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Summary:

Over the weekend, The New York Times reported that Skype founders Niklas Zennstrom and Janus Friis were in talks with private equity groups to raise about $1 billion and buy their Internet calling service back from eBay. They sold the company to eBay in 2006 for […]

skype_logoOver the weekend, The New York Times reported that Skype founders Niklas Zennstrom and Janus Friis were in talks with private equity groups to raise about $1 billion and buy their Internet calling service back from eBay. They sold the company to eBay in 2006 for $2.6 billion and later got another $500 million as a final settlement. To say that the eBay-Skype merger was royally botched would be a bit of an understatement. It’s hardly a surprise that eBay CEO John Donhaue is looking to get rid of the $3.1-billion noose put around eBay’s neck by his former boss, Meg Whitman. Whitman signed off on a deal that essentially allowed Niklas and Janus to walk away with the core P2P technology that makes Skype work. Joltid, a holding company controlled by Niklas and Janus, sued eBay earlier this month, and Skype has in turn sued Joltid. I can’t help but notice this paragraph in an eBay 8-K filing.

Although Skype is confident of its legal position, as with any litigation there is the possibility of an adverse result if the matter is not resolved through negotiation. In such event, Skype would be adversely affected and the continued operation of Skype’s business as currently conducted would likely not be possible.

With this litigation hanging over its head, eBay’s hands maybe tied when it comes to Skype’s future. For instance, it can kiss a spinout offering on the stock markets goodbye. With the exception of Google and Microsoft, there aren’t any serious buyers who have deep enough pockets to pay eBay the cash and keep Skype going. And with this litigation, who would take a flyer on Skype? The buyout offer from the founders might seem like an episode of the hit British series “Hustle,” but it could be a good offer nonetheless.

I spoke to a few ex-Skypers, and they tell me if the dynamic duo did buy the company, they would love to go back to work for the startup that changed the phone landscape. As I have said previously — somewhere around $1 billion is actually a fair price for Skype. According to analysts, eBay wants about $1.7 billion for Skype.

Skype has about 405 million subscribers, and it now accounts for about 8 percent of international long-distance traffic. It had $550 million in revenues for 2008. It has started to expand into business markets, and the company has finally started to take the mobile opportunity seriously. It’s also one of the fastest-growing apps on Apple’s iPhone/iPod touch platform. A version for WiFi-enabled BlackBerrys is coming in May. The bad news is that, sooner rather than later, Skype’s growth is going to hit a ceiling.

At that point, Skype needs to start thinking beyond offering cheap calling and transform itself into a more innovative service that leverages the 400-million-strong installed base. For instance, it could easily become a content distribution service. It would also need to figure out how to work with other, more modern communication platforms such as Twitter and Facebook.

If Niklas and Janus do indeed pull it off, I would have one piece of advice for them: keep Skype CEO Josh Silverman around, preferably in the current role. They should focus on technology, vision and strategy for the company. What advice would you give Niklas and Janus? What do you think Skype can do to evolve and adapt for the future?

  1. The company is required by law to disclose any lawsuits currently underway in their 8-k filing. That paragraph could be found almost word for word in hundreds of other companies 8-k’s and footnotes to their released financial statements if they have any legal action pending against them. I see no reason to read anything into that particular paragraph.

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    1. Brad

      For sure, you are right but this is a key piece of technology and from what I saw of the sale agreement, it wasn’t part of the deal. I think there might be a rough patch ahead for Skype.

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  2. I agree ebay must sell it back – ebay has not been able to do what they were supposed to with skype – integrate for better c2c auctioning in certain parts of the world. agreed skype is profitable but it neither aligns with ebay’s vision and nor has it synergized so far with any of ebay’s products. skype needs to go back to disruptive service provider model.
    1) Niklas and janus can start offering the service to one (FB) or all social networking sites by embedding and perhaps charging them. Even if skype doesn’t charge – it can reach $1B target for 2009 by just sheer traffic that FB et al will generate.
    2) Besides social networking it is time for skype to rev up their video offering (lack of multiconference, high resolution content) – create a disruptive parallel to telepresence.
    3) create iphone like clients for all wireless phones – leverage hspa, edge, wifi….add more traffic!

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  3. What two greedy bastards. They sell it for 3 billion with 50mill users and no earnings, now they want it back for 1 billion with 400million users and earning 100million a year? I would never sell Skype. It’s on its way to being the top telecom company in the world. Sell the Auction business and stick with the winner. If they didn’t get all the technology they needed to run the thing for 3.1 billion initially, somebody is really stupid. I’d tell them they can have it back allright. I’d tell them where they could stick it!

    http://skypejournal.com/2009/04/what-good-price-for-skype-ltd.html

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  4. Travis Kalanick Monday, April 13, 2009

    Om,

    Niklas doesn’t need our advice.

    T

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    1. While that might be true, it is important to listen to everything. Moreover, like you I think my readers do have a lot of good suggestions to offer. :-) Even to Niklas.

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  5. Hey Om,

    Why couldn’t Skype become a full blown mobility platform like iPhone?

    Looking at the parallels between Skype (eBay) and the iPhone Ecosystem (Apple), I see some symmetries, plenty of missed opportunities (to be sure), but still a downside that looks pretty good.

    I can think of a number of companies that might want in on that action (why not Cisco?). It’s a real business with a massive installed base and a pretty satisfied customer base.

    If you folded in personal and business listings, classifieds, marketplace functions and online payment you could you could build out a nice information services business on top of a solid communications services business.

    As an aside, where I thought eBay was going when the acquisition was announced back in September, 2005 was as follows:

    1. eBay looked at Web 2.0 emerging and saw all of these companies and upstarts jumping on the “syndicate, subscribe and open API” bandwagon.

    2. They concluded that long term relevance “real estate” implied building out a proprietary runtime platform, with the goal of capturing more of a consumer’s daily mindshare (than their transactional setup is tuned to).

    With Skype, they could build a client software platform play that had existing network effects, solid foundational proof of the efficacy of a minutes-based business model and session orientation, which offers up a lot of value add for Platform Extenders.

    For what it’s worth, some time back I wrote an analysis of Skype’s acquisition by eBay. Check it out if interested:

    A different spin on eBay-Skype (http://bit.ly/J8aM)

    Cheers,

    Mark

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  6. They should open enough of the protocol so others can make enterprise integration/management servers. Skype needs the users and entrenched installations, not a licensed software business. Open Source is still a threat; a new system for voice could sweep the net and leave Skype as the new MySpace.

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  7. [...] a que Om dice que eBay debería vender la empresa porque ya no puede crecer más, estamos hablando de la empresa dueña del 8% del tráfico de llamadas internacionales a nivel [...]

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  8. It’s crazy to sell Skype for 1B when its revenues is already at 550M, and it’s only getting started. I agree Ebay should sell Skype, but at a higher price and with a minority equity stake. If Net Neutrality prevails, Skype can become one of the biggest telecom software companies in the world, and that’s big.

    Skype can definitely become a platform as well. It has the social graphs and a lot of voice, video, and data capabilities, so there might be some interesting applications that can be run on Skype.

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  9. [...] Skype should sell to founders. [...]

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  10. [...] has a nice summation of Skype’s users and value: Somewhere around $1 billion is actually a fair price for Skype. [...]

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