed. Moreover, it was a failure that was extremely expensive, with Joost expending tens of millions of dollars of investors’ capital.”
—Volpi is described as “a faithless fidicuary” who “took advantage of the trust and confidence placed in him to steal confidential, highly proprietary information relating to an extremely popular Internet-based technology, as well as other strategic, commercially valuable and sensitive information.” As president and CEO of Joost, Volpi, they claim, had access to info from both Joost and Joltid—including the Global Index P2P software that powers Skype and other Zennstrom-Friis efforts. Joost had the source code; Skype had more limited access—an executable-only code form of GUI. (That’s the license that is being litigated in the UK between eBay and Joltid; Skype’s continued use of the code is the subject of the copyright infringement case.)
and Tech Crunch re: the technical aspect of why Skype could never open up to developers:
A source code version of the GI Software is licensed by Joltid to Joost, allowing Joost to be the first company to successfully deliver television and other video content in real-time over a peer-to-peer network. An executable-only object code form of the GI Software was licensed by Joltid to Skype, a well-known Internet-based company that provides users throughout the world with free or low-cost telephone services over the Internet. Skype did not obtain a license to the GI Software source code, however, and the license it did obtain was terminated based on Skype’s breaches of the license agreement.
This is getting ridiculous. Is there anyone in this saga that doesn’t stink, basically?
Kazaa/Skype/Joost - and I guess Joltid - founders Janus Friis and Niklas Zennstrom are richer than God. Let’s get that out of the way.
Kazaa was a disruptive and destructive force in music that took the baton from Napster after the RIAA killed the popular file sharing software. But Kazaa’s fate was no different than Napster’s.
Skype, on the other hand, was not only disruptive but also wildly profitable. The duo cashed out admirably in a sale to eBay. It turned out, of course, that eBay bought everything but the underlying technology.
Joost was a disaster from Day 1, and as one of WatchMojo.com’s distribution partners, that was clear from Day 1. We try to tell them all of the things they were doing wrong, to no avail.
Regardless, even if every other project they touch fails, they have made their mark - and earned their fortunes - with the sale of Skype. However, I wonder if this has made them lose their senses.
In fact, I think that it’s a good thing that they two seem to have begun to focus on investments through their Atomico Investments, because I think they are damaging their own reputation as entrepreneurs and businessmen with the way they have handled everything since the sale of Skype.
For one, selling eBay the company without the technology is just bad form, even if the clueless Meg Whitman didn’t see a problem with this. I understand Friis and Zennstrom planned to use the underlying Joltid peer-to-peer Global Index technology for subsequent projects, including Joost, but it is simply bad form. What they should have done is worthy of a separate article.
However, the fact that they are now suing former Joost CEO and Chairman Mike Volpi is also bad form, because I don’t think that they will be able to recruit as many would-be CEOs in the future. By the looks of it, if what they allege is true, Mr. Volpi has also acted questionably, but at some point, you cut your losses and walk away.
As an entrepreneur, I inquired with Atomico way back in the day (full disclaimer: Atomico since invested in DECA, another content producer, though in no way really competitive with WatchMojo.com), but seeing how they have gone about this eBay/Volpi mess… you have to ask yourself, if you are an entrepreneur, does this saga make you more or less interesting to partner with them?
If they are now investors, the answer to that question should trouble them.
It is astounding that eBay forked over $3B for Skype and didn’t actually buy Skype’s underlying technology.
It is amazing that they didn’t realize this and outright criminal that they didn’t get a fully-paid, irrevocable, perpetual, non-exclusive (exclusive for the purposes of international calling) license.
Om Malik has all of the links you need:
- Skype Founders suggest they still own underlying technology to Skype
- Will Joltid turn eBay’s planned Skype IPO into a nightmare?
- Why eBay Should Accept Skype Founders’ Buyout Offer.
Now this will probably get settled one way or another, and as a non-Skype user, non-eBay shareholder, I don’t really care either way.
But a few points:
- this proves that just because you hire expensive lawyers doesn’t mean anything.
- One more example of upward failing, and to think this woman, Meg Whitman, could have been our Treasury secretary. I am sorry how wonderful Ms. Whitman was, this was done on her watch and it’s just appaling in terms of botched due diligence.
- With all due respect to Skype founders Niklas Zennstrom and Janus Friis, you have to wonder, will anyone ever buy a company from them again? I mean, sure Viacom/CBS and a number of VCs invested in their next venture Joost (hmm… is there such a thing as karma?), but this was before this bit of news was out. Ultimately, I am not sure I would have a lot of comfort and confidence doing a deal with these guys.
“The biggest lesson - people want to watch great content,” former Joost CEO Mike Volpi.
“The challenge with the online video business is pretty straightforward - most of the economics accrue at this point to the companies that own the content itself and, for the intermediaries, there aren’t any, that I can think of, profitable business models out there. The challenge is that media companies have approached the sector with more of a self-publishing model, meaning the content comes from their websites, as opposed to through aggregators.
