Category Archives: Skype

Bad and Good in Avaya’s Pending IPO

We don’t know when Avaya will have its IPO, but we learned a couple weeks ago that the company will trade under the symbol ‘AVYA‘ on the New York Stock Exchange.

Long before that, back in June, Avaya first indicated that it would file for an IPO, from which it hoped to raise about $1 billion. Presuming the IPO goes ahead before the end of this year, Avaya could find itself valued at $5 billion or more, which would be about 40 percent less than private-equity investors Silver Lake and TPG paid to become owners of the company back in 2007.

Proceeds for Debt Relief

Speaking of which, Silver Lake and TPG will be hoping the IPO can move ahead sooner rather than later. As parents and controlling shareholders of Avaya, their objectives for the IPO are relatively straightforward. They want to use the proceeds to pay down rather substantial debt (total indebtedness was $6.176 billion as of March 31), redeem preferred stock, and pay management termination fees to its sponsors, which happen to be Silver Lake and TPG. (For the record, the lead underwriters for the transaction, presuming it happens, are J.P. Morgan, Morgan Stanley, and Goldman Sachs & Company.)

In filing for the IPO, Avaya has come clean not only about its debts, but also about its losses. For the six-month period that end on March 31, Avaya recorded a net loss of $612 million on revenue of $2.76 billion. It added a further net loss of $152 million losses the three-month period ended on June 30, according to a recent 10-Q filing with the SEC, which means it accrued a net loss of approximately $764 million in its first three quarters of fiscal 2011.

Big Losses Disclosed

Prior to that, Avaya posted a net loss of $871 million in its fiscal 2010, which closed on September 30 of 2010, and also incurred previous losses of $835 million in fiscal 2009 and a whopping $1.3 billion in fiscal 2008.

Revenue is a brighter story for the company. For the one months ended June 30, Avaya had revenue of more than $2.2 billion, up from $1.89 billion in the first nine months of fiscal 2010. For the third quarter, Avaya’s revenue was $729 million, up from $700 million in the corresponding quarter a year earlier.

What’s more, Avaya, which bills itself as a “leading global provider of business collaboration and communications solutions,” still sits near the front of the pack qualitatively and quantitatively in  the PBX market and in the unified-communications space, though its standing in the latter is subject to constant encroachment from both conventional and unconventional threats.

Tops Cisco in PBX Market

In the PBX market, Avaya remained ahead of Cisco Systems in the second quarter of this year for the third consecutive quarter, according to Infonetics Research, which pegged Avaya at about 25 percent revenue share of the space. Another research house, TeleGeography, also found that Avaya had topped Cisco as the market leader in IP telephony during the second quarter of this year. In the overall enterprise telephony equipment  market — comprising sales of PBX/KTS systems revenues, voice gateways and IP telephony — Cisco retains its market lead, at 30 percent, with Avaya gaining three points to take 22 percent of the market by revenue.

While Infonetics found that overall PBX spending was up 3.9 percent in the second quarter of this year as compared to last year, it reported that spending on IP PBXes grew 10.9 percent.

Tough Sledding in UC Space

Meanwhile, Gartner lists Avaya among the market leaders in its Magic Quadrant for unified communications, but the threats there are many and increasingly formidable. Microsoft and Cisco top the field, with Avaya competing hard to stay in the race along with Siemens Enterprise Networks and Alcatel-Lucent. ShoreTel is gaining some ground, and Mitel keeps working to gain a stronger channel presence in the SMB segment. In the UC space, as in so many others, Huawei looms as potential threat, gaining initial traction in China and in developing markets before making a stronger push in developed markets such as Europe and North America.

There’s an irony in Microsoft’s Lync Server 2010 emerging as a market-leading threat to Avaya’s UC aspirations. As those with long memories will recall, Microsoft struck a valuable UC-centric strategic alliance — for Microsoft, anyway — with Nortel Networks back in 2006. Microsoft got VoIP credibility, cross-licensed intellectual property, IP PBX expertise and knowledge — all of which provided a foundation and a wellspring for what Microsoft eventually wrought with  Lync Server 2010.

The Nortel Connection

What did Nortel get from the alliance? Well, it got some evanescent press coverage, a slippery lifeline in its faltering battle for survival, and a little more time than it might have had otherwise. Nortel was doomed, sliding into irrelevance, and it grabbed at the straws Microsoft offered.

Now, let’s fast forward a few years. In September 2009, Avaya successfully bid for Nortel’s enterprise solutions business at a bankruptcy auction for a final price of $933 million.  Avaya’s private-equity sponsors saw the Nortel acquisition as the finishing touch that would position the company for a lucrative IPO. The thinking was that the Nortel going-out-of-business sale would give Avaya an increased channel presence and some incremental technology that would help it expand distribution and sales.

