Why Skype™ is Hype

Skype Hype # 1. "Skype uses groundbreaking technology".
Indeed. Technology owned by other people. The same "groundbreaking" technology which is also actively utilized by copyright infringers, Internet hackers and anonymous Internet traffickers of stolen music, video and software applications, which is neither new nor groundbreaking. Stealing other people's intellectual property and running with it as fast as they can before courts catch up seems to be the defining business principle of Skype, and its Kazaa legacy.

FACT A: Skype technology is neither new nor groundbreaking. Skype uses the same node forming technology which is utilized by Kazaa and various bit torrent applications. Skype original founders - Janus Friis and Niklas Zennström - created and built the copyright infringing application Kazaa, before a court of law forced it to be shut down. Kazaa was subsequently sold to Sharman Networks and now functions in a non infringing, pay-per-download manner, utilized only by a small fraction of its former user base.

FACT B: Skype licenses its technology from JoltId and now is in breach of its license. The node forming technology behind Kazaa and Skype is based on "Global Index" platform, which is still owned by JoltId, yet another company formed by Janus Friis and Niklas Zennström. JoltId claims that their "Global Index" platform is described and patented by US Patent 7,480,658, assigned to JoltId. JoltId sued Skype and Ebay over breach of its license, and the lawsuit is currently pending. As a result, Skype and Ebay disclosed in their quarterly SEC filing that "Skype service could be permanently shut down" if the lawsuit is not settled or a "work-around" is not found fast.

FACT C: Skype cannot modify or troubleshoot its current "Global Index" module. During the acquisition of Skype by Ebay in 2005, Ebay did not acquire rights to "Global Index" technology. Ebay only acquired a license to use a pre-compiled "Global Index" executable module - a "black box" which could not be modified or reverse engineered, according to the provisions of their "Global Index" licensing agreement with JoltId. This explains why Skype was unable to create meaningful SDK developer tools, or substantially extend their functionality - Skype does not own any of the technology, nor can they modify it or develop new features.

FACT D: Skype is infringing on other technology and patents. Yet another company, Net2Phone successfully sued Skype in the US District Court of New Jersey. Net2Phone claims that Skype violates its US Patents 6,108,704; 6,701,365; 6,009,469; 6,131,121; 6,226,678. Most recently, the lawsuit advanced to the next phase, and Ebay's motion to stay was denied. Skype will likely be forced to settle or shut down.

Skype Hype # 2. "Skype technology is user safe".
Maybe. When Skype application is not running.

FACT E: Skype node forming network can be hacked and is vulnerable to trojans, viruses and spyware. Skype uses the same node forming technology which was utilized by Kazaa and various bit torrent applications. "Bot forming" is the leading cause of Denial of Service Attacks, whereby anonymous hackers and criminal groups hack into large numbers of continuously connected nodes like Skype and take control of certain computer functions, flooding networks with malicious traffic, orchestrating hacking attacks on other individuals, banks and corporations, spreading trojans and malware to more Internet users. In fact, it must be each Internet application provider's responsibility to ensure their product or application cannot be used as a bot base for subsequent hacking attacks - perhaps via some form of third party issued certification.
Skype's own security web page mostly discusses cryptography algorithms and assures users that it "protects your communications from falling into the hands of hackers and criminals" - as if hackers and criminals are out to eavesdrop on your online conversation with Grandma. The chances are that hackers and criminals simply want to turn your computer into a bot so they could use it for future hacking attacks, and store malware and illegal content on its hard drive, not listen in on your online conversations. However, the last published independent security evaluation of Skype platform was conducted back in 2005 (5 "Internet years" ago) by "Tom Berson at Anagram Laboratories" - a Skype user and hardly an independent and objective authority on this subject. In fact, Skype users put themselves at risk each time they use the application, as there is a number of Skype specific trojans and worms that routinely spread through Skype node forming platform. Don't say you have not been warned.

