Skype Under Attack

Will pioneer Net2Phone's lawsuit for patent infringement ground Net-calling's high-flier?

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.

In the latest high-profile tech-patent scuffle, Internet-calling pioneer Net2Phone is suing Skype Technologies over technology that helps customers make inexpensive phone via the Internet.

Squabbles like this one are hardly novel, but this one is being seen as an opportunistic gamble by Net2Phone's parent, IDT (IDT ), a telecommunications provider based in Newark, N.J. Founded in 2003, Skype's fortunes changed considerably last year when it was snapped up by online auction giant eBay (EBAY ) for $2.6 billion.

FIGHTING BACK. 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's 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 yea (see BW Online, 05/16/06, "Skype Goes for Broke").

"The free offer could be siphoning free long-distance business in North America. That's got to hurt, and this suit could be a stalling technique," says Jon Arnold, principal at J. Arnold & Associates, a communications research firm. "It's one way of fighting back."

Skype isn't the only newly enriched provider of Internet-based telephone service to be the object of a potentially messy lawsuit. Vonage (VG ), 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.

SETTLEMENT AHEAD? So how strong a case does Net2Phone have? 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. Net2Phone will have to prove that Skype's technology isn't original, and instead just an improvement on technology to which Net2Phone owns patents, say experts.

"Net2Phone can argue that they were the first who developed and patented it and you guys are trying to reap where you didn't 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 hadn't been served the suit yet. IDT spokesman Gil Nielson said: "We don't comment on pending litigation." Some patent lawyers say there's likely to be countersuit from Skype that will claim that Net2Phone is infringing on its patents, and the case will end in a settlement.

Gogoi is a reporter for BusinessWeek.com

BW MALL SPONSORED LINKS

Internet Marketing Bachelor's Degree Learn Effective Internet Marketing Strategies While Earning a Bachelor's Online!
Save $451 on Auto Insurance Esurance features reliable coverage with 24/7 claims & customer service.
Mobile Commerce Solutions Offer Your Customers the Opportunity to Make Transactions On the Go. Learn More.
Study accredited UK postgraduate degrees Earn an industry focused accredited masters degree in 1 year full-time or 3 years online. Ranked 2nd in UK for employability by FT. Aberdeen Business School offers courses in business, information and law. We are based in the oil capital of Europe.
Refinance Rates As Low As 5.0% Receive Up to 4 FREE Quotes - Fast! Serious Refinance, Cashout or Debt Consolidating Requests Only.

Buy a link now!

Get BusinessWeek directly on your desktop with our RSS feeds. XML

Add BusinessWeek news to your Web site with our headline feed.

Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.

To subscribe online to BusinessWeek magazine, please click here.

Learn more, go to the BusinessWeekOnline home page