My feeling, though, is that Avaya overpaid for the Nortel business. There’s a lot of Nortel-related goodwill still on Avaya’s books that could be rendered impaired relatively soon or further into the future.  In addition to Nortel’s significant debt and its continuing losses, watch out for further impairment relating to its 2009 purchase of Nortel’s assets.

As Microsoft seeks to take UC business away from Avaya with expertise and knowhow it at least partly obtained through a partnership with a faltering Nortel, Avaya may also damage itself through acquisition and ownership of assets that it procured from a bankrupt Nortel.

Magor Offers “Telecollaboration” to SMEs

Some have accused telepresence of being the preserve of the rich.

To be sure, room-based telepresence has an exclusive aura, conferred by its prohibitive price and imperious requirement. It is a proficient, if costly, means of bringing meeting participants together around a virtual boardroom table, but it is relatively inflexible and stiffly formal when asked to share the stage with data-based collaboration.

For verisimilitude, though, telepresence sits at the pinnacle of the video-meeting throne. It is followed in the hierarchy by videoconferencing, which covers a broad swatch of ground and extends from specialized systems to software-based services that provide a best-effort experience on nearly any device with a broadband Internet connection. With regard to the latter, think Skype.

It has become readily apparent, in fact, that the market for video communications is richly segmented rather than monolithic. Cisco would like to get more than its “fair share” of the market action, but its current portfolio (even with Tandberg) remains vulnerable to competitive incursions in the SME space, where price sensitivity is more acute than in the rarefied environs of the world’s largest transnational corporations. To be fair, though, even the world’s corporate kingpins are holding their wallets a little tighter as we move into a “new normal” of permanent cost controls and reduced growth scenarios.

Macroeconomic misgivings aside, there is also that unsettled question about how elegantly collaboration can be brought, figuratively and literally, into the videoconferencing picture.

One company taking its best shot at addressing the challenge is Magor Communications Corporation. The company calls what it does “telecollaboration,” which it defines as an “emerging category of communications solutions (that) . . . . combines high-definition (HD) videoconferencing and advanced collaboration capabilities to enable life-like interactions and experiences no matter where people are located.”

Put simply, Magor is trying to fuse adaptable high-quality (1080p, where possible) videoconferencing with data-based collaboration.

The company, which is now raising a round of financing, recently gave me an opportunity to experience its technology firsthand.  I came away impressed by the price-performance proposition, the quality and naturalness of the videoconferencing experience, and the smooth interplay of collaboration and videoconferencing. The user interface also seemed uncluttered and surprisingly simple. Like the best telepresence and videoconferencing systems, Magor’s facilitated a natural eye-to-eye conversation without getting in the way.

The Magor technology doesn’t give you all the visual brilliance of, let’s say, Cisco’s telepresence, but it also won’t give mid-sized enterprises sticker shock. That factor, and some others I’ll mention at the end of this piece, could be pivotal to the company’s success.

If you ask Magor what sets it apart from the pack, it cites four main differentiators.

At the top of its list is a patented video-compression technology that allows Magor to stream HD video at 2 Mbps, peaking at 4 Mbps. In contrast, it says, its competitors transmit at 5 Mbps, peaking at 30 Mbps, to accommodate one 1080p stream. When the network is heavily congested, Magor says, its system can dynamically and gracefully adjust the video quality to accommodate constrained resources. If network conditions improve, Magor readjusts video quality accordingly. To effect these quality adjustments, Magor’s software samples the video stream multiple times per second.

A second point of differentiation, according to Magor, is that its functionality is delivered entirely in software that runs on industry-standard, off-the-shelf hardware. Magor says it is looking to port its software to a range of platforms, including increasingly powerful notebook PCs, tablets (such as the iPad), and smartphones.

Magor says another distinguishing characteristic is its support for original-format data collaboration rather than for a bandwidth-sapping H.323 “collaboration image” pushed through a side channel.

Finally, Magor points to how easy its systems are to use. To add users or data collaboration to a conference, participants need only push a button on a SIP phone or click on a mouse.

With regard to pricing, a single-display system goes for approximately $15,000, with a dual-display system selling for about $30,000, and a three-display configuration going for $45,000. The two- and three-display configurations are offered with the option to purchase additional HDTV cameras, which increases the price of the packages by about $2,000.

Launched in 2006 under the aegis of Wesley Clover — an investment firm chaired by Terry Matthews, founder of Mitel and Newbridge Networks — Magor sports an accomplished executive team. Mike Pascoe, the company’s CEO, served in the same role at Meriton Networks and PairGain Technologies. Dan Rusheleau, Magor’s executive VP of product development, co-founded Newbridge. Not surprisingly, considering its progenitor, the entire executive team comprises alumni of Terry Matthews’ corporate constellation.

