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eBay admits it paid too much for Skype

"We are almost going back to year 2000 types of errors ... [Internet companies] are buying users instead of revenue and profitability. That's what eBay did for Skype. They saw a great asset with tons of users but no clear monetization path."

Aaron Kessler, Internet analyst at Piper Jaffray

EBay is finally acknowledging that it paid too much for the Internet phone company Skype two years ago.

On Monday, eBay, based in San Jose, California, said it was taking a US$1.43 billion charge related to the acquisition of Skype.

EBay paid US$2.6 billion for the rapidly growing service in 2005.

Since the purchase, Skype's membership rolls have swelled past 220 million. But the company has not had as much success making money as it has had growing. Skype does not charge its users for calls to other Skype users. There is only a small fee for calls to landline numbers and cellphones.

Skype earned US$90 million during the second quarter of this year, far below eBay's projections. EBay said in a regulatory filing that the charge was "the result of the updated long-term financial outlook for Skype."

The Skype deal helped to initiate a renewed acquisition frenzy in the online world and a return to what some call a bubble mentality.

After the spectacular dot-com flameout seven years ago, Internet executives pledged to begin judging technology companies by revenue rather than by something as ephemeral as "eyeballs," or traffic on a Web site.

But somewhere along the line, the high-tech industry reverted to its old form.

"We are almost going back to year 2000 types of errors," said Aaron Kessler, a senior Internet analyst at Piper Jaffray. Internet companies "are buying users instead of revenue and profitability. That's what eBay did for Skype. They saw a great asset with tons of users but no clear monetization path."

EBay has struggled to turn Skype's popularity into profits. This year Skype added a "yellow pages" directory and ways for its users to rate businesses. Neither of those features has drawn much attention or activity.

EBay has also begun to integrate Skype calling into auctions on the eBay marketplace, in the hope that buyers and sellers would communicate better. But the success of that integration is almost impossible to measure.

"It has seemed relatively clear that Skype has underperformed even modest expectations for the last two years," said Derek Brown, an analyst at Cantor Fitzgerald.

EBay also said on Monday that as part of the US$1.43 billion charge it was making a US$530 million payout to Skype shareholders. When it bought Skype, eBay pledged to pay up to US$1.7 billion if Skype met certain user growth and revenue goals.

The company also announced that Niklas Zennstrom, Skype's chief executive and one of its founders, was stepping down to become nonexecutive chairman and would focus on his entrepreneurial efforts outside the company.

Hani Durzy, an eBay spokesman, said the parting was mutually agreed upon.

"He could have continued to run the company, but he wanted to focus on new opportunities. He's an entrepreneur at heart," Durzi said.

Michael van Swaaij, eBay's chief strategy officer, will act as chief executive of Skype until eBay hires a replacement.

The high price eBay paid for Skype now brings to mind some of the most flagrant mistakes of the first dot-com boom, like Time Warner's purchase of America Online -- and how some of those mistakes could be repeated in a new investment frenzy.

"Right after the bust, people started focusing on business models and revenue," said Greg Sterling, a Silicon Valley analyst and consultant. "There has been a little bit of departure on that, with a focus on building the biggest audience and figuring that revenues will follow. That is the attitude that has prevailed over the last couple years, and it may not be sound."
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