In the latest high-profile tech-patent scuffle, Internet-calling pioneer Net2Phone is suing Skype Technologies over technology that helps customers make inexpensive phone calls via the Internet.
The law suit, filed in the US District court of Newark, alleges that Skype infringed a patent filed by Net2Phone under US Patent Class 6,108,704, which describes a method for establishing a point-to-point communications link between two devices via Internet protocol.
Squabbles like this one are hardly novel, but this one is being seen as an opportunistic gamble by Net2Phone’s parent, IDT, a telecommunications provider based in Newark, N.J. Founded in 2003, Skype, which has more than 100 million users around the world, Skype’s fortunes changed considerably last year when it was snapped up by online auction giant eBay for between US$2.6 billion and US$4.1 billion, depending on performance milestones being reached.
Like other law suits filed recently against big name companies with deep pockets, the Net2Phone suit is going for broke, seeking damages and an injunction against further infringement, which would basically mean shutting the Skype service down.
Net2Phone and Skype compete in the VOIP (voice over Internet protocol) market. They provide services that let users talk to each other via the Internet using either PCs or telephones.
Skype has made Internet voice calling much easier with vastly improved quality, but Net2Phone is considered a pioneer in the computer-to-phone calling area. Its service enables users to place computer to computer calls for free and has a paid service called SkypeOut, which enables users to place calls to telephone landlines for a cheap timed rate of typically 1.5 euro cents a minute. The company, which was founded in Luxemborg, has a very strong European user base but has yet to gain traction in the US.
Fighting Back
If the pen is mightier than the sword, then the patent lawyer’s pen may be one of the mightiest of them all. Especially in the rapidly moving world of technology, an infringement suit can be an effective way to extract a wad of cash — or at least ensure a rival gets bogged down in messy litigation for a spell.
So how strong a case does Net2Phone have? Net2Phone will have to prove that Skype’s technology is not original, and instead just an improvement on technology to which Net2Phone owns patents, say experts.
The scrappy Scandinavian startup was successful from early on. Still, it generated only $24.8 million in revenue last year from 74.7 million registered users, compared with eBay’s $3 billion 2005 revenue. "Once these companies start improving their bank account they automatically become targets of lawsuits," says Jerry Kaufman, principal at Alexander Resources, a consulting company in the communications industry.
Opportunistic or no, the suit also indicates the increased threat posed by Skype. Net2Phone has been a leader in calls from PCs to phones, while Skype has specialized in PC to PC calling — although it has increasingly been treading on PC-to-phone turf. And on May 15, Skype announced that its customers’ calls to any phone in the U.S. or Canada will be free for the remainder of this year.
"The free offer could be siphoning free long-distance business in North America. That has got to hurt, and this suit could be a stalling technique," says Jon Arnold, principal at J. Arnold & Associates, a communications research firm. "It is one way of fighting back."
Settlement Ahead
Skype is not the only newly enriched provider of Internet-based telephone service to be the object of a potentially messy lawsuit. Vonage, which raised $531 million in an initial public offering on May 24, is being sued by shareholders who say the company duped consumers into investing in its stock offering.
Net2Phone can argue that they were the first who developed and patented it and you guys are trying to reap where you did not sow, says Jay Kesan, professor of law and director of the program in intellectual property and technology law at the University of Illinois. "It will hinge on whether Skype made it better by developing different technology or by just adding more features."
But that will be tough to prove, because technology has moved so fast. Neither company would comment on the case. An eBay spokeswoman said that the company had not been served the suit yet. IDT spokesman Gil Nielson said: "We do not comment on pending litigation." Some patent lawyers say there is likely to be countersuit from Skype that will claim that Net2Phone is infringing on its patents, and the case will end in a settlement.
Skype’s business and usage continue to grow quickly. It ended its 2006 first quarter on March 31 with almost 95 million registered users. Its revenue jumped 42 percent to $35.2 million from 2005’s fourth quarter. In 2004, it had revenue of around $7 million.
Meanwhile, Net2Phone ended its 2006 second quarter on Jan. 31 with $25.8 million in revenue, up 19 percent from 2005’s fourth quarter and 45 percent from 2005’s second quarter. The company recorded a net loss of $4.1 million in 2006’s second quarter, narrower than the net loss of $10.6 million in 2005’s second quarter.