I suspect there’s a potentially sizable market for what Magor is selling, but it will face competition from above — Cisco, HP, Polycom — and from below, where Logitech’s LifeSize and the cheap-and-cheerful Skype are among the players.

The big challenge for Magor will be to establish strong business partnerships that give it the industry profile, channel reach, and business scalability to gain separation from the pack. It is busily building OEM strategies, vertical-market plans, and reseller networks. It already has Mitel in its camp, and it is working on a series of other agreements.

Reviewing the Skype Deal

If the battle for Skype were a television series, it would have been equal parts soap opera and suspense thriller. It nearly segued into courtroom drama, but it wouldn’t have been a good one, likely way too one-sided for engrossing fare.

In the end, it was the specter of a courtroom rout that got the principals to the table to hammer out a settlement that leaves a few people happy, a few people content, and a few people disconsolate. There were winners, losers, and those who fall somewhere between those unambiguous extremes.

I think Om Malik has done an excellent job categorizing how the various players fared. His blunt assessment is keenly accurate, cutting through the cant and dishonest spin of those who would try to persuade us that we can trust neither our own lying eyes nor our critical faculties.

As far as the official breakdown, eBay finally gets to sell majority ownership of Skype to a consortium of investors, though the composition of those investors — and the overall percentage of the company they’ll take off eBay’s hands — has changed.

The key paragraph, excerpted from the press release announcing the settlement, is this one:

“As part of the settlement agreement, Joltid and Skype founders Niklas Zennström and Janus Friis will join the investor group, contributing Joltid software and making a significant capital investment in exchange for a 14 percent stake in Skype. As a result, Silver Lake and other investors including Andreessen Horowitz and the Canada Pension Plan Investment Board (CPPIB), will together hold 56 percent of Skype and eBay will retain 30 percent. As previously announced, eBay will receive approximately $1.9 billion in cash upon the completion of the sale and a note from the buyer in the principal amount of $125 million. The deal, which values Skype at $2.75 billion and is not subject to a financing condition, is expected to close in the fourth quarter of 2009.”

In the original ill-fated arrangement, announced September 1, eBay sought to sell 65 percent of Skype to a consortium of investors that was led by Silver Lake. That consortium included Index Ventures but excluded Skype’s founders, Zennstrom and Friis, who — by the time this story runs its course — will have been both sellers and buyers of Skype in separate transactions with eBay.

Like the doomed proposal that preceded it, today’s announced agreement values Skype at about $2.75 billion.

Index Ventures and Mike Volpi, a partner in that firm, are not part of the deal. Index would like us to believe that this arrangement occurred entirely of its own volition, but the evidence suggests otherwise. Here is what Danny Rimer, a partner at Index Ventures, had to say about the Skype settlement:

“We are pleased that Skype will now be able to put litigation behind it, and we wish Josh Silverman, his team and the Skype investors well in continuing to grow a great business. Although Skype has the potential to be a great investment, the deal terms changed for Index such that it no longer matches our investment criteria and thus we have decided not to participate in the transaction.”

Om Malik contends rightly that this is . . . er, poppycock.

I don’t know whether Index could have said anything to take the sting out of the loss it sustained, on multiple fronts, in this whole Skype imbroglio. Nonetheless, the quote Rimer provides is embarrassing and ungracious. There are times when it’s best to say nothing, and this qualified as one of them.

It’s all over but the shouting now. With 23 directors, Skype might want to soundproof the boardroom.

Skype Settlement Said to be Imminent

Although a settlement seems to be in place — with Skype founders Niklas Zennstrom and Janus Friis receiving a 10-percent equity stake in Skype, plus two board seats, and with Index Ventures and Mike Volpi getting banished from the deal — a formal announcement including all the pertinent details has yet to be delivered by the legal gods to us mere mortals.

It shouldn’t be long, though.

Network World Reprises Volpi’s Medley of Email Hits

For those who cannot get enough of the intrigue, scheming, and shenanigans surrounding the boardroom-to-courtroom-to-boardoom battle for the ownership of Skype, Brad Reese at Network World reproduces a medley of Michael Volpi’s greatest email hits.

Thrill to Volpi’s message about “getting the father of SIP to jump ship” from Cisco. Enjoy his follow-up message to Egon Durban, managing director at private-equity firm Silver Lake, regarding the need to fill out a SIP engineering team with five or six solid VoIP software engineers. Marvel at Volpi’s disparagement of former colleagues and Skype-deal confederates.

