Skype: Going, Going, 65% Gone

One of the more confounding business acquisitions of the last 10 years has been eBay's purchase of Swedish VoIP services provider Skype. eBay is in the business of online auctions and payment transactions, and Skype delivers low-cost IP telecommunications services - other than the Internet as a basic delivery mechanism, they are not related business models, except perhaps in the alternate universe known as "bizarro world." Adding insult to injury, eBay paid a total of $3.1 billion for Skype in 2005, when they were generating approximately $70 million in annual revenues. This equates to a premium of over 44x revenues, and while Skype's revenues have increased to $600 million, market valuations have dropped as well.

This means that even though Skype revenues have increased 8.6x, their market value has dropped by 11% since the eBay acquisition, at least according to the terms of the announced deal. Controlling 65% of Skype, the new majority shareholders, led in part by U of I alum Marc Andreesen, will not be burdened with an auction business as a distraction. Further, eBay can use the $1.9 billion to make intelligent acquisitions in the transaction processing and exchange segments.

But why did eBay purchase Skype in the first place? There are some who would argue that it was predicated on the agency problems associated with increased diversification - namely, the justification for additional compensation and heightened job security. But this argument is deflated in the face of CEO Meg Whitman's "retirement" in 2007, only two years after the acquisition. If the agency problems were evident, it is axiomatic that a longer term at the helm would occur. She did not resign in disgrace, and in fact is now running for governor of California.

Fortunately for you, dear reader, I possess inside information that may shed some light on the reason behind "the mistake that shall forever be known as Skype." In 2002, eBay was in the market for a new billing system. Their original system was a kluge of software that grew over time into a monolithic mess. In-house programmers kept adding features and functionality in response to immediate needs, and eventually a point was reached were it could not expand any more and would not accommodate eBay's plans for future rate schedules. Our company, a telecommunications billing vendor and systems integrator, made it past down-selection and was one of the two finalists. We didn't win the contract, but our competition was also a telecom billing vendor. Installation and testing took over a year, and eventually eBay went online with their new billing system in 2003-2004 timeframe, with a sequenced rollout to different segments of their customer base.

eBay had purchased a billing system that could not only handle their auction and PayPal traffic, but it could also support VoIP services as well. And sometimes companies get involved in new strategic ventures because they can, not because they should. Just imagine a meeting in the boardroom in San Jose, when the discussion turns to what possible new directions they can set forth. The head of IT says, "I don't know, but we have all the infrastructure in place to support a VoIP telephone company." The rest is history...