Daily Archives: October 14, 2009

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.”

Ciena Must Avoid “Winner’s Curse” in Nortel Auction

Some market analysts now are expecting Ciena to have to fend off competing bids in its attempt to acquire Nortel’s Metropolitan Ethernet Networks (MEN) business, according to a Dow Jones Newswires article.

The article, also available here (for those of you without WSJ subscriptions), cites Nokia Siemens Networks and Fujitsu as potential bidders.

Employing a mix of cash and stock, Ciena’s $521-million stalking-horse (lead) bid for insolvent Nortel’s MEN assets is on the outer limits of what the company can support financially. If other bidders throw their hats into the auction ring, Ciena will be forced to withdraw from proceedings or put itself at risk by paying a prohibitive price to capture the prize.

Not everybody is sure the prize is worth owning, particularly at exorbitant cost. RBC Markets’ Mark Sue, among others, has warned Ciena not to fall victim to the “winner’s curse” of overpaying for the privilege of owning an asset.

No vendor should bid on the assets unless it actually wants to own them, but it is possible that a bigger, richer player than Ciena could indulge in brinkmanship, especially if it has inside knowledge of how badly (or not) Ciena wishes to own the Nortel assets. That other vendor would merely enter a higher bid in the knowledge that Ciena would escalate, thus paying more to triumph at auction.

Again, it’s not a course of action a vendor should follow if it has no interest in Nortel’s MEN assets, but it is something a Ciena competitor might consider if it has both interest in the assets and wants to make sure that Ciena would have to stretch itself to the financial breaking point to close the deal.

I’m just not convinced Nokia Siemens Networks or Fujitsu cares enough to play that game — and I don’t see anybody else on the immediate horizon. I am sympathetic to the analysts who see Nortel’s optical and Ethernet assets as mixed bag, replete with legacy products and technologies. Yes, there are some vibrant bright spots amid an otherwise drab product portfolio — and some of the customer relationships could prove lucrative if managed properly — but does anybody want to pay close to a $1 billion for this particular assemblage of Nortel assets?

I don’t think so, and I suspect any potential counterbid that might materialize would not be dramatically above the stalking-horse marker.

Ciena should have a clear idea, from the outset, as to precisely what price it is willing to pay. For the sake of Ciena shareholders, I hope that price is not much more than the current bid.

Ciena CEO Gary Smith has said Nortel’s MEN assets are perfect complements to Ciena’s core business and product portfolio. There are product overlaps, however. Smith also says his company could successfully integrate the Nortel assets, even though Ciena has struggled with past acquisitions.

Even if Smith is right on both counts, Ciena still needs to avoid overpaying for the Nortel properties. Overpaying probably would be defined by any amount much above the current bid.

Dell Tips Hand on Further Acquisitions

Eponymous CEO Michael Dell blitzed through the rain-soaked Bay Area yesterday, speaking at Oracle OpenWorld and to a Churchill Club audience.

On the whole, Dell’s remarks were neither as stridently partisan nor as frankly provocative as those Larry Ellison made to the same audiences recently, but he still offered a few comments worth parsing.

Dell’s disparagement of netbook computers captured considerable media attention. What he said is basically true: Today’s netbooks generally don’t possess the display size or performance characteristics to qualify them as replacements for full-fledged notebook PCs. That’s convenient for Dell, of course, because the profit margins on sales of netbooks fall well short of those attributable to notebooks.

Dell sells netbooks, but the company is positioning them as computers one would buy if one has never owned a computer before or can’t afford a more-capable system. I think Dell sees the netbook primarily as a developing-market play.

One of Dell’s other comments was potentially more revealing. Referring to the role of the server in the data center, he said the following:

“A lot of what goes on in the data center is being gobbled up by servers. We see switching, for example, rapidly collapsing into the servers. You’ve got virtualized switches, but even the switches that aren’t virtualized — they’re now sitting inside blade chassis.