Moreover, consider that he was writing all these email hits while still employed as the CEO of a company (Joost) that was founded and run by the same duo, Niklas Zennstrom and Janus Friis, who founded Skype before selling it to eBay and who entertained hopes of owning it again. Also ponder that much of the same underlying p2p software used at Joost, at least originally, also served as the architectural foundation for Skype.

Finally, consider that Volpi was said to have led and been involved in an architectural transition at Joost that saw the video-sharing site move from the p2p foundations on which it was based — using the same Joltid technology that was licensed by Skype — to a client-server architecture that employed Flash-based web clients at the end points.

At minimum, there would appear to be superficial similarities between the architectural overhaul that had occurred at Joost and what Volpi proposed for Skype.

Reputation Bashing in Joltid-Volpi Brouhaha?

In a short piece summarizing and commenting on the latest developments pointing toward a settlement of the legal conflicts and ownership of Skype, All Things Digital’s Kara Swisher opines as follows:

Skype founders Niklas Zennström and Janus Friis had sued Index and also partner Michelangelo Volpi via tech companies they control, Joltid and Joost.

The pair had already been in a legal battle over software licensing issues with eBay (EBAY), the company that had sold Skype to in 2005.

They then accused Index and Volpi, employing a reputation-bashing style, of using confidential information as part of a consortium bid to acquire a large chunk of Skype.

Well, did Zennstrom and Friis use “a reputation-bashing style” in their litigious cage match with Mike Volpi? I suppose that’s one interpretation of what occurred, but it’s not the only one.

For the record, I read Volpi’s email correspondence, written while he was CEO of Joost, adumbrating his plan to take control of Skype and perhaps serve as chairman of that company. I am not a lawyer, and I am not crazy enough to pass legal judgment on what Volpi said and did while sitting in the big chair at Joost, but it seems to me at least some of his behavior, in that role, was ill-advised and ethically questionable.

I am not the first, nor the last, to reach that determination.

In closing, I’ll just say that even though one’s reputation can be bashed, if one’s integrity is as adamant and unyielding as aggregated diamond nanorods, the bashing will do neither significant nor lasting damage. Conversely, if one is not quite an impregnable ethical fortress, the bashing of one’s reputation can do serious harm.

Reported Skype Settlement Sees Founders Taking Ownership Stake; Index Ventures Out

The battle between the founders of Skype, its current owners (eBay), and others who wish to own it will reportedly reach its end in a negotiated agreement.

So says the New York Times. Before the Times published its report, Om Malik also reported that a settlement might be in the works.

Several people briefed on the situation told the Times that the proposed settlement will be struck between a consortium of investors, who successfully bid for Skype in September, and the original founders of Skype — Niklas Zennstrom and Janus Friis — who filed a fusillade of lawsuits in an effort to derail the consortium’s $1.9-billion deal to buy 65 percent of Skype from eBay.

The settlement mooted by the Times’ sources would restructure the consortium buying Skype, with Zennstrom and Friis, who created Skype and sold it to eBay in 2005, taking a significant interest in the p2p communication company they founded. (Back in September, I wrote about a potential settlement along these very lines.)

Apparently withdrawing from the deal — doubtless at the strong insistence of Zennstrom and Friis — will be Index Ventures, a London-based venture capital firm whose partner, Mike Volpi, formerly served as CEO and chairman of Joost, a video-sharing firm also founded by Zennstrom and Friis.

This is where the tale gets tangled and sordid, and where it requires some expository backtracking.

A phalanx of intellectual-property disputes and lawsuits relating to software technology licensed to Skype by Joltid — a company controlled, again, by Zennstrom and Friis — was designed to prevent eBay from completing the $1.9-billion sale of a 65-percent interest in Skype to a group of investors that includes Index Ventures, private-equity firm Silver Lake, venture-capital firm Andreessen Horowitz, and the Canada Pension Plan Investment Board.

But there’s an additional subtext to this byzantine story. It involves Volpi, a former Cisco executive who was involved in a great many of the networking giant’s acquisitions through the late 90s and into the current decade. In 2007, Volpi left Cisco to take the helm at Joost, a video-sharing business built atop some of the same software technology that provided the p2p architectural foundations for Skype and Zennstrom and Friis’ earlier companies, including file-sharing trailblazer Kazaa.

What transpired at Joost is key to understanding the intense antagonism between the principals involved in the fight for Skype.

At some point, as Joost struggled to gain ground against established video-distribution websites, Volpi turned his attention to Skype. In February of this year, while he was serving as CEO and chairman of Joost, Volpi began email correspondence with Danny Rimer of Index Ventures — the VC firm Volpi would later join — regarding a scheme to take control of Skype in conjunction with private-equity firm SIlver Lake and others. To make matters worse, Volpi wrote the correspondence using his email account at Joost.

