Business Tech

eBay has finally found a way to hang up on Skype.

The e-commerce giant plans to sell its Internet telephone service unit to an investor group that includes Netscape founder Marc Andreessen's new venture. Under the deal, eBay will receive approximately $1.9 billion in cash and a note from the buyer in the principal amount of $125 million, for a total of $2.025 billion. The participants expect the deal to close in the fourth quarter.

The investor group, which will take a roughly 65 percent stake in Skype, is led by Silver Lake and includes Index Ventures, Andreessen Horowitz, and the Canada Pension Plan Investment Board. The remaining 35 percent of the Internet telephony service will be retained by eBay.

The parties said the deal values Skype, which is likely to see an IPO in the coming months, at $2.75 billion.

With the sale, eBay acknowledged that things hadn't worked out as planned with Skype, which it acquired for $2.6 billion in 2005 with the plans to offer customers the ability to discuss their transactions in real time. Over the course of the four years since then, eBay found that its acquisition failed to provide what it sought.

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Hurt by its sluggish auction business, eBay reported a 29 percent drop in second-quarter earnings.

Net income fell to $327 million, or 25 cents a share, compared with $460 million, or 35 cents a share, in the year-ago quarter. Sales also were lower, slipping 4.5 percent to $2.1 billion for the quarter ended June 30, the company said Wednesday.

Excluding one-time charges and stock-option costs, eBay said quarterly earnings would have reached 37 cents a share, or $478.6 million.

Despite the downturn, results beat the forecasts of analysts, who had expected sales of $1.99 billion and net income of 36 cents a share.

eBay said that the volume of merchandise sold on its auction site fell 10 percent in the quarter compared with a year ago, though analysts had been expecting a decline of 20 percent or more.

The results prompted some analysts to raise their investment opinions and earnings estimates on eBay.

Growth in eBay's core auction business has stalled over the past year, prompting the company to try new tactics. It's been pushing more fixed-price auctions, hoping to lure back buyers and sellers.

But the weak auction trade has been offset by healthy growth for both PayPal and Skype.

PayPal revenue hit $669 million in the second quarter, a gain of 11 percent from the previous year. Skype saw revenue rise 43 percent to $170 million.

PayPal President Scott Thompson recently said he plans for the company to double in size next year. And Skype, which eBay scooped up four years ago, is expected to launch an IPO next year.

For the current quarter, eBay is looking for sales of $2.05 billion to $2.15 billion, while analysts have been eyeing revenue of only $1.99 billion. Excluding special charges, the company is projecting earnings of 34 cents to 36 cents a share, with analysts on average forecasting 35 cents a share.

"We are making progress," eBay CEO John Donahoe said on a conference call with investors. "But we know we still have the long way to go as we work to improve trust, value and selection, and we will stay focused on this execution path."

In a highly watched legal ruling, a court in Sweden on Friday found all four defendants in the high-profile Pirate Bay case guilty of having made copyright-protected files accessible for illegal file sharing.

The defendants were each sentenced to a year in jail and also ordered to pay a total of 30 million Swedish kronor ($3.6 million) in damages to copyright holders, among them a number of American media giants.

The four men--Peter Sunde, Gottfrid Svartholm Warg, Fredrik Neij, and Carl Lundström--were found guilty of having made 33 copyright-protected files accessible for illegal file sharing via the Piratebay.org Web site.

"The crime has been committed in a commercial and organized form," Judge Tomas Norström said in a Web broadcast from a press conference in Stockholm. Warg and Neij are the founders of The Pirate Bay. Sunde is a programmer and a spokesman there, and Lundström offered technical services to the site in 2005.

Copyright holders cheered the verdict, as the large penalty will likely discourage illegal file sharers, according to those in the music business. While the legal process still has a long way to go in the United States, Rick Carnes, president of the Songwriters' Guild of America, said he and everybody else "put out of business by cyberlooting" were smiling after the verdict.

Of course, even though the verdict has been handed down, legal actions are far from done.

"The prosecutor leads 1-0 after the first round, but this will, of course, be appealed," said Per E. Samuelsson, defense lawyer for Lundström, according to the Swedish newspaper Dagens Nyheter.

Meanwhile in the media word, controversy brewed this week when Amazon.com delisted from its sales ranking system gay and lesbian book titles that it deemed "adult."

When one author of novels with gay characters noticed that many books were suddenly deranked, he made inquiries into the matter and received the following response from an Amazon representative:

In consideration of our entire customer base, we exclude "adult" material from appearing in some searches and best-seller lists. Since these lists are generated using sales ranks, adult materials must also be excluded from that feature.

An online petition against the move attracted thousands of signatures and pointed out that the policy appears to be biased against books with gay, lesbian, and transgendered characters.

