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From The Times

October 2, 2007

EBay admits to bad call on how much it paid to take over Skype

Suzy Jagger in New York

Mousetrap weblog: could Skype kill Facebook's $10bn valuation?

EBay, the internet auction site, admitted yesterday that it had overpaid hugely for Skype, the internet telephone company.

It also said that Niklas Zennstrom, Skype’s founder, would step down as chief executive of Skype to become nonexecutive chairman.

He has resigned from the role before his permanent successor has been hired.

The online auctioneer has cut bonuses due to Mr Zennstrom and others by 60 per cent because it was so disappointed by Skype’s performance.

EBay bought Skype in 2005 for $2.6 billion. Yesterday it warned shareholders that it would have to take an impairment charge of $900 million (£450 million) because it had valued the group too highly two years ago.

At the time of the deal, eBay said it would pay a maximum earn-out bonus of $1.7 billion based on various performance targets.

It said yesterday that it would pay only $530 million in cash to the Skype founders in the only and last payment of its kind.

An eBay spokesman said: “Skype has not performed as well as we would have hoped. And we are disappointed about the impairment charge. But we still believe Skype to be an extremely valuable asset.”

He said of the bonus payment: “We think it is reasonable given the progess that Skype has made and also looking at the trajectory of the active user base. It is a one-time payment.”

Under the terms of the Skype founders’ earn-out agreement, the earliest they could have received payments would have been next year.

Skype allows users to talk to each other online, through their computer, as if they were on the telephone. While calls between Skype users are free, the company makes money by charging for calls made from Skype to ordinary landlines and mobile phones.

The spokesman said that talks regarding Mr Zennstrom’s resignation as chief executive had been going on for some time, but that both parties believed it was “the right time to happen”.

While Skype has shown significant sales and subscriber growth since it was acquired by eBay, that rate of growth has been slowing.

In the second quarter of this year, Skype reported revenues of $90 million, up 103 per cent on the same quarter the year before.

That rate of revenue growth had slowed compared with the 123 per cent rise in the first quarter of the year and the 164 per cent rise in the last quarter of 2006.

The key challenge for Skype has been to encourage its customers to use more services that are not free and improve the profitability of business from those users.

During eBay’s second-quarter results in July, Meg Whitman, the chief executive, signalled her frustration: “Skype is not where we want it to be in terms of user activity. This will require increased attention and focus from the leadership team.”

Aaron Kessler, an analyst at Piper Jaffray, the US investment bank, said: “The problem for them has always been trying to get their 200 million users to pay for services. They haven’t really figured out a way to monetise their clients – they haven’t introduced new services such as search engines.”

'An eBay spokesman said: â€œSkype has not performed as well as we would have hoped."'

... and that mirrors the thoughts of thousands of Skype users worldwide after they're once again disconected from thier call.

I love Skype, and it's become a vital service to me... I just wish it were a little more dependable.

Ojin, Chesterfield,

As a frequent user of Skype I cannot not really fault their service. There are the occasional call drop outs but on a technology that is 'connectionless' unlike regular phones that is to be expected. Why Ebay expected to make a fortune out of Skype is a mystery as its very reason for being was for free calls via the Internet. Even Skypeout for calling regular lines had to be cheaper than the many low costs phone call re-sellers and as an example I pay on Skype 1.7 cts a minute to a UK phone instead of my previous 3.5 cts a minute on the regular phone.

Mike, Alicante, Spain

I get better service with cheaper costs for international calls from other VoIP providers. Why would I use Skype?

Sergio, Turin, Italy

you don't say. Anyone with at least a hare's brain would be able to tell ebay their decision to overpay for Skype goes down as one of the worst decisions of all time.

James, London, UK

Yoomba.com is just as good as Skype. All you need to use is your email address to speak to other yoomba users. Try it.
Yoomba is easy and it is also FREE.

Maurice, Ashdod, Israel

I am not a genius but i use somebody cheaper and that gives me good quality sound...The eBay people must be the geniuses.

Gian Piero , Ventimiglia, italy

Michaela, can't you install the 32-bit version? I have lots of 32-bit software installed on my 64-bit linux machine, it all works great. 64-bit code is actually significantly slower, programs that don't need to access >4Gb memory are better off as 32-bit.

Fran Taylor, Concord, NH, US

Why did Skype fail? It was an incredible idea, great (on the whole) implementation and massively popular.

I think it could be something as simple as how they (donâ€™t manage to) process payments for a large number of potential clients.

Read my theory here: http://blog.whitewallweb.com/2007/10/04/why-did-skype-really-fail/

Peter Flynn, Cape Town, South Africa

this was written on the wall from the very first day. I love eBay and Skype as solutions, though I could not see a synergy between the two and hence the high payout. If I can't see it, I am sure then the level heads in a board roo of eBay could not as well. It turned to be a Bush like decision to enter IRAQ.

Nimisha
www.atOnePlace.com

Nimisha, San ramon, USA

They are scared that Verizon is going to sue the crap out of them. At the moment Verizon is busy destroying Vonage, as soon as they are done picking over the bones, they will come after Skype.

Soon there will only be one corporation.

Fran Taylor, Concord, NH, US

Serves them right for not allowing me to pay with my Paypal account to buy credits. As a result, I had to miss an important teleseminar.

