October 1, 2007 3:55 PM PDT

eBay: What to do with Skype?

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Don't call it a bust 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 $2.6 billion two years ago.

On Monday, eBay said it would take a $900 million 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 Monday that Skype co-founder and Chief Executive Niklas Zennström has stepped down.

His departure was expected. Zennström, 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 endeavor.

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.

"The Skype service has been tremendously popular as a free service. But at some point, free doesn't work anymore. It's not a management problem. It's a business model issue."
--Jordan Rohan, analyst, 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 voice over Internet Protocol 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 Web site and the Skype voice service. Even though Skype has grown into the largest voice over IP provider on the planet, the bottom line is clear--it still hasn't made enough money to justify the hefty $2.6 billion 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 voice over IP 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 July 18 on revenue of $90 million.

But despite this success, eBay's CEO 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.

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 cell phones for a fee.

Skype and eBay don't break out 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 actually 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 be realized 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 stand-alone 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 monetize those users."

CONTINUED: Mobile opportunities…
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A business model problem
As least in respect to the Mac version, the Skype business model
also doesn't include attention to product quality. The authors seem
to take sadistic pleasure in cooking up goofball ways for Skype to
Posted by nicmart (1829 comments )
Reply Link Flag
You're right...
Agreed. Many of Skype's present troubles may well come from a "What are those irritating things called customers?" attitude I experienced two years ago, but have become better since the acquisition by eBay.

Skype alienated many a possible new user by truly not giving a damn about customer service or satisfaction. And unfortunately, although less, that mindset still sometimes seems to prevail.

(This may be difficult to confirm given Skype often deletes negative postings to its forums. At the very least, my own critical postings are no longer there.)
Posted by ZenWarrior (23 comments )
Link Flag
What to Do? I will do... this with Skype
I think Ebay should immediately start a voice recognition department. Use the Skype voice data statistic to improve voice recognition system in different languages. Skype should ask the user to enter the first language they use in Skype. These data is the most valuable.
Posted by kai6novice (18 comments )
Reply Link Flag
and then what
Wow a $2.6 bil voice recognition department. What should eBay do with a voice recognition department? Recognize voices, yes, but what else... Also, Skype doesn't have copies of voice conversations, the system is peer to peer so no central copies are made nor is knowing what language people are speaking on Skype is that valuable.

These ideas are the reason eBay has a problem now.
Posted by sanenazok (3449 comments )
Link Flag


2.6B seemed stupid 2 years ago.

2.6B seems downright criminal today.

Skype was and is, to some extent, a great VOIP program. Remove the ludicrous price tag and Skype is extremely successful.

And who didn't think that Ebay's ideas about Skype integration seem more than a bit off? I mean... what the hell? You're paying 2.6B so that you can integrate Skype into your auction site? What?!

I just hope that Ebay doesn't smother Skype in a futile attempt to squeeze 2.6B out of a service that was and is worth a fraction of the amount that they paid for the service.

Ebay would be much better off spinning Skype off and improving the Skype service than continuing to try to find ways to integrate Skype with their auction website. Where are the business features? Why not offer PBX features? Why not integrate Skype with Asterisk and sell phone service to businesses? Why not work on features that are not even possible for local telcos to compete against?

Oh well. Enjoy your swamp land.
Posted by Fat Drunk and Stupid (32 comments )
Reply Link Flag
Re: Big Surprise
I have to agree with you. This was one of those deals where you just KNEW it wouldn't make anything better on either side.

2.6 billion down the drain.