Of course, being delisted from the rankings doesn't mean that the book giant has stopped selling the title; it just means that the title won't show up with a public-sales ranking or in the best-seller lists--often a factor in how shoppers make their purchases.

One blogger claimed that he did it to cause an outrage among the gay community, a claim that was dismissed by Amazon representatives, who characterized the episode as "a glitch in our system, and it's being fixed."

However, an unnamed Amazon employee confirmed the report of manual error. "Amazon managers found that an employee who happened to work in France had filled out a field incorrectly, and more than 50,000 items got flipped over to be flagged as 'adult,'" the employee said.

Meanwhile, Amazon has reportedly blocked the use of the controversial behavioral-advertising system Phorm on its British site. The move comes as the European Commission takes action against the United Kingdom, alleging that the country failed to adequately comply with data protection laws in Europe.

Phorm's technology is designed to allow its customers to observe a user's behavior while online, such as Web sites visited or keywords entered, and then serve up relevant advertisements based on that behavior. The controversy over Phorm's technology revolves largely around privacy issues.

Google on the go
Buoyed by continued growth in search and by cost cuts, Google reported better-than-expected profitability for the first quarter of 2009. Google's net income increased 8 percent annually to $1.42 billion. Revenue increased 6 percent to $5.51 billion, but excluding commissions paid to advertisers (called traffic acquisition costs), revenue increased 10 percent to $4.07 billion.

But everything is most definitely not coming up roses. Google's revenue, after ascending steadily quarter after quarter, peaked in the fourth quarter and declined 3 percent in the first quarter. Google's business is still relatively strong, and it's been hit by the recession less than many in the tech world, but it's been hit nonetheless.

In short, people are buying less, and advertisers consequently are advertising less. As an Efficient Frontier study released earlier this week showed, advertisers are getting more conservative by bidding for search terms where there is a proven return on investment. Google Chief Economist Hal Varian's "Wal-Mart effect," in which people under financial pressure would steer more of their purchasing behavior through search engines in an attempt to get the best deals, has its limits.

Meanwhile, Google-owned YouTube has struck deals with a host of entertainment companies, including Sony Pictures, CBS (parent company of CNET News), Metro-Goldwyn-Mayer, Lions Gate Entertainment, Starz, and the BBC, to acquire "thousands" of TV episodes and hundreds of films. The new content will be available only in the United States.

YouTube executives also said during a conference call that they have redesigned part of the Web site to create separate areas for professionally made content. On the site's front door will be two new tabs. Movies from Sony Pictures will only trickle on to YouTube, at least initially. YouTube has agreed to display the films using a video player from Crackle, Sony Pictures' own video site. The studio will control all the advertising for the films, and Crackle will also get credit for the traffic.

So far, YouTube has been a free, advertising-supported service, but Google plans to build payment mechanisms into its video-sharing site. The change in tactics will mark a new era for Google's attempt to make money from YouTube. The service is tremendously popular, but also tremendously expensive to operate, and Google has been working hard for months to come up with a more successful financial formula for sharing video.

On the line
The founders of Skype have reportedly been trying to repurchase the Internet phone service. Niklas Zennstrom and Janus Friis sold their company to eBay four years ago for $2.6 billion. The two men have been meeting with private-equity firms and gathering their own funds to finance the deal.

eBay has acknowledged that Skype has few synergies with its core businesses. And eBay's chief executive has publicly stated that he's willing to sell it for the right price.

Zennstrom and Friis are reportedly encountering turbulence in striking a deal with eBay to buy back the Internet phone service, despite the financial backing from a group of large private-equity firms. KKR, Warburg Pincus, Elevation Partners, and Providence are reportedly teaming up with the Skype founders. But eBay and the founders' group reportedly face a wide gap on price, and a deal involving the private-equity firms appears unlikely.

Those efforts may be for naught, as eBay announced plans to spin off Skype with an IPO in the first half of next year. While eBay plans to launch a Skype IPO in the first half of next year, the company noted that its exact timing will be based on market conditions.

Last year, Skype generated $551 million in revenues, up 44 percent over the previous year. The number of Skype's registered users has increased to 405 million at the end of last year, up 47 percent from the previous year.

Meanwhile, Time Warner Cable has put the brakes on a trial that was testing its new "consumption-based billing" system for its broadband service. Chief Executive Glenn Britt said in a statement that there has been "a great deal of misunderstanding" by consumers and lawmakers who have criticized the plan.

Time Warner had quietly been testing its metered billing service in Beaumont, Texas, since last year. But last week, the nation's second-largest cable provider said it was planning to expand the test of the bandwidth caps to other cities, including Austin, San Antonio, Rochester, N.Y., and Greensboro, N.C.