What still floors me is that Paypal IS Ebay and vice versa!

They're not running a business up there at Ebay HQ. They're just messing about.

It took them all this time to find out that SkHype sucks!

TSN, Singapore,

If Ebay wants Skype to make money, they should consider allowing people to spend more money. I am a Skype customer and an Ebay user. In a few weeks I was calling a loved one overseas, and had been using Skype's SkypeOut services, paying through PayPal and Visa card. After reaching a spending limit which Skype had predetermined, I could not buy any more Skype credit this month. Well, I have the option of "Direct Bank Transfer" from some company called Moneybookers, but I already have Paypal, and trust them. Does Skype not want my money? Apparently I make up their only source of income.
Update: As I was checking on the name of this company, I see a new feature: I can now pay almost twice as much this month as I could last month for Skype credit using my preferred methods. Maybe they realized they were asking us to stop paying them?

Maxwell Bloch, Saint Mary's,

$530m ain't bad for missing your targets.

From what I know, eBay became hostage to the targets they'd set for the founders: the earn-out depended on profits, but the street was also concerned about the subscriber base, leading to an almighty bust-up between Niklas and Meg. I think this has been on the cards for a while, but it looks like Niklas managed to negotiate himself a nice sweetener.

Shenblonk, London,

Haha, Rakesh said it best.

Zennstrom was just lucky that Microsoft didn't have the vision (or incentive or whatever it was they were lacking), to incoporate a better codec like g.729 into MSN Messenger and interconnect the MSN to the PSTN... after all, when SkHype launched, how many users did MSN Messenger already have??? And they had already introduced free calling over the internet like 5 years prior to SkHype?

Then he was too lucky again that eBay did know WTF they were doing buying a company for $2.6B when they hadn't even reached $10M in annual revenue yet. But it serves them right for defrauding milliones of user with PayPal, the most offensive service from the Internet. How does Meg and her CFO keeps their jobs after that? Asking Zennstrom to resign isn't very consequential - I am sure he is happy to free up his agenda, enjoy his latest $530M payout and watch some Joost!

Goes to show: Marketing is Everything.
http://www.paypalwarning.com/
http://www.paypalsucks.com/

Michael, ViÃ±a del Mar, Chile

The Biggest problem they have is that the free network usage keeps experiencing outages, so weather or not it's true the paid services go down alot too. I subscribe to Skype Out, and I find that it happens way too often that the system gives me a busy signal when it shouldn't be.

Also, the Skypecasts which, when working is great, has too much downtime. They should fix these systems and put ads in with the free services to make up for the money that they are not making.

Chris, London, Ontario

Serves them right for STILL not making a 8 bit version of Skype for amiga. Also for not even attempting to offer Canadian phone numbers.

How dare they only grow at 128% per quarter. After all netmessenger made a ton of money.

rick, ottowa, Canada

What a surprise... not! Skype is not the cheapest VoIP operator to call landlines/mobiles, there is at least a cheaper one which has good sound quality. I won't name it here for obvious reasons.

Nuno Duarte, Gaia, Portugal

It amazes me how ungrateful we can be. Skype allows you to make free calls with another Skype user to any broadband connected PC in the world and with excellent sound quality. How cool is that? International calls at local rates - brilliant. If someone had told you this 5 years ago, you'd have laughed. Get a life people!

Ted, Rome, Italy

Serves them right for STILL not making a 64 bit version of Skype for Linux. Linking the Windows version of the Skype software "Send money to..." feature with a company with rubbish reputation that Paypal has was also a non starter. But seeing on average at busy times 9 million users logged in to the system is pretty good. If they sort out the recent network problems it'd be great!

Michaela, Plymouth, UK

"looking at the trajectory of the active user base"

Why can't IT people speak English? Still, at least the spokesman didn't use that hackneyed IT favourite, "enhance the user experience".

Michael, Brighton,

How about putting up skype on ebay with no reserve price. I am willing to cough up a hundred bucks to get it going. After all the worlds trash gets sold on ebay, why not skype. I think the service also needs to be rechristened as 'Hype'

Rakesh, NC, USA

Skype's service is decent enough, though like eBay the service has become more expensive as time has gone on. The "connection fees" implemented earlier this year caused me and many other users to drop them and switch to lower-priced (and connection fee-less competitiors). Ebay's got it all wrong with Skype. Users don't want to pay more for other services--we want those services for free.

Max, Seoul, South Korea

They messed Skype up by introducing customer unfriendly stuff like connection charges, not integrating with 3G video phones, etc.

Jack , Redmond, WA, USA

Excellent synergies... auction company buys a telephony firm based on the rationale that ebay users need to communicate with each other. Next stop... buy a public utility; after all, eBay users need electricity to power their computers. Next, buy FedEx or UPS so shipping is facilitated.

Internet telephony is dead in the water -- because mobile phone plans provide whenever/wherever access with a huge chunk of minutes.

Jagadeesh Venugopal, Boston, USA

They should have tried to make a Skype phone call before shelling out all that money. The service was rubbish with poor audio and unexplained cut offs. I also suspect many ex-users have found out, like me, that you can even undercut the low Skype charges using other providers.

Ron, Bedford , U.K.