In a motion for a preliminary injunction as well as in a preceding lawsuit, Jotid and Joost accused Volpi of a veritable panoply of chicanery and outright malfeasance. Regarding the investment-consortium’s bid to take majority control of Skype, the plaintiffs charged that “the entire transaction is . . . . infected with Volpi’s misconduct.”

With Volpi having used his Joost account for email correspondence regarding Skype, the Joost and Joltid plaintiffs produced Volpi’s email messages and other documentation to support their injunction demands.

Not only did Volpi discuss a Skype takeover with his future colleague at Index Ventures while he was still at Joost, but Volpi also made critical, even disparaging, comments about prospective deal partners (including former Cisco colleague Charlie Giancarlo) and about his employers, Zennstrom and Friis.

Regarding Giancarlo, Volpi wrote:

“Charlie is a good guy, but not a superstar . . . . His core asset at Cisco is (sic) that he was much more inclined to say “yes” to John (Chambers, Cisco’s CEO) than I was.”

In those email messages, Volpi also discussed how Skype could change its underlying software architecture to obviate the intellectual-property claims related to Joltid and its p2p software.

The entire saga may have done irreparable damage to Volpi’s previously stellar professional reputation. In a column published originally on October 31, the San Jose Mercury News’ Chris O’Brien wrote:

Even if we give Volpi the benefit of the doubt and assume he prevails on the legal issues, his actions and behavior are likely to put a considerable dent in his reputation. It may be hard to predict who will be the winner in these legal cases, but it’s clear that Volpi is the early loser.

If the New York Times report proves accurate, the epilogue of this story will be worth following.

Joltid Versus Volpi: The Antagonism Intensifies

The high-stakes battle for Skype already was contentious, even bitter.

It became poisonous today when companies controlled by Niklas Zennstrom and Janus Friis filed a motion for a preliminary injunction against Michael Volpi and venture-capital firm Index Ventures in the United States District Court for the District of Delaware.

In the motion and accompanying supporting documentation — filed by Joost US, Inc., its indirect parent company Joost N.V., and Joltid Limited — Volpi, formerly the CEO and chairman of video-sharing company Jooost, and Index are accused of a veritable panoply of chicanery and outright malfeasance. Many of the allegations are nothing short of incendiary.

Flowing from intellectual-property disputes and lawsuits relating to Joltid software technology, the motion is intended to prevent eBay from completing the $1.9-billion sale of a 65-percent interest in Skype to a group of investors that includes Index Ventures, private-equity firm Silver Lake, venture-capital firm Andreessen Horowitz, and the Canada Pension Plan Investment Board.

Zennstrom and Friis would like to own Skype, in whole or in part, and they’re desperate to stop eBay’s Skype deal from coming to fruition.

A press release announcing the preliminary-injunction motion spells out the plaintiffs’ immediate objectives:

The Motion for Preliminary Injunction asks the Court to enjoin Index and Volpi from using any of Joost’s and Joltid’s confidential information regarding (among other things) the Global Index Software, the technology developed and owned by Joltid that provides the peer-to-peer capability embedded in the Skype program. The Motion also asks the Court to enjoin the defendants from:

(i) using the confidential information in connection with the operation or strategic planning of Skype;

(ii) communicating such information to other parties in the “Buyout Group” that has made a bid to acquire Skype from eBayInc.;

(iii) soliciting employees of Joost and Joltid with offers to join Skype;

(iv) having communications with current or former employees of Joost orJoltid regarding the companies’ confidential information; and

(v) further participating in the Skype acquisition or assuming any position with Skype until a final adjudication of the merits of the case.

Citing allegations made against Volpi and Index Ventures in a lawsuit filed on September 19, the filing flatly asserts that “the entire transaction is . . . . infected with Volpi’s misconduct.”

Those who haven’t been following this complex and personally fraught conflict can be forgiven for not understanding the complicated drama without the benefit of an annotated program. As I attempted to explain in an earlier post, the allegations are centered on former Cisco wheeler-dealer Volpi’s tenure as CEO and chairman of Joost, a company founded by Zennstrom and Friis.

Like other companies – such as Kazaa and Skype – launched by Zennstrom and Friis, Joost leveraged and licensed underlying peer-to-peer software code from subsidiary companies (including Joltid) also owned by Zennstrom and Friis.

In 2008, during Volpi’s unsuccessful reign at Joost, he is reputed to have led an effort to shift the company’s client-based software and p2p architecture – based on Joltid’s Global Index (GI) software, which also provides the underpinnings for Skype — to a web-based model with a centralized server-based architecture. Although he cited business and technological reasons for the move, Zennstrom and Friis contend skullduggery was afoot.

