The power of a mismanaged intangible

Here is an interesting item from the newsletter Telecoms.com --

Skype in danger of shutdown over P2P licensing, says eBay:In a filing to the US Securities and Exchange Commission (SEC) late last week, eBay warned that Skype depends on key technology that is licensed from third parties. The third party in this case is Sweden-based Joltid, a peer to peer technology firm run by none other than Skype's founders and ex-owners Niklas Zennström and Janus Friis. . . . eBay's concern seems to stem from a court filing in March, 2009, in which Skype and Joltid came to legal blows over the technology licensing terms. Joltid argues that because Skype does not own the underlying code for its product, it has violated the licence terms by disclosing such code in other US-based patent cases. As a result, Joltid is threatening to terminate the agreement with Skype. A trial is currently scheduled for June 2010, but eBay warns that it might have to radically change or even shutdown Skype if it loses a case against Joltid and has no other alternative.

Very interesting - on three points. First is the substance itself - the claim that Skype "violated the license terms by disclosing such code in other US-based patent cases". So it is not a patent case per se but a contracts case.

Second, it an interesting situation where the company (eBay) did not secure all of the intangible assets when it acquired Skype -- either by not getting all the patents or not hiring Zennström and Friis or not getting some form of non-compete agreements. As the Telecom.com article notes, eBay has already written off $1 billion on this acquisition. This misstep makes the deal look even worse - and would, I think, call into question eBay's plan for spin off Skype in an IPO next year. I wonder what their shareholders think of this.

Third, eBay disclosed it in an SEC filing: a clear case where an intangible -- a patent license -- was seen as material information. The disclosure was made in eBay's 10-Q quarterly report for the second quarter of 2009. The item was part of the report's section on "Litigation and Other Legal Matters" where they discuss all pending litigation. Here is part of what eBay says specifically about the case:

Although Skype is confident of its legal position, as with any litigation, there is the possibility of an adverse result if the matter is not resolved through negotiation. Skype has begun to develop alternative software to that licensed through Joltid. However, such software development may not be successful, may result in loss of functionality or customers even if successful, and will in any event be expensive. 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.

Later on in the filing in the section on Risk Factors, they there is a more general discussion about reliance on third party licenses:

Skype depends on key technology that is licensed from third parties.Skype licenses technology underlying certain key components of its software from third parties it does not control, including the technology underlying its peer-to-peer architecture and firewall traversal technology and the video compression/decompression used to provide high video quality. Although Skype has contracts in place with its third-party technology providers, there can be no assurance that the licensed technology or other technology that we may seek to license in the future will continue to be available on commercially reasonable terms, or at all. The loss of, or inability to maintain, existing licenses could result in a decrease in service quality or loss of service until equivalent technology or suitable alternatives can be developed, identified, licensed and integrated. While we believe Skype generally has the ability to either extend these licenses on commercially reasonable terms or identify and obtain or develop suitable alternatives, the costs associated with licensing or developing such alternatives could be high and the technical challenge of assuring "backward compatibility" with older versions of Skype's technology may be difficult to overcome. Any failure to maintain these licenses on commercially reasonable terms or to license or develop alternative technologies would harm Skype's business.

Interestingly there is little discussion about any other licensing agreements. The only other point of discussion is that eBay relies on security and encryption technologies licensed from third parties. But there is no discussion about the licensing agreements at risk -- just technological obsolesces (i.e. increased ability to overcome those security arrangements.) One would think that eBay -- and almost every other company -- has some level of reliance on third party technologies. And that a discussion of the vulnerability of those agreements might be in order.

I realize that companies rely on a myriad of contractual arrangements. A discussion of all of those arrangements might be overwhelming. But, I've noticed that in other cases key agreements (like Sirius contracts with certain radio personalities) are rightfully discussed in their SEC filings. I would think that key agreements would be "material" information even before a problem with the agreement threatens to sink the company. The place to start maybe a discussion by all companies on the key technologies they control versus those they license from third parties.