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Summary:

If you’re an eBay shareholder, it’s time for you to get mad about the sheer incompetency of the management. First they paid top dollar for Skype back in 2005, making billionaires out of Niklas Zennstrom and Janus Friis. And, now instead of waiting for an opportune […]

If you’re an eBay shareholder, it’s time for you to get mad about the sheer incompetency of the management. First they paid top dollar for Skype back in 2005, making billionaires out of Niklas Zennstrom and Janus Friis. And, now instead of waiting for an opportune time to go public, eBay management is selling low, at a time when the only buyers are bargain hunters.

The New York Times reports that eBay is nearing a deal to sell Skype, its Internet calling service. The news was first reported by TechCrunch last week. It was initially reported that Marc Andreessen’s new venture fund, Andreessen Horowitz, and original Skype investors Index Ventures were among the likely buyers of the company. Silverlake Partners, a Silicon Valley-based private equity group, is said to be involved with the deal, the Times adds.

Silverlake’s inclusion makes absolute sense — after all, Index and Andreessen Horowitz don’t have the funds to move the needle, for San Jose, Calif.-based eBay is rumored to be looking for $2 billion for Skype, which sounds bizarre considering that as recently as May, eBay CEO John Donahoe was quoted as saying that $2 billion was too low a valuation for Skype.

eBay bought Skype in 2005 for $3.1 billion (though the price has since come down to about $2.6 billion) but a series of management blunders turned a fast-growing startup into a cesspool of mediocrity and bureaucratic infighting. It was as if someone opened the fuel tank on a rocket heading to the moon. It was only last year, when Josh Silverman was appointed chief executive, that sanity returned to Skype. With the calling service on track to bring in $600 million in revenues in 2009 (though we’re not sure how much profit it makes for eBay), the company is a likely candidate for a public offering when the IPO window opens again, perhaps in 2010.

That’s why the decision to sell the company at just over three times sales doesn’t make much sense to me. Unless, of course, eBay management is trying to use this deal to paper over the problems that continue to plague its core business of auctions. The other reason could be the legal problems faced by Skype. These legal problems are a primary reason Skype’s IPO dreams have turned into a nightmare.

As we reported earlier, Skype co-founders Zennstrom and Friis tried to buy the company back from eBay but were rebuffed. The duo own a company called JoltID, which has since then sued Skype, alleging that eBay over the use of its P2P technology, which is at the heart of the Skype service. Here is what Friis told me in 2006:

Kazaa and Skype were based on a piece of technology called the “Global Index.” Skype basically built a communication layer on top of that. That technology has evolved since then, and the Venice Project, is built on that global index and we have developed a P2P video streaming layer on top of that core technology.

So back in 2005, eBay paid billions for Skype but didn’t get the crown jewels, aka the technology. I reported this oversight back in 2005. How then-CEO Meg Whitman signed off on the deal, I still can’t understand. I mean, even a lemonade stand owner who can’t tie his shoelaces wouldn’t overlook something as simple as that. And what about the eBay executives who were shepherding that deal?

So anyone who buys Skype will have to contend with that litigation. It’s already scared off Google from buying Skype. It’s not clear if Zennstrom and Friis are involved in the rumored deal reported by The New York Times.

The best course of action for eBay is to have patience. It should try and work out a deal with the JoltID crew, and wait to go public. After all, eBay has already taken a $1.7 billion dollar write-off on the deal. Why not wait and recover all its money?

  1. Great post Om
    I am positive that the new purchasers group include Zennstrom and Friis in some shape or form, its the only thing that would make sense at this stage with litigation ongoing.
    Whilst I agree that Skype has been a poor purchase for Ebay I think this sale in what is a distressed market is pretty much ok.
    I think Ebay has never really known what to do with with Skype (remember the fiasco that was integrating Skype with ebay) they got a chance to get back to their core business and grabbed it with both hands.

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  2. eBay’s shareholders should be furious, but it may be that bailing now is a smart move.

    I suspect that eBay’s lawyers didn’t want to own the P2P protocol because of the KaZaA mess.
    Safer (but wrong) to license it.

    Ebay missed a fantastic chance to integrate Skype, not with the auction side, but with Paypal – which would have been a much better fit.

    Pat’s right the new owners will need the JoltId guys on-side unless they are up for a total re-write (which is actually perfectly do-able).

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  3. i strongly agreed with Pat Phelan

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  4. Does anyone ever get held to account when they destroy so much shareholder value?

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    1. nope, they get a sh&%load of money to go away. love those pay-for-performance metrics.

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    2. eBay area of competence stops before actual eBay commerce. Just go upstairs to the top floor and see if anyone there knows what they are doing on the first floor. Okay, they don’t. Save the trip and write a sympathy note to buyers and sellers. “Incompetence trickles down.”

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  5. Om –

    I actually think this is the best decision E-Bay has made regarding the Skype. Given the economic environment and what they got for Skype, it’s a good deal. I agree that they wated so much potential….

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  6. It is official:
    http://share.skype.com/sites/en/2009/09/a_new_chapter.html

    Holding onto 35% is an interesting move – kinda ‘have you cake and eat it’ strategy.
    Any sign of the JoltID guys in the deal ?

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  7. Om
    Good article,
    Braindead EBay should keep it.
    VOIP is coming back strong ( look at the Vonage).
    Verizon and Comcast are offering VOIP services too.
    Skype has mobile phone APPS that can make good money.

    Ebay is loosing it all , they are loosing the online selling with Amazon too.

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  8. A classic case of crowding your brand. Ebay is what it is a fabulous marketplace. Its like Kraft, well known for cheese who decided because they were in the food business decided to market mayonaisse and jams!
    The only product they have is Philadelphia cheese, the generic!
    Same for Ebay and Skype too incongous brands crowding each other.
    It can be expensive launching a new brand. Most CEO’s MD’s take the well known tried and tested safe route, (probably ’cause they are bottom line accountants and not marketing people, went to same school of management and haven’t a creative bone in their bodies), to extend their line. It’s not as if line extension doesn’t work. It works fantastically well. Then it splutters, chokes and dies slowly. This is because when brands are first extended, people are eager to try out new products. However, they soon tire of it and go back to the brand that defines clearly what they’re after.
    If you have established a market for NEO’s and other premium punters, are known and respected as having premium products and service then DON’T make the mistake of pitching the budget market with your premium brand name.
    Skype should have taken the whole communications market by now. Over the 5 years I have used it it hasn’t changed too much.
    Wait for the ads and the payment!

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  9. Thanks for saying what everyone is thinking! After paying such an outrageous price for Skype, an IPO was the only upside scenario. This move is stunning.

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  10. There’s no guarantee the Skype IPO would be successful. The Vonage IPO was a disaster and Vonage’s product could be marketed to a much broader audience than Skype.

    VC might be a perfect fit for Skype to get it out from under the shadow (and management) of Ebay and provide an opportunity to create a marketable household brand.

    A certain threat to the VOIP industry as a whole is that VOIP telephony is basically the business of bandwidth. Bandwidth margins are increasingly shrinking and larger businesses (Verizon, Comcast etc.) are forcing prices ever lower in a tactic to rob market share from traditional phone lines. Delivering share holder value as a stand alone VOIP company would be extremely difficult in this environment.

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