Skype: Not quite what eBay bargained for
Published: 02 Oct 2007 13:03 BST
Don't call it a failure just yet, but it's fair to say eBay executives aren't thrilled with what they're getting out of Skype, which the auction king bought for $2.6bn (£1.3bn) two years ago.
On Monday, eBay said it would take a $900m (£441m) so-called impairment write-down against the value of Skype. This means that eBay has been forced to reassess the value of the internet telephony company relative to its overall business today. By recording a charge, the company is essentially saying that it has taken a loss on its original investment.
In what looks like an attempt to shake things up at Skype and move the division in a new direction, eBay also said on Monday that Skype co-founder and chief executive Niklas Zennstrom has stepped down.
His departure was expected. Zennstrom, who helped start Skype in 2003, has joined forces with Skype co-founder Janus Friis to start an internet television service called Joost. And it has long been anticipated he would take more time to work on that endeavour.
From the time that the Skype acquisition was announced in September 2005, analysts and investors on Wall Street shook their heads wondering how the company could pay such a hefty premium on a company that essentially provided free or low-cost voice minutes in a market that is dominated by large incumbent telephone companies.
At some point, free doesn't work anymore... It's a business-model issue
Jordan Rohan, RBC Capital Markets
When the merger was announced, eBay, which owns and operates the most well-known online auction service, said it saw great potential in using Skype's peer-to-peer VoIP technology to connect buyers and sellers in the eBay marketplace. There were grand plans to integrate eBay's PayPal payment system with Skype's VoIP network.
But nearly two years after the acquisition closed, there is little integration between eBay's auction website and the Skype voice service. Even though Skype has grown into the largest VoIP provider on the planet, the bottom line is clear — it still hasn't made enough money to justify the hefty $2.6bn price tag.
"The Skype service has been tremendously popular as a free service," said Jordan Rohan, managing director and internet analyst at RBC Capital Markets. "But at some point, free doesn't work anymore. It's not a management problem. It's a business-model issue."
That said, Skype has been a success story of sorts in the VoIP arena. Its subscriber base has grown from 57 million registered users in 2005, to 220 million users at the end of June 2007. That's an increase of more than 160 million registered users in less than two years. The division also recorded its second quarterly profit in a row on 18 July on revenue of $90m (£44m).
But despite this success, eBay's chief executive Meg Whitman said when the results were released, she was still not happy with Skype's usage levels.
The big question now is, what's next for Skype?
Making money
Clearly, the current business model is not enough to satisfy eBay in light of how much the company spent on Skype. And the reason is simple. Even though Skype has done a very good job of getting users to download its software client, most people who use the service do so to make free Skype-to-Skype phone calls.
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The only way that Skype makes money from its subscribers is when people use its Skype-In or Skype-Out services. Skype-In allows users to pay to rent a phone number, which people on regular phones can call. Skype-Out allows users to call traditional phones or mobile phones for a fee.
Skype and eBay don't share how many subscribers use Skype-In and Skype-Out, but Rohan said there is evidence in Skype's numbers to suggest its Skype-Out usage is declining.
"Skype-Out usage is way down," he said. "But regardless, Skype's core business isn't much different from a really cheap calling-card business. The margins are really thin."
It's clear that the dream of massive integration between eBay's auction site and Skype won't happen anytime soon. But the company still sees big potential in Skype's voice services.
"We feel like we can do a lot more with Skype as a standalone VoIP provider," said Hani Durzy, a spokesman for eBay. "Skype has been focused on user acquisition, and it's done a great job. But we also feel like we can find new ways to monetise those users."
For example, Durzy said the company is looking at ways to integrate e-commerce into the Skype client itself. Exactly how this would work…
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