The way the plan worked is that Time Warner would cap data downloads and uploads at 10 gigabytes to 60 gigabytes a month, with prices ranging from $25 to $65 per month, depending on the region. The company also planned to introduce a new plan that would have offered 100GB of downloads for $75 a month. Additional downloads would be charged $1 a gigabyte, with a cap of $75 on the extra fee, essentially making an unlimited plan cost $150 per month.

Also of note
CNN took control of the leading Twitter account as a race against Ashton Kutcher and Britney Spears to be the first with 1 million Twitter followers came to a close (Kutcher won)...Facebook is encouraging users to vote on whether proposed terms of service culled from user feedback should replace the existing terms of service...The man who co-wrote "Never Gonna Give You Up," the 1980s song revitalized by the Rickrolling phenomenon on YouTube last year, is accusing Google of exploiting him.

Intel announced two new board members Thursday as Carol Bartz, CEO of Yahoo, resigned from the board.

The chipmaker said Thursday that John J. Donahoe, CEO of eBay, and Frank D. Yeary, vice chancellor of the University of California at Berkeley, have been elected to serve on Intel's board of directors.

Concurrently, Intel announced that Carol Bartz, the new CEO of Yahoo, is retiring from the board.

Intel issued the following information about the two newly elected board members:

Donahoe, 48, has served as eBay president and CEO since 2008. He joined eBay in 2005 and oversaw the company's global e-commerce businesses. Prior to joining eBay, Donahoe spent more than 20 years at Bain & Company, a worldwide consulting firm, last serving as CEO. In addition to serving on eBay's board of directors, Donahoe is on the board of trustees of Dartmouth College. He received his bachelor's degree in economics from Dartmouth College and an MBA from the Stanford Graduate School of Business.

Yeary, 45, is an adviser to the chancellor and his senior staff on strategic and financial issues important to UC Berkeley. Prior to this appointment in 2008, Yeary retired as global head of mergers and acquisitions for Citigroup after nearly 25 years in finance. Yeary received his bachelor's degree from UC Berkeley in economics and history.

eBay will lay off about 10 percent of its workforce, the company announced Monday, and said third-quarter results will come in at the low end of expectations.

The company also announced plans to acquire online payments business Bill Me Later for $820 million in cash and approximately $125 million in outstanding options, as well as Danish classifieds specialist Den Bla Avis and vehicle site BilBasen for approximately $390 million in cash.

eBay said its workforce reduction, which cuts about 1,000 jobs, will result in a pretax restructuring charge of between $70 million and $80 million, which will be taken in the fourth quarter of 2008, eBay said. The online retailer will also let go several hundred temporary workers and reduce the number of open positions.

The company, scheduled to report third-quarter results on October 15, said on Monday that it expects to hit the low end of its revenue guidance, and exceed GAAP and non-GAAP earnings per share. eBay said in July that it expected net revenues of between $2.1 billion and $2.15 billion for the third quarter, with GAAP earnings per diluted share of between 30 cents and 32 cents per share, and non-GAAP earnings per diluted share of between 39 cents and 41 cents per share.

Previously: Amazon invests in BillMeLater. Our advice: Say no now.

eBay's tie-up with StumbleUpon may be about to tumble.

According to a report in TechCrunch, eBay has hired Deutsche Bank to handle a sale of its Web site discovery service StumbleUpon, which it acquired a little over a year ago for roughly $75 million.

StumbleUpon takes a gander at the Web sites that people have visited and makes recommendations about other sites and videos that they may like.

In the report, TechCrunch cites a source who says that eBay is hoping to use Deutsche Bank to land the "right buyer," though the asking price is unknown and uncertainty exists whether the online retailing giant will be able to get what it paid, or will have to run the proverbial blue light special.

According to the report:

In July, StumbleUpon had 1.3 million worldwide visitors and 25 million page views. Twelve months earlier, the service attracted 4.4 million visitors and 31 million page views (ComScore).

StumbleUpon currently has more than 6 million registered users.

MOUNTAIN VIEW, Calif.--"Innovation" has been thrown around so often in technology circles that to some, it's a four-letter word.

At one tech company, innovation can mean bringing a dazzling new product to store shelves. At another, it can translate to a tiny new button on a Web site. That's why, executives say, the word itself has been overused and devalued.

Still, new cutting-edge products mean everything to a successful tech company.

Executives from eBay, Hewlett-Packard, Microsoft, and others were here at SDForum's first Corporate Innovation and Research Fair on Friday to talk about their techniques for staying creative. Each company has its own style, with some strategies that overlap. But they all acknowledged it's not easy to innovate, especially considering that large corporate cultures can be a curse to fresh ideas.

