Court Wrangling Haunts Skype's Rags-to-Riches Story
Posted on: Tuesday, 13 September 2005, 21:00 CDT
Sep. 13--Three years ago, Niklas Zennstrom and Janus Friis were on the lam, moving from country to country as the music industry pursued them for creating Kazaa, the Internet file-sharing service that has allowed billions of music, movies and software files to be illegally traded around the world.
Now they're on their way to becoming tech billionaires for selling eBay a different version of that same file-sharing technology in the form of the Internet phone service Skype.
Timing, as they say, is everything. After the global entertainment industry sued their company for copyright violations four years ago in Los Angeles, Zennstrom and Friis sold Kazaa to Sharman Networks of Australia. Exactly a week ago, a Sydney judge found Kazaa had violated Australian copyright law on a massive scale, freezing $23 million controlled by Sharman's hapless CEO and her compatriots. But there were no tears in London on Monday when Zennstrom unloaded Skype for $2.6 billion in cash and eBay stock in a deal that could reach a dot-com worthy $4.1 billion by 2009.
One can't help but wonder what eBay CEO Meg Whitman is doing with two guys whose penchant for undisclosed locations would put Dick Cheney to shame.
Still defendants in the Los Angeles suit brought by the world's biggest movie studios and music labels, Zennstrom and Friis studiously avoid setting foot on U.S. soil. It probably was no coincidence that it was Whitman who flew halfway around the world to share the stage with Zennstrom, who runs a 200-person company that had $7 million in revenue last year.
Zennstrom and Friis assert that their relationship with Kazaa ended with the January 2002 sale of the file-sharing service to Sharman. An eBay spokesman cited this detail Monday when asked if the company was concerned about ongoing legal liabilities from the duo's Kazaa days.
But far from abandoning Kazaa, Zennstrom and Friis retained ownership of the most valuable aspect of the file-swapping network, the FastTrack technology at its heart. Zennstrom loaned Sharman at least part of the money to buy Kazaa, according to court records in the Los Angeles case. In return, he and his business partner collected 20 percent of Sharman's income in the form of royalty payments to Joltid, a shell corporation they control, these court records show. In other words, they profited from the piracy of the tens of millions of people who used Kazaa to trade copyrighted songs, videos and software.
Documents on file with the Securities and Exchange Commission show that through Joltid, they helped create Altnet, a venture in which Joltid originally held a 49 percent stake.
A Southern California company, Brilliant Digital Entertainment, held the majority interest. Altnet was formed with the express purpose of selling music, games and software on Kazaa.
Joltid developed the technology that powered Altnet in exchange for a guaranteed monthly fee of $30,000. This May, Joltid sold its remaining stake in Altnet to Brilliant Digital for 7 million shares of Brilliant's stock.
An Australian judge last week found Altnet and Brilliant Digital in violation of copyright laws through their association with Kazaa.
The path from Kazaa to Skype to eBay reads more like a corporate thriller than a typical Silicon Valley start-up success story.
In July 2000, when they created Kazaa, Zennstrom and Friis took care to avoid the legal pitfalls that left the original Napster vulnerable.
Zennstrom, a Swede, and Friis, a Dane, set up shop in Amsterdam and contracted with software programmers in Estonia to write Kazaa's code, called FastTrack.
The file-sharing service's soaring popularity led Hollywood to sue Zennstrom and Friis in Los Angeles, setting off a global goose chase as industry attorneys vainly attempted just to serve notice of the suit on Kazaa's creators.
Zennstrom eluded the entertainment industry for more than a year, living in temporary apartments in Stockholm, Paris and London. A former Scotland Yard detective would ultimately track him down in London, having dinner at the Sticky Fingers restaurant with his wife, according to the Los Angeles court records. Friis showed his disdain for the U.S. courts by failing to show up for a December 2003 deposition in Vancouver, Canada, claiming to be too sick to travel.
"Instead of preparing for that deposition, (Friis) was crisscrossing Europe with a journalist in tow, eating sushi in Tallinn, Estonia, showing off offices in Stockholm, and even posing for a photograph with a pint of beer in his hand outside a London pub," wrote entertainment lawyer Thomas Hentoff in a brief in the Los Angeles case. "The jaunty figure in the photograph does not remotely resemble the supposed victim of a 'quite severe' illness, taking 'strong medication,' whom the doctor purportedly required to trade a jet seat for a sick bed. Enough is enough."
We know the valley loves to mythologize guys like Zennstrom: a geek's geek who, on a night out on the town in Toronto last year, spent half the dinner pecking away at his handheld computer instead of conversing with the reporters who were his dining companions. Regardless of their technical prowess, are they worthy of our admiration -- let alone billions?
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Source: San Jose Mercury News
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