Not that long ago, it looked like intelligence was getting sucked out of the server and it was going somehow into the network, but actually now it looks like it’s going the other way. The server is becoming the epicenter of the data center, and you’re seeing the switches get embedded inside the server. I’m sure there are plenty of other opinions out there.”

Yes, there are other opinions. Cisco might argue that the chassis switch is subsuming the server, and that the network retains considerable intelligence. Irrespective of whether one asserts the primacy of one over the other, though, both companies are arguing that servers and networks are converging in the data center. That has interesting implications for Dell’s strategic direction.

Based on what Dell has said regarding the server as the epicenter of the data center — with switches embedded inside the server — one can justifiably extrapolate that it’s only a matter of time before Dell gets into the networking game, likely with blade switches for its own servers.

The question then arises: Where does Dell get that functionality? An acquisition (or acquisitions) seems the likeliest option. I’ll look at Dell’s potential networking moves in a subsequent post, considering both its current partnerships and how receptive certain vendors might be to an acquisition.

On the topic of acquisitions, Dell said his company will be “reasonably active,” is “rapidly developing” merger expertise, and is seeking more deals as part of a turnaround plan. The company announced its $3.9-billion takeover of Perot Systems Corp. last month, and will presumably take a bit of time to integrate that acquisition properly before making another sizable buy.

Nonetheless, Dell indicated further acquisitions are coming. Dell will look at acquisitions that bolster sales to corporate customers and will consider more purchases in the healthcare industry.

The corporate focus – Dell derives more than 80 percent of its revenue from enterprise customers – is the right one for the company. As for healthcare, it is Perot’s strongest vertical, ripe for government-subsidized automation and technological upgrades.

Said Dell:

“When you look at the health-care space, it’s the one sector of the economy that has the least amount of IT, and we see it as very promising for growth. There’s usually more technology at the grocery store than there is at your doctor’s office.”

Dell sees electronic medical records (EMR) as a potentially compelling application for software-as-a-service (SaaS) delivery. He must also be encouraged by US-government stimulus spending on healthcare, with about $20 billion pouring into healthcare information-technology initiatives.

That’s promising for Dell, as is the long-awaited refresh cycle for enterprise servers and desktops. Dell sees the server refresh occurring now, and he believes PC upgrades will commence in 2010.

On the refresh cycle, Dell said:

“I think there’s a powerful refresh cycle coming. It won’t come all at once, but we believe it’s going to happen as we get into the early part of next year on the client side–on server side it’s already started.

The average client device in business is running Windows XP, but that’s an eight-year old operating system. If you get the latest processor technology and Windows 7 and Office 2010, you will love your PC again, and we have not been able to say that for a long time–it’s a dramatic improvement in performance and capability.”

Dell might be asking too much. It’s one thing to call for an operating-system upgrade, which seems inevitable in light of Windows Vista’s market travails, but it might be a bridge too far to insist that enterprises also make an immediate switch to Office 2010. Microsoft might like the sound of those words, but I suspect corporate bean counters will be less enchanted.

What about Dell’s smartphone? Everybody, it seems, wants to know whether it’s got a future. It is being proffered by Dell’s consumer division, which, at first blush, might seen counterintuitive. After all, Michael Dell has said the company’s strategic focus, and its future acquisitions, will occur in the enterprise space. What’s up with a smartphone for consumers?

Remember, however, that Dell’s smartphone, the Dell Mini 3i, hasn’t come to America yet. Running the Android-based Open Mobile System (OMS) for China Mobile, the Mini 3i is carefully positioned to tap a unique opportunity, predicated on partnerships and customized content. It’s not a template for success in the USA or Europe, but Dell will take it, and perhaps run with the same approach in other developing markets.

Dell seems set on taking a modified version of its Android smartphone into the American market in 2010, but I think the company would be well advised to adopt an entirely different approach, better aligned with its enterprise strategy, in developed markets.

Although Dell sounded modestly optimistic notes on the global economy — saying a nascent recovery in the USA is several months ahead of developments in Europe — he also emphasized that Dell would continue to pursue cost cuts.