Max Mancini, eBay's senior director of Platform and Disruptive Innovation, went so far as to say that Silicon Valley venture capitalists wouldn't make so much money on start-up investments if tech companies were better at developing new products.

"Venture capital firms thrive on inefficiencies in large organizations," said Mancini, who spoke at the gathering held at the Computer History Museum.

His counterpart at HP added to the idea by saying that demands from Wall Street and senior management can stifle innovation. "If you're a larger company, there's high probability you have creative people (in your organization). But creative people get impatient," said Rich Friedrich, director of HP's Enterprise Systems and Software Lab.

That means that these companies either must invest billions in research and development units, or bake in policies to ensure that people dream up new products. Google, of course, asks engineers to spend 20 percent of their time on pet projects. Microsoft, in contrast, employs more than 800 researchers in labs around the world.

A bottom-up style
Roy Levin, Microsoft's director of research in Silicon Valley, said that one reason the labs have proven helpful to Microsoft, including bringing products like Windows Media to consumers, is their bottom-up style. The labs' researchers pick projects themselves and collaborate with each other. They're also not beholden to profit-and-loss goals or managers, he said.

"Every time you introduce (managerial) hierarchy, you introduce barriers to collaboration; and collaboration is key," Levin said.

But once a technology is ready, transferring it to a product group or bringing it to market can be highly difficult, he said. That's why so-called technology transfers are "a contact sport," he said. Researchers must travel a lot to get new ideas and prototypes in front of the right people, Levin said.

eBay's Mancini said that the auction company does two big things to promote creativity. The first is operating a technology platform that mirrors the eBay framework so that its engineers can experiment with new tools. That way, developers can test products outside of the company's rigid software development process, he said.

"Venture capital firms thrive on inefficiencies in large organizations."

--Max Mancini, eBay

The other method is to invite third-party developers into the fold through application programming interfaces. He said that in the last year developers have created an estimated 12,000 applications for eBay, producing as many as 60 percent of the listings on the site. "That's innovation we probably couldn't afford," he said.

"Innovation is about the ecosystem, either removing barriers internally or allowing third parties to help meet the needs of your customers in ways you can't afford to do (or have the time to do)," Mancini said.

Similarly, HP's Friedrich said that one of his company's strategies is to partner with outsiders on projects. "All of the innovative people don't work for your company," he said.

HP, for example, teamed up with DreamWorks years ago to work on technology for life-like animation and "cloud" services that were used to produce the movie Shrek. Last week, HP also teamed up with Intel and Yahoo to create six large-scale computing centers that would allow outsiders to test technology.

"All of the innovative people don't work for your company."

--Rich Friedrich, Hewlett-Packard

Cloud services are one of several areas of research for HP, which invests about $3.6 billion annually in R&D, Friedrich said. It's also looking at projects in sustainability and managing data. On a broader level, HP is trying to shift the company from a hardware maker to a software company; and it's doing that largely through acquisitions.

Oracle's Marie-Anne Neimat, vice president of development for embedded databases, also pointed to acquisitions as a way to evolve, beyond Oracle's multibillion dollar annual investment in R&D.

"It's new blood," she said.

Finally, some technology companies have turned into venture capitalists, too.

Ike Nassi, SAP's executive vice president of research for the Americas and China, said it recently started a venture capital incubator. It solicits ideas from internal employees and external start-ups; and if it's a good idea, SAP will help form a new business unit, fold the start-up into an existing product line, or spin it out as a new company, he said.

"If you have an interesting idea and don't want to go the VC route, we provide seed funding," Nassi said.

That's similar to other technology companies. Intel, Google, Motorola, Amazon, and Comcast run venture capital units either formally or informally.

What about the word innovation?

"It's completely devalued," Nassi said. "The thing we need to look at is managing risk--whether placing an investment on this versus that, and what's the payoff of that investment."

eBay is negotiating to acquire almost 40 percent of Korean auction site and e-retailer Gmarket.

The online auction giant released a statement Wednesday confirming it is in talks to purchase Gmarket shares from auction-site affiliate Interpark and its chairman, Ki Hyung Lee. The company said no definitive agreement has been reached, although a preliminary filing is awaiting approval from the Korea Fair Trade Commission.

Seoul-based Gmarket was founded in 1999 and has established a base of 14.7 million registered users. In the financial report for its second quarter, ended June 30, the company announced a net income of $15.4 million.

By comparison, San Jose, Calif.-based eBay reported a net income of $460 million in its second quarter of the year, with 338.2 million registered members. In 2001, eBay showed interest in the Korean market by acquiring a majority stake in Korea's Internet Auction Company.

Gmarket's shares increased by 14 percent to close at $25.36 after eBay announced its interest in the company.