Essentially, the plaintiffs assert, Volpi used inside knowledge of how Global Index and other Joltid software worked to help Skype violate terms of an executable-license agreement it had struck with Joltid for use of the General Index software. Unlike Skye, Joost had a license for the source code.

Meanwhile, Joost’s fortunes were waning while Skype remained popular with millions worldwide as a means of conducting presence-based voice, IM, and video communications.

At some point, in early 2009, while he still was the CEO of Joost, Volpi is accused of conspiring with his colleagues at Index Ventures on a plan to gain a controlling interest in Skype, partly through his knowledge of how Joltid’s General Index functioned. The plaintiffs allege that Volpi, trading on confidential technical information he obtained at Joost, made himself indispensable to the “buyout group,” and that he subsequently met with senior executives at Skype to discuss technical workarounds that would extricate that company from its lawsuits with Joltid over use of General Index code.

Volpi is also alleged to have attempted to poach employees at Joost who had intimate knowledge of how the disputed p2p software worked.

A welter of email correspondence and other documentation has been adduced by the plaintiffs to support their case for an injunction. Some of those background documents make for fascinating reading, particularly Volpi’s email correspondence relating to the structure of the Skype deal.

I might revisit some of that content in future missives. Suffice it to say, Volpi’s remark about Charlie Giancarlo – now with Silver Lake Partners, but formerly an executive counterpart of Volpi’s at Cisco – will raise eyebrows.

Said Volpi of Giancarlo: “Charlie is a good guy, but not a superstar . . . . His core asset at Cisco is (sic) that he was much more inclined to say “yes” to John (Chambers, Cisco’s CEO) than I was.”

Displeased Tandberg Shareholders Face Hobson’s Choice on Cisco Deal

The deal is unlikely to be derailed because of it, but not all Tandberg shareholders are enamored of the $3-billion all-cash offer Cisco made for the Norwegian videoconferencing-systems company.

In a Financial Times column earlier this week, a Tandberg shareholder noted that Polycom, Tandberg’s videoconferencing-systems rival, was trading at an equivalent EBITDA multiple. He or she reasoned that a takeover-bid premium should apply to Tandberg’s value.

The anonymous shareholder also argued that Cisco’s acquisition offer did not account for the valuable synergies that will flow from the merger. Said the deal critic:

“Tandberg claimed the deal would lead to USD 10bn of revenues in 10 years which is twice the amount the company would achieve on a standalone basis.”

Finally, and potentially disconcertingly for Cisco, the shareholder pointed out that more than 10 percent of the company’s shares have traded above the offer price since the deal was announced. Not unreasonably, the anonymous shareholder contends, new buyers of Tandberg paper will be reluctant to vote in favor of Cisco’s offer. The Cisco acquisition is conditional on an acceptance rate of 90 percent of shares.

Even with a degree of restiveness in the ranks of Tandberg shareholders, Cisco has reason to remain confident the deal will go through. That’s because, as mentioned in the Financial Times piece and elsewhere, Tandberg is unlikely to receive a better offer.

Other potential acquirers, such as Microsoft and HP, are focused elsewhere at the moment. Silver Lake Partners, the private-equity firm that had been in abortive discussions to acquire Tandberg last year, is no longer in the picture, choosing to participate in the contentious Skype deal instead.

Unimpressed with the Cisco offer, dissident Tandberg shareholders have no recourse to other options. It’s a case of Hobson’s choice.

Volpi’s Joost Tenure Key to Understanding Skype Saga

Perhaps the key to understanding the increasingly bitter battle for Skype can be found in what transpired during Michael Volpi’s tenure as the CEO of Joost, the video-sharing startup founded by Niklas Zennstrom and Janus Friis.

In the current context, what’s important about Volpi’s reign at Joost is that it coincided with an architectural change in how the company delivered video over the Internet.

I was reminded of Joost’s architectural overhaul by Julian Cain, an engineer who worked on Kazaa and is familiar with Joltid, bluemoon, and Skype. Cain, as you’ll recall, was a source for an earlier post I wrote on the deepening antagonisms between Skype’s founders and its current and would-be owners.

Zennstom and Friis originally set up Joost with the p2p architecture that formed the technological basis for companies the pair had founded previously, including Kazaa and Skype. In 2007, Michael Volpi became Joost’s CEO. Under his leadership, and evidently as part of a project he led, Joost slowly began an architectural transition away from its p2p roots. As Cain explained in a email message last night:

In case you don’t know how the Joost migration worked, well, it simply began to use p2p less and the long-tail providers more. Killing the Joost client for an ActiveX/NPAPI plugin with a p2p runner application for p2p services, and then removing the Joost plugin from download, is what abolished the p2p network for good. If the website could not load the Joost plugin, then it used Adobe Flash. It was seamless;, however, they didn’t have to deal with paid services and such a large user-base and other factors. Of course, look what Joost is now.