Charles R. Whealton
Charles Whealton @ pleasedontspam.com
Posted by chuck_whealton (521 comments )
Link Flag
Switching to Skype when Vonage is Shuttered
I'm a current Vonage subscriber, and I'm ready to make the jump over to Skype for their unlimited plans (plus hardware) if/when Vonage's patent woes force them to shut-down. I'd rather get my service from them, rather than going to a Bell, or worse yet, my cable company. I'm sure others will do the same. Hopefully eBay doesn't decide to do away with Skype becuase it can't attain some crazy valuation...
Posted by fishpop (11 comments )
Reply Link Flag
Even worse
Skype works even worse than vonage..and they'll charge you if you use it from outside north america, even if you have a north america unlimited plan...
As for ebay paying 2.6 billion dollars for skype, a fool and their money are soon parted. That has to be the most foolish acquisition price of my lifetime.
Posted by Bill_A (13 comments )
Link Flag
I hate to say but "I told you so", Callsite is better than Skype
When eBay announced the Skype acquisition I wrote that this acquisition would have been hard
to justify for $29Mill, set aside $2.9Bill.
Because the future of web based communication, well is web based. Which means solutions
that instantly run inside a web browser and do not require a separate download & installation.
I mean who the Hek wants to download a 30MB software to be able to call the owner of
the web site where the "call me via Skype button is embedded"!!! And what if I am changing PCs,say going from office to office or Internet cafe to Internet cafe, etc. So the right solution for web based voice communication is a voice communication capability which is totally web based and does not require separate download & installation, something like CallSite.
Posted by Info_Max (52 comments )
Reply Link Flag
What if you're changing PCs? You take your Skype account with you. Skype can easily be made entirely portable and carried on a single USB flash drive. When used with any computer, that computer becomes your telephone. I see it done every single day--by those with a clue.
Posted by ZenWarrior (23 comments )
Link Flag
Int'l calls from cell phone
We use cellular gateways combined with Skype to allow our employees to call the cellular gateway, access the PBX, then dial out internationally over VoIP. Our international people access the PBX through the IP connection on the gateway then go out the cellular side to cell users in the US. Huge cost savings.
Posted by fpalacios (2 comments )
Reply Link Flag
Not compelling to pay
When I got a skypein number last year, it was $30. Now it is $70. Am I going to renew? NO. Overpriced.
Furthemore, the unlimited North America plan is fine..except if you happen to travel. Why am I going to pay by the minute if I happen to take my computer to Europe (and pay for the internet connection there)? They are not going to make money because they are not being fair, it is not reasonable and someone else is going to get the business.
Posted by Bill_A (13 comments )
Reply Link Flag
Skype Uses Your PC to Run it's P2P Network
That's why they are screwed for mobile, at least for now. Even if you aren't making phone calls Skype uses your PC to form and support its network. Why don't any of the writers just say that? Maybe they just don't know. Nothing is for free if it has any value, and Skype is not free as most people think. I don't want anyone using my computers for free which Skype is doing with its quid pro quo network.
Posted by WJeansonne (480 comments )
Reply Link Flag
P2P is the heart of free distribution. Once somebody needs a server...
Location Based routing techniques will permit unlimited roaming.

The next generation of digital communication is a full MIM0 mesh, a router on every rooftop. Using GPS location as a routing tool, allows mobile devices to be tracked and served seamlessly.

Because every device is connected to every device in sight, and messages are sent redundantly and randomy, radios that appear and dissappear merely drop the redundancy a bit. Think RAID for RF.

Unless they buy their own spectrum, they may need to partner with GOOGLE for 700 MHZ.
Posted by disco-legend-zeke (448 comments )
Link Flag
Never used it, not even once. I have nothign against it or any voip service, but everyone I know and interract with uses a cell phone and modern plans have free nights and weekends, free mobile 2 mobile and even free incomming calls. With such features, why would anyone want to be tied down to using a service which requires you to be in front of your computer to send and receive calls?
Posted by thedreaming (573 comments )
Reply Link Flag
Cellular vs Skype
I respect all reader comments and opinions.

As president of a telecommunications management of
information systems business (TMIS) for a number of years I
believe Ebay is sitting on a virtual goldmine.

Recently I revisited the Skype voice over internet offering, signed
up for the service and gave it a try over my new Macbook laptop
computer which has a built in mike and video camera.

The service is really clear and easy to use as my first
conversation was with a business person overseas in India.
Additionally, I signed up for the unlimited calling plan to make
calls outside of the Skype to Skype network anywhere in the US
and Canada anytime of the day. I also plan to purchase other
Skype service offerings.

Many businesses have heavy calling patterns that occur during
the daytime when most of your cell phone plans offer limited
day minutes with exception of some carrier mobile to mobile
plans, yet many of us are with different service providers. You
have a few regional wireless providers who offer unlimited day
minute plans.

Regarding being limited to sitting at a computer to make calls
Skype now offers wireless internet handsets that now enable
calling without a computer providing you have internet access.

Wireless hot spots are being added daily in various locations and
the next bug push should be in the area of in building wireless
amplification for both voice and data with some sort of
universal signal standard to complete voice and data wireless

Skype will need to develop more enhancement services like multi
group video and voice conference applications for their new
SkypeCast service . There are many other service applications
they can add to their existing services.
Posted by Comresrch (2 comments )
Link Flag
Phone companies that degrade voice force providers to build network.
The Telecommunications act of 1996 was designed to permit concurrent growth of new technology, without harm to the telcos.

