Skype Co-Founder Admits Expectations Were Too High

Oct 15, 2007

Larry Barrett

Niklas Zennstrom, Skype's co-founder and former chief executive, told attendees at last week's ETRE technology conference in Hungary that while the Internet telephone services provider was growing at a steady pace, "we overshot in terms of monetization" and admitted the company had not delivered the immediate revenue boost expected following eBay's $2.6 billion acquisition in 2005.

On Oct. 1, eBay announced it would write off about $1.4 billion in one-time charges in its third quarter to complete the acquisition and establish a more realistic valuation for Skype's assets and long-term business prospects.

At the same time, eBay also announced Zennstrom's resignation and appointed Michael van Swaaij, eBay's chief strategy officer, as Skype's interim CEO until a permanent replacement is hired.

"We had to chart the trajectory of growth and how fast that would run, (but) we found out that was a bit front-loaded," Zennstrom said, according to a Reuters report from the conference in Budapest. "Our position in the market has strengthened… you need to look at the long-term value of companies."

Evidently, eBay CEO Meg Whitman didn't think that long-term value was enough.

In a filling with the Securities and Exchange Commission, eBay confirmed it would take a $900 million charge in goodwill related to the acquisition, a tacit acknowledgement that eBay paid too much for the Luxembourg-based company.

Worse, Skype's initial investors, including Zennstrom and co-founder Janus Friis, apparently agreed. That's because eBay also announced it would only cough up $530 million of a potential $1.7 billion payout to former Skype shareholders to conclude the transaction.

During a September meeting with current and prospective application developers, Skype outlined part of its plan to monetize its communications platform by launching its first Web service for developers looking to build mashup applications in the Skype environment.

David Willis, an analyst at Gartner, said eBay will need to find more creative ways to monetize Skype's technology if it's ever going to recoup some of its investment, adding that eBay's struggles with Skype are "not due to issues with vision but with that of execution."

"eBay's September 2005 acquisition of telephony vendor Skype was overpriced by any direct measure: technology value, user base and revenue," Willis wrote in a research report released Tuesday. "Skype now generates only $1.60 per subscriber per year. However, eBay was correct in its vision of interconnecting the worlds of business applications and communication capabilities."

Willis said Skype's basic technology could have been purchased elsewhere for about one hundredth of the price, and chastised eBay for expecting too much, too soon.

"Internet telephony users do not carry the same valuation as other users such as ISP subscribers," he wrote. "The market was not ready to adopt Skype as a means to integrate with commerce. Users see its services as an inexpensive or free calling option, not a means of accelerating their business as an eBay buyer or seller."

While Skype has more than 220 million registered users, Willis said the barriers to competition are low and alternative offerings from the likes of Yahoo, Google, Microsoft and AOL have emerged, putting even more pressure on eBay to monetize the Skype platform.

Along with simplifying its developer tools, Skype plans to incorporate more payment options for users who want to play games or buy widgets and applications developed on the Skype platform. Skype claims it now has more than 6,000 community developers working with its platform and that its 130-plus integrated applications have garnered more than 32 million downloads in the past nine months.

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