That architectural change looms as a central issue in the lawsuit Joltid, the company owned by Zennstrom and Friis, filed against Volpi and his colleagues at Index Ventures last week. That, of course, was the latest in a series of legal dustups between Zennstrom and Friis on one side and Skype and eBay on the other.

At the time of the architectural shift at Joost, Volpi claimed plausible reasons for the change. The justifications were commercial and technical. Other video-sharing sites, namely YouTube and Hulu, had proven far more popular. Meanwhile, some Joost users had complained that videos were slow to load.

Nevertheless, Cain contends those weren’t necessarily the only reasons Volpi pushed for the architectural overhaul.

Volpi’s move from p2p to Adobe Flash while at Joost wasn’t in any way to do with the lack of gain at that time. If they wanted to (do so), they would have been pushing HD content (both live and prerecorded) over p2p with long-tail back-off by now without any real competition . . . . . Volpi broke that into myths and theories based on what he wanted to do, not technical facts, trends, statistics or analytical data.

Still, Volpi had successfully transitioned Joost from the Joltid p2p foundation on which it was based. He’d moved it onto a server-based architecture that used Flash-based clients at the end points. He’s done it once. There’s no reason to think he couldn’t do it again, this time at Skype.

If the conflict plays out the way Cain believes it will, Zennstrom and Friis will not back down and neither will Volpi and his confederates.

In my last post on this topic, I suggested a settlement might be possible. Cain believes that isn’t in the cards. Both sides are playing to win, and neither is in the mood for accommodation. One way or the other, it will be settled in court.

I also said in my last post that eBay and Skype’s new majority owners would have to rebuild Skype from the ground up to obviate the lawsuit Joltid has filed regarding the disputed “Global Index (GI)” software, the patent for which became active early this year. While it remains true that Skype would have to be reconstituted from scratch, the reconstruction effort could be completed earlier than I anticipated.

A means of getting there faster is represented by technologies offered by Adobe. Henry Sinnreich and a team of SIP experts have worked for Adobe for a long time now, and Cain reminded me that Adobe Flash supports SIP p2p with NAT traversal. He explained as follows:

Don’t forget Adobe Flash has SIP and p2p with NAT traversal as well. This would be very easy to offload the client without much interruption; however you can kiss the desktop client and p2p network goodbye.

Om Malik wrote a post in 2008 that foresaw the implications of Adobe’s work in this area. Commenting on the advent of Flash p2p, Malik wrote:

The reason we should pay attention to this product is Adobe’s distribution strength. The company can easily upgrade its Flash clients and instantly become owner of one of the largest p2p services. What that means is that now anyone can contemplate a Joost-like service that works within a browser. Using AIR to extend those p2p abilities to the desktop would be fairly easy as well.

So, the move to a new client architecture could be achieved with relatively minor disruption to Skype’s operations. Meanwhile, the service’s registration index would have to be transferred to a centralized server-based model.

It appears Volpi and company have a solid plan in place, and one can assume they’re well on their way to executing it. Not for the first time — and certainly not for the last – I stand corrected.

Why Settlement with Joltid Appears Best Option for Skype’s Backers

Even as Skype continues to plot and execute what could be a lucrative enterprise strategy involving interoperability with SIP-based PBXes, a cloud hangs over it.

In the battle between Skype’s founders and its current owner and would-be investors, the sphere of engagement is not limited to the courtroom. There are unsettled technology issues, too.

Representatives of Skype and eBay have told the media that a technical “workaround” is being explored that would extricate them, and their prospective new investors, from the ongoing legal entanglements with Joltid and Skype’s original founders, Niklas Zennstrom and Janus Friis.

I have no question that Skype is assessing technical alternatives to the current Skype architecture, which is predicated and dependent on underlying peer-to-peer software licensed from Joltid. That software, which eBay had neglected to procure from Joltid when it bought Skype for $2.6 billion in 2005, is now the focus of a legal dispute between the parties.

The trouble for Skype is that a “workaround” does not seem technically possible. Instead, eBay and Skype’s new owners would have to recreate the service from the ground up, essentially starting all over again with a brand-new architecture. In this context, it is important to recognize that what is called Skype for SIP is just a server-to-server mechanism that provides interoperability between SIP PBXes and Skye, not a potential replacement for the Skype service.

Whatever emerges as a substitute might be called Skype, but it would be something else entirely, probably based on the industry-standard Session Initiation Protocol (SIP), which was mentioned above and has been widely adopted by wireless operators, telecommunications carriers, and enterprises of all sizes.