It allowed them to unbundle network elements. So if i just wanted a copper pair, i could rent it for $8. As these new services grew, the LECs panicked, and got federal mandates overturned.

A case in point, Las Vegas. Where COX and SPRINT simply refuse to lease unbundled fiber or copper.

Great Bean Counter type idea. Now the streats are all trenched by facilities based competitors. New york city has a company that just owns conduit. (i watched one section being built, it had 64 three inch pipes)

However, as pointed out in the article, the future is wireless because of the low installation cost. Hang a pair of $1500 off-the-shelf radios 10 miles apart, and you OWN a 20 MEG link.

Hang 10 $150 802.11N routers in your block, and EVERYBODY owns about 500 Megs.

Add GPS cascade routing instead of IP based Path-oriented routing, and you create a self forming, self healing network, owned entirely by the users.

Google already gets this, and there is nothing to stop other entities from bidding on that or other pieces of the spectrum. Al Gore could get elected on a platform of Public access to 700 MHZ. The cost of spectrum. OWNING spectrum is, well, like owning the air. Hey i want to bid on RED. anybody using RED light for signaling would buy a license from me. Today we know that 2.4 and red are the same... everybody can share red as long as they use beams, not broadcast; we now have the technology to produce dynamic, massively redundant, beams of RF. Its already working in 2.4 and 6.8, 700 MHz awaits only a sensible ruleset for operation.

There is nothing wrong with the old model, RF technology did not permit simple beam forming. The lowest cost alternative was a fixed dish.

I saw steerable dish stuff at a trade show.

Today, a virtual dish is created electronically, in the chipset, not just one but Many. I saw in operation a panel antenna/radio tha could do 200 WI-FI connections at the same time.

Tell your favorite candidate to pledge to stop the sale of red. After all, spectrum belongs to the people. Not the wealthy communications dinosaurs.
Posted by disco-legend-zeke (448 comments )
Reply Link Flag
Re: eBay: What to do with Skype?
This was bound to happen, but un-surpriseingly,
SKYPE years ago provided the ability to replace the now 100-year-old antiquainted analog voice/phone system.-it also ran on almost every commercial or free PC/NetOS out there!

But, instead "FUD", thanks to (our) CRTC, not to mention FCC, AT&T, BELL,... Microsoft(...'cause proprietary MSN/Hotmail would have been gone!),...
prevented this
-the communications' Powers' that be sure didn't want this rearing its ugly head.
But then again, if Skype would have "really" succeded we'd probably also be driving fossil-fuel-free" cars, and not enslaved by Oil Companies/gov'ts...

So eBay is just another paperless tiger told what to DO -and in this case its "...GET RID OF THIS SKYPE..." -sad but ohhh so true.
Posted by RickNekus (8 comments )
Reply Link Flag
And they wonder why usage is down!!
Like you, I was stunned when I saw the renewal prices. While they had a nice "leg up" on some of the other players in this area, it certainly wasn't by enough to pull off that big a price increase without people walking away. I mean, twice the price of Yahoo!Voice for a phone number? Did they not see that they would lose people?
Posted by JayMonster (90 comments )
Reply Link Flag
This is what happens when you don't fix problems
Sure, Skype has tacked on some new toys like "Live" but they have done little to nothing to improve the base service or fix ongoing nagging problems with the core product.

On the Skype Out Side, the lack of Caller-ID, I think really hurts people using it. I know when I call people, I get repeated comments about my stupid caller-id number (012)345-6789, I mean, what is that? It makes me look like a telemarketer!

The Interface is still a bit kludgy looking and "old fashioned" and appears on the surface to be decades behind Yahoo!Messenger and MsnMessenger (or whatever the hell they are calling it this week at Microsoft). It is intrusive on your desktop in a way it shouldn't be.

It is also far too resource intensive even when idle. Could somebody perhaps do so omptimizations perhaps?

Yes, plenty of people have signed up for Skype, and I bet many of them still have it on their computers. But how often are they actually opening it?
Posted by JayMonster (90 comments )
Reply Link Flag
Being fair?
Since when has business considered 'fair' to be a workable stratagem? They're just working out how hard they can get away withy screing you to thte wall.

As an aside, did you ever consider cellphone contracts to be "fair"?
Posted by redking44 (8 comments )
Reply Link Flag

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