eBay Comes to Terms with Skype and Reality

Internet VoIP service's founders leave as auction company takes $1.4 billion charge.

Robert Poe on October 2, 2007

It's easy to ask in hindsight: What was eBay Inc. thinking when it acquired Skype? In September 2005, eBay paid $2.6 billion up front for the Internet VoIP company, with more cash to come if its new purchase met certain performance targets. Did the company think synergy with its auction and online-payment businesses would make the buy worth it? Did eBay really expect to make big bucks from Skype's inbound and outbound calling services? Whatever it expected didn't come true. Skype's founders and eBay have split, more than a year earlier than expected. And both sides are, in different ways, writing off some big money.

Under the deal announced October 1, 2007, the founders would get an earn-out of $530 million. That's one-third of the $1.7 billion they would have made if they had stayed, and Skype's performance had met targets, into mid-2009. One of the founders, Niklas Zennstrom, will change positions, from CEO to nonexecutive chairman. Co-founders Janus Friis and Geoffrey Prentice will resign as corporate officers. For its part, eBay will write off the $530 million. It will also write off $900 million in "goodwill," taking a total charge of $1.4 billion in its Q3 results.

One question the news raises is which side had the idea for the early split. A lot of evidence suggests it was the founders' decision. For example, an eBay spokesman said that Zennstrom could have stayed on to run the company if he had wanted. A post on co-founder Friis's Web site talked about exciting projects ahead. One of those would be his and Zennstrom's Internet TV startup Joost which, probably not by coincidence, went live the day of the eBay announcement.

In addition, eBay had no structure in place to assume operations as soon as the founders left. Michael van Swaaij, eBay's chief strategy officer, is temporary CEO. Henry Gomez, who as president was formerly eBay management's lead representative at Skype, will go back to eBay full time. A search firm will look for a new CEO. So it appears almost as if the founders just decided to up and leave.

Still, it's hard to believe that Skype's founders would find leaving the company early for brighter opportunities more attractive than the $1 billion-plus on the table. More likely is that they were going to miss the performance targets anyway, so they weren't really losing a thing. Indeed, several attempts to make Skype more business-friendly hardly resulted in skyrocketing growth. The founders' early departure would thus solve everyone's problems; they could get on with their more promising projects, and eBay could clean up the financial mess and move forward.

A more interesting question is what eBay's next move will involve. In-Stat analyst David Lemelin thinks that eBay is preparing to sell Skype. The hoped-for synergy is obviously not paying off, and VoIP revenues remain far from overwhelming. Lemelin thinks that's not just because of anything Skype did or failed to do, but because stand-alone VoIP service is itself less promising than it once seemed. The only way that Internet VoIP will prove viable, he believes, is in conjunction with other services.

One such service is mobile communications. Lemelin said that he wouldn’t be surprised if a handset maker like Nokia bought Skype and loaded its client software on all the dual-mode cellular/wifi handsets it made. Other possible buyers are unified and multimedia communications players. Lemelin speculated that MSN.com, AOL LLC and Yahoo! Inc. could all make better use of Skype than eBay could.

Whatever happens, one thing is clear. As Keith Nissen, another In-Stat analyst, put it, "One can say that within Skype and eBay, the realities of the market have sunk in." Equally clear is that those at the top of big companies can be as clueless as anyone else. "With any company that has so much cash, you think they have some grand scheme they're pursuing," noted Nissen, "but they might not."

Eventually, though, reality offers them some clues. In this case, those clues happened to cost $1.4 billion.