The current incarnation of Skype is based on Joltid’s proprietary P2P code. In its early days, the software did not play well with the evolving SIP standard, which was designed to facilitate and support not only voice communication but also videoconferencing and instant messaging. Skype supports voice, video, and IM, too.

For a long time, SIP and Skype developed on parallel tracks, providing similar functionality but not talking to each other, figuratively and literally. Skype got the market jump on SIP for a variety of reasons, some having to do with telco-versus-Internet political battles that encumbered and retarded SIP’s development in the IETF and other standards bodies.

Another major difference was that Skype, with its peer-to-peer architecture and its promiscuous approach to establishing communications sessions, was built to circumvent firewalls and network-address-translation (NAT) gateways.

From a technical standpoint, Skype’s facility for firewall and NAT traversal made it effective and easy to use. From a business perspective, the fact that it was free made it popular. That’s why Skype got off to such a great start, and why it has more than 480.5 million registered users.

If one’s strength also is one’s weakness, then Skye’s initial asset, its NAT-traversing peer-to-peer architecture, has developed into a potential liability, both legally and technically. With a key piece of the peer-to-peer architecture in Joltid’s hands, Skype and its current and aspiring owners must win the litigation or develop a technological solution that obviates the legal threat.

Unfortunately for Skype, as has been explained in this forum previously, a simple workaround – in the form of a patch or a software adjunct – doesn’t appear feasible. That means Skype and its backers must hope they prevail in the legal battle, or that they can build, from scratch, an entirely new service that will assume the Skype name.

Skype and its future owners won’t put all their eggs in one basket. They won’t sit back and count on winning in the courtroom. In fact, they’re exploring how to reconstitute Skype in a different form. The latter will take a lot of time, and presumably a lot of money. The cost, seemingly prohibitive, would have to be factored into any calculation of risk and reward.

There is one other possibility.

That third option involves a settlement with Zennstrom and Friis and their corporate vehicle, Joltid. Given the scenario I’ve just laid out, I think this alternative will be thoroughly investigated. There’s a good chance Joltid would drop the litigation if it were given an ownership position in Skype. Relevant questions then would be: How much do Zennstrom and Friis want, and how much would eBay and its new investors be willing to concede?

Regardless of how it ends, the story will be interesting to follow.

Joltid Fires New Salvo in Lawsuit Against Volpi

In a post last night, I considered — among other things — whether eBay could feasibly develop its own code to replace peer-to-peer (P2P) software from Joltid.

Doing so would achieve two objectives for eBay: it would keep Skype online, and it would enable it and Skype’s new investors to move forward with a $1.9-billion deal.

I also mentioned the increasingly biter relationship between Joltid’s principals, Niklas Zennstrom and Janus Friis, and Michael Volpi, who served as CEO and chairman of their video-sharing company Joost. He also served on Skype’s board during tenure at Cisco, where he was best known for his M&A dealmaking prowess.

He is now a partner at venture-capital firm Index Ventures, which is one of parties that hopes to acquire a majority percentage of Skype from its current owner, eBay. There lies the rub, as far as Zennstrom and Friis are concerned.

Presumably after completing their investigation into Volpi’s actions during his tenure as CEO and as chairman Joost, Zennstrom and Friis have come out swinging, filing yet another lawsuit that complicates eBay’s Skype deal.

This new instance of litigation was filed in the Court of Chancery of the State of Delaware against Volpi and Index Ventures. A press release from Joost summarizes the lawsuit concisely:

The lawsuit alleges breach of fiduciary duty against Volpi, aiding and abetting breach of fiduciary duty against Index, interference with prospective business advantage, misappropriation of trade secrets, breach of contract against Index, breach of confidence, and civil conspiracy. The suit seeks an injunction requiring the defendants to return to the plaintiffs all documents and files containing confidential information that the lawsuit alleges was misappropriated from Joost, and enjoining the defendants from making any use of the alleged misappropriated trade secrets, among other things.

We can only wonder at what underlies the legal salvos and litigious maneuverings. We don’t know what alleged breaches of fiduciary duty Joltid and Joost are ascribing to Volpi. We don’t know what “documents and files containing confidential information” or “missappropriated trade secrets” Volpi and Index are alleged to have purloined from Joost.

Could it all have something to do with the Joltid peer-to-peer software that is essential to Skype and is at the core of the preexisting licensing dispute between Joltid and eBay? If that were the case, it might explain why eBay seems reasonably confident about developing software that could be replace the Skype code it licenses from Joltid.

Whatever the facts that underlie the fracas, the conflict is intensifying.