“The challenge that Joost had throughout it’s life was that it had virtually no access to exclusive content. Many people will make issue of the choice to go with peer-to-peer or not, to go with a client or not; fundamentally, the issue is the content wasn’t what we needed it to be. That’s probably the biggest lesson - people want to watch great content.”
—Who’s to blame for not having great content?: “You can’t really say that you’d blame anybody for it. Content companies have decided that it’s in their best interests to publish from their own websites. I still believe that consumers generally would like to have that type of content on a good aggregation site, they would still love to have it on Joost, or YouTube or whomever - but, broadly speaking, the media companies have decided that’s not the strategy they’re going to pursue. Everybody acts in their own self-interest.”
Nice to see content is starting to get its due. Read more.
Say what you want about Bittorrent’s troubles, but the VCs here are basically ensuring that what few quality startups remain out there look the other way when VCs come knocking:
John Furrier, who’s got the scars from his venture-backed startup days chimes in, here.
Not being able to convince any of the 10 or so VCs I met to invest (and not accepting the terms from the couple of VCs who wanted invest) has proven to be a Godsend: had I raised money, we’d probably have less revenue to date, but far more costs. I’d be forced to lay off 30% of the company and I’d be Chief Nobody right about now…
Another thing 2009 will do is make entrepreneurs want to start modest, dare I say lifestyle businesses that turn a profit and create value… instead of faddish funadinistas with no business model, revenues or profits in sight.
As a side note, this just only adds to my bearishness on P2P as a business model and reinforces my belief that CDN have commoditized.
Our friends at Joost took a major step forward: GigaOm broke the news today. I’ve know about this for a few months, but naturally could not comment much. Man it’s hard to be a CEO blogger sometimes.
As a distribution partner of Joost, we have a lot of content on the service and having gotten a sneak peek at the social media bells and whistles I think this will push them ahead… a bit. In all fairness, the company - armed with a massive $45M and rumored to have raised even more this year - did lose a whole year in the market… in that time span, Hulu - armed with $100M and News Corp. and NBC’s content libraries - managed to crack the Top 10.
Hmm… not sure if such a confession is wise, but let me say that the porn industry’s concerns over piracy are somewhat misguided. Not because piracy won’t decimate it, like it decimated music, but because smut’s larger problem is user generated porn. Yeah, I know, sounds crazy. But make your way over to YouPorn.com (hmm… so not safe for work - or your productivity) but UGC does not pose a risk to mainstream publishers advertisers revenue because most marketers don’t want to advertise alongside UGC.
But, with porn, advertising is not an issue, it’s all about subscriptions, and I got news for you: if “consumers of porn” (whoever these people are, of course) had to choose between a pay-to-watch porn flick that is largely fluff and filler or a free user generated video that is largely, well, porn… I think we know who will win. Of course, there is the quality of the actresses… but the, have you seen Jenna Jameson lately?
Didn’t notice much that Skype was down, I think I’ve used it 5 times in my life. The initial few times it was flaky, then when the service got better I had tuned out. Of course, I am clearly not in the majority, as over hundreds of millions of people use the service… it did make it onto our Top 13 most explosive web startups of all time.
Anyway, Skype finally shed some light on the matter, the problem? According to their blog:
On Thursday, 16th August 2007, the Skype peer-to-peer network became unstable and suffered a critical disruption. The disruption was triggered by a massive restart of our users’ computers across the globe within a very short timeframe as they re-booted after receiving a routine set of patches through Windows Update.
More people use Windows that any other operating system… and Patch Tuesday is not a new phenomenon…
Wow, with peers like these, who needs friends?
On a side note, I wonder who spent less time worrying about Skype last week: the eBay management or the co-founders of Skype, who are now working hard on Joost…
When Joost raised $45M in its recent outside financing, a lot of people assumed the company would leverage the hype surrounding it to coast to a supremacy position in online video watching of professional, high quality content.
Then Babelgum joined the party, Veoh rebooted its offerings to compete more directly with Joost and the space became more crowded.
Today we learn via Mashable, who in turn picked it up via WebTVWire, that WiTV is a new Italian-based service that shuns the P2P architecture and provides for more communications options than Veoh or Joost, and presumably, Babelgum.
Features include:
The argument could be made that there will be more than enough viewers to make all of these services winners, but with the amounts that are being raised ($40M for Veoh and $45M for Joost) you have to start to wonder if the video platform space - be it for aggregation/distribution or advertising - is starting to look frothy and if these are indeed the next generation iFilm’s and UGO’s, i.e. companies that raise nearly more money over time than they exit for…
I suspect, and yes, this is somewhat based on personal experience, that the smart money will start to look at content producers. I am personally finding more and more VCs, for example, interested in investing in web video, though that could be that over time, we get on the radar of more media-focused VCs.
Either/or, this past month a handful of content producers raised considerable amounts of money, suggesting that content remains king, no matter what the medium.
It’s ironic that Joost is focusing on the US, where poor broadband networks make P2P a hit or miss, whereas WiTV is Italy-based (where broadband seems to be ahead of North American standards) yet it does not.
Disclaimer: Veoh, Joost are both distribution partners of WatchMojo.com.
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