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Skype Sale Nears: Why eBay Shareholders Should Be Mad

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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 (s 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 (s GOOG) 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?

30 Responses to “Skype Sale Nears: Why eBay Shareholders Should Be Mad”

  1. just playing devil’s advocate here — eBay gets to lick its wounds and get $2B today. it may be worth more than betting on VoIP call margins to hold up over time. i think we all know where those are headed.

  2. Many commenters seem to believe that eBay sold Skype for a low valuation but forecasts for Skype’s performance suggest something different. Skype’s revenue per user numbers have been falling in recent years (~$1.60 per user in 2007 to ~$1.50 in 2008) due to an increasing mix of free users (Skype-to-Skype users).

    One way the $2.75 billion price tag for Skype would be justified is if the buyers could reverse the falling per user revenue by increasing advertising for free users or limiting the number of free calls. I did an analysis at (full disclosure – I’m an employee of Trefis) that shows that if the revenue per Skype user can stay at $1.60 or above in the future then a $2.9 billion+ valuation is fair; otherwise, the base Trefis valuation of $2 billion is more reasonable if revenue per user continues falling to $1 over the next few years.

  3. The initial purchase seemed like a great idea, however the complete failure to integrate Skype into their core services and even though Skype is making good money and could return it’s investment soon, faced with the possibility of litigation which could result in either a massive settlement or licensing, unloading may be a smart move.

  4. Sounds cool to me. I have been using Skype, and I really appreciate the free Skype to Skype calls. I have a family abroad and I thank Skype because it helps me get closer with my family. If selling Skype will benefit everybody, then this is one great news.

  5. “Forgetting” to buy the technology happens all the time, albeit usually when old media companies buy new media / tech companies. Second most common mistake after letting all the techies with the knowledge cash in and run immediately after the aquisition.

  6. We all make mistakes, and it seems as if it was a classic ‘eye off the ball’ move. Good thing to recognise it and move on. Keeping such a substantial share means that if the group they sell it to can relaise its potential they still get the upside. Don’t criticise too much for making amistake, but be harsh if they try again. Stick to making money from Ebay.

  7. What’s amazing here (beyond your dead-on point that to somehow “miss” locking down core assets is an all-time head scratcher – how did the lawyers miss?) is that plenty of people questioned the strategic-ness of the Skype acquisition when it went down, and at the time, I defended it as eBay’s foray into building a client software platform play.

    Imagine eBay + Skype + PayPal as iPhone for the desktop, and this could have been a 1+1=3 as opposed to the 1+1=<2 that it ended up as.

    Here's the original post, if interested:

    A Different Spin on eBay-Skype



  8. Colonel Panic

    Meg Whitman was famously quoted as saying on eBay that “A monkey could run this business.” This should haunt her because, apparently, a monkey WAS running that business. She rode a rising tide and, when the business became challenging, she was quick to abandon it. When they believed the business had peaked, they tried to move into other businesses, pure and simple. The so-called “synergies” between eBay and Skype were BS.

    Paying $2.6Bn for a company where you don’t have ownership of (or a perpetual license to) key aspects of the core IP is utterly unforgivable. And I do not buy the excuse of liability as the reason this was overlooked. I think they were pressured to buy and did not do their homework.

    When Skype was purchased, Friis and Zennstrom were highly motivated sellers. They needed to raise cash fast to fend off barbs from the RIAA et al over Kazaa. They hadn’t established revenue flow for Skype. Their operating costs were threatening to overwhelm them. Still, eBay perceived it was in a bidding war and overpaid for the asset. Then they assigned a succession of stooges to oversee the business and allowed the London office to become hugely political (it was already ineffectual).

  9. “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.”

    ??? Maybe I move in unusual circles but I don’t know of a single person who uses Vonage, while most of my friends and family use Skype. What is this so-called “broader audience” that Vonage but not Skype can be marketed to?

    • Exactly what I was thinking.

      Vonage services ~320MM north american users and requires physical equipment, shipping, provisioning, E911, and a host of other complications.

      Skype can be downloaded and running in 2 minutes anywhere on the globe (except, possibly, China).

      • I would agree to that. In an internet world, where being on top is often about “network effects”, Skype has left Vonage far behind. It doesn’t have anything close to the visibility of Skype, notwithstanding the technology. And Skype is increasingly becoming important for businesses, especially ones like ours. We extensively use Skype in our work, and had entered and won the Skype for business competition. The reason Skype conducts these competitions is to position itself as a business product.

    • The Vonage product can be (and is) marketed to anyone who knows how to use a telephone and plug in a router. The plugging in a router part can be handled by an experienced son-in-law.

      The Skype product requires a computer, a headset, and user account.

      It’s a totally different experience tilted to those who are computer savvy. Additionally, their web interface is extremely kludgy and difficult to use.

      For Skype to win in an IPO, they have win users buying minutes. Free international calls, which has been their strongest play so far, isn’t going to generate profits share holders demand. In order to generate paid minutes, they have to go toe to toe with existing solutions like traditional landlines (POTS lines to VOIP geeks ;) ) and VOIP solutions from Comcast and Verizon. These users won’t readily adopt a telephony model tied to their computer.

      All of this, of course, is in my humblest of opinions

    • Well, I’m not sure what the original poster meant, but Skype lives in its own isolated world (and does a great job there) while Vonage is an example of an open technology and thus, by definition, has a much broader audience.

      • Odd, I could have sworn it was vonage that sold ‘locked’ linksys ata’s and
        blocked traffic from ‘unauthorized’ SIP devices (like asterisk pbx).
        Can you reach a vonage account via a service like (you can’t) ?

        Seems to me they are just as closed as Skype (if not more), they just didn’t
        go the whole hog and create a new protocol too.

  10. I don’t particularly think it is a terrible deal given the current circumstances (not referring to the JoltID situation). It was still valued at 2.5B as EBAY gets to keep 35%. Essentially, this is about mitigating risk as EBAY can still get some value from a future IPO in addition to the 1.9B today.

  11. 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.

  12. 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!

  13. 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.

  14. 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….

    • 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.”

  15. 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).

  16. 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.