Skype Hype # 3. "Skype technology is fit to serve as communications platform".
Once someone defines exactly what "Skype technology" is...

FACT F: Node forming packet distribution model was designed for stealth trafficking of illegal content, not communications. Skype uses the same node forming technology which was utilized by Kazaa and various bit torrent applications. It features an augmented peer-to-peer delivery mechanism, while potentially exposing users to malware and viruses, and compromising user security and privacy. At its core is the idea that each participating user’s networked device must also continuously traffic and store large amounts of unrelated data, such as updated indexes and routing of other users, and other users re-routed data packet traffic. In this sense, the individual application’s overall performance is limited and user resources are grossly misallocated. Individual users are essentially robbed of their own resources, for the benefit of the collective nodes.
The inherent decentralized nature of Skype/Joltid/Kazaa packet traffic distribution platform is also its weakest point when it comes to supporting industrial grade applications and services, as certain indexing and routing tasks are best performed by central servers, not collectively distributed nodes.

Skype Hype # 4. "Skype technology can be quickly and effectively re-engineered".

"We could do it but only if we re-engineered the way it works and we don't have the time right now."– Niklas Zennström, co-founder of Skype, responding to the Skype security model.
An investor group paying $1.9 billion to eBay Inc. is "very confident" in work-around software, according to eBay Chief Executive John Donahoe

FACT G: Ebay is online marketplace, not a technology company. Ebay is desperate to sell Skype, the 2005 acquisition of which will go down in history as one of the most expensive corporate flops of all times (second only to AOL). Ebay shareholders must be furious to see Ebay failing by its very own business model - buy low, sell high and make a markup. Ebay is not a technology company, and their attempts to successfully re-engineer the Global Index "black box" module, while faced with time pressures and multiple litigations are laughable at best. The Internet communications market patent thicket is rather significant, and there is a good chance that even a "re-engineered" Skype would inherently infringe on someone else's technology, even if the attempted work-around is proved functionally sound. Ebay executives may soon have to "re-evaluate" their expectations, and revise their L2L - "lawsuit-to-lawsuit" business model.

Skype Hype # 5. "Current Skype business model is sustainable. Skype is valued at over $3,000,000,000".
That is a lot of zeroes for a soon-to-be-shutdown enterprise, which may not even be able to independently service the proposed buyout debt.

FACT H: Skype is quickly running out of time and funding. There are multiple pending lawsuits, aiming to shut down Skype. Neither of the plaintiffs would be interested in Skype business continuing as is. Janus Friis and Niklas Zennström aim to force Ebay to sell Skype back to them, at a deep discount (rejoice, Ebay shareholders). Net2Phone plans to shut down Skype for good, as they are a direct competitor, while working out some sort of technology licensing arrangement may not be in Net2Phone's own interests. Considering the significant cost of multiple concurrent litigation defense, the cost of the rushed technology "work-around", the cost of the mainstream media sustained "we are confident we are ok" campaign - a quickly increasing tab which Ebay shareholders are currently forced to foot and something they may soon start to actively question. Skype business model is good for lawyers, not so much for Ebay shareholders.

FACT I: Skype may not be able to service its own debt or remain price competitive. The most recent "investor group" is planning to raise around $2.7B ($2,700,000,000) in high-yield money to fund the buyout transaction. The actual amount is not known, but this figure can be used as a useful estimate. Considering current capital markets environment, Skype's unsecured debt would most likely find a buyer at 15%-18% per annum, with annual interest payments of approximately $486,000,000 - most likely exceeding Skype's entire estimated annual profit. Considering that Skype cannot prevent any competition as it does not posses any effective intellectual property protection, their business model may not be sustainable, due to the exceptionally high financial leverage. Large balance sheet debt would also effectively preclude Skype from remaining price competitive in the marketplace. Once Skype user base is eroded away by competition, Skype's revenues will decline, increasing its chances of eventual bankruptcy. This model hardly deserves a "$3,000,000,000 valuation".

More Skype Hype debunking is soon to follow...

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