What Was Skype’s Shortfall?

I wish, Web 2 era dont taste dust just become these anticipated over hyped deals — perhaps this is lesson for biggies like Google and MS for not to get carried away when go out for shopping!

I rather conduct business through email on Ebay. Skype is good but not needed.

Ebay wrote down a $1.4 billion expense because of Skype. They spent 4.1 billion originally. So Ebay revalued its portion Skype at 34% of its original investment. If Skype is going to have revenues of $400 million in 2007, maybe Ebay was hoping for a minimum revenue 34% higher or about 600 million. This is very rough. Ebay could have valued Skype based on a variety of things, not just revenue.

Erick, I still dont understand why you continue to harp on this topic. It is plain and simple. Let me give you a better analogy. Lets say Techcrunch gets acquired for 2million by CNet and as part of the acquisition (which you would agree to based on your forecast) you were suppose to add 100k users over a one year period. and lets say for agruement sake you that was done in January, now its November and you have only attained 30k users.

Would you blame CNet for asking Micheal to step down from his position and recalculate his earn out based on his “under” performance?

I think the thing we keep forgetting here is that ebay like any other company has shareholders to report to and when individuals dont perform they have to do what is in the best interest of their shareholders and the company. I think that is only fair.

I think earn out are great ways to hold “sellers” accountable to their sometime rather ridiculous forecast.

Keg Whitman should step down already. This was one of the worst purchases of the last 3 years. She’s done and so is eBay so they need new blood in there and not from within either!

Skype can still do good. They just have to push it harder!

Make it a standard and it will take off like a rocket!

Darin

I wouldn’t say skype has a “downfall”, quite simply the problem is ebay overpaid. The valuation was way out of line.

In response to rons dixon: what happened to caveat emptor (buyer beware). When a large company buys a small company, the founder doesn’t have complete control over his future. He is now operating within the infrastructure, bureaucracy and budget constraints of the new owner. The buyer of the company might make certain assumptions based upon their installed base, growth, etc. about the impact this will have on the acquired company’s targets (revenue, earnings, etc.). In other words, the targets may not be made by the seller in a vacuum. In this scenario, holding the seller as solely responsible is unfair. Earn outs in an acquisition are used frequently to maintain top talent. However, performance based earn outs can be defined or strongly influenced by the acquirer and not solely the result of the seller’s ridiculous forecast. Since neither of us were there, we cannot place blame on either the acquirer or the acquired.

I agree with John.

Weather Skype is integrated into eBay fully or not at all is less of an issue with respect to the price they paid for it. They paid too much for Skype’s growth. And they know it. I wouldn’t call it Skype’s downfall, but rather eBay’s mistake.

So what. Companies make bad moves all the time. Move on.

Is the valuation always out of line???

People are still smoking the .com Huka pipes although they refuse to admit it.

Carmelo Lisciotto

@ Mike, in no way was i laying the blame on either the buyer or the seller in this case. But I have notice a prevalence of a certain reasoning behind the skype-ebay deal.

I am merely offering another side, that i think was not put forward. And yes while the earn-out details we are not privy to, I still think (my opinion) that earn-out conditions was set entirely by the buyer and the seller had “0″ input.

My two cents.

Did I miss something? Didn’t Zennstrom pocket something like half a billion? If he’s unhappy, and I don’t read anywhere that says he is, he needs a really good shrink.

what about stumbleupon ? i think it would have a similar fate

Did Ebay really have to do all this? Is there a generally accepted way to put a value on an asset like Skype? Are there any other high-growth, high-margin $400m companies that are valued less than a few billion?

I have to agree with “rons Dixon” in part on this one. As a past acquirer we used earn outs very successfully to keep the two founders motivated. It was their first startup and we paid (market value) for their product. Their profit margins were unbelievable high, upwards of 80% and we just couldn’t see how, with market conditions changing they could maintain that.
They stayed motivated and achieve very good results.
Now I must that that Mike also makes a few very good points, especially as it relates to how “big companies” work. Sometime things take much longer, strategies are not understood and appreciated as easily as in startups and the politics of the environment changes the landscape for the decision making process.

Another point that Rons made and I agree with was that the “terms” of a earn out are set “entirely” by the acquirer. Again we can only speak about our experiences. We (meaning the seller and buyer) sat down and went over, strategy, market conditions, etc. And we suggested based on those key variables and a few others how , best to execute that strategy.

I think this is great !!

This one is plain and simple. Integration.

As someone who has done both (1) start a company and (2) integrate large acquisitions, I can tell you - integration is by far the harder challenge. The shortfall is most often a function of many things including size, growth, expertise, unrelated challenges, and maybe the expectations from an off original valuation.

You can pick someone to blame, that’s easy - the analyst that did the valuation, the Board who approved the acquisition, the incoming CEO who was strong enough to lead to the exit, his/her boss who had X number of direct report senior executives with the same size challenges. Doesn’t matter. There are very few people in the world who actually know how to do large acquisition integration well. Seeing eBay have difficulty with this one just helps prove the rule, not highlight an exception.

Skype is still there. It will drive some great value. Some times it takes more time than most managers could stomach. I sure found integration tough and I didn’t work for eBay.

The problem with Skype is that the margins in long distance are terrible. Most of Skype’s revenue comes from Skype Out, which is simply discount long distance service.

So while their gross revenues may be $400 million, it would not surprise me if the gross margins are 10-20% or less. Add infrastructure costs, head count, etc, and they’re not making money.

EBay should have stuck with its core business. Skype would have been better off if they’d been acquired by a telecom. At least they would have understood the economics of the business better (or maybe they did, and refused to pay more than fair market value).

eBay posted negatives for the most recent quarter, but that was their first negative quarter since 1999. Few companies, let alone internet companies, can put up numbers like that. Yes, eBay and Skype are completely different businesses, but if eBay can go 8 years making profits every quarter from an Internet business, then to me that screams of creativity and ingenuity. Give eBay a chance. With their experience they may very well be able to convert Skype into some kind of successful revenue generating machine. http://www.newsvisual.com/news.....-allo.html

It was obviously that ebay paid to much for skype.

Lots of good points here.

Two things stand out to me about Skype:
1) The revenue-generating features are marketed atrociously. Skype should have been bundling key features to help people understand them, instead of selling each thing separately. They have packages now, but these aren’t well designed.
2) They’re way behind on messaging, should be offering incoming fax, and forwarding of both voicemail and fax to email if desired. This would rope in small business user, who will pay more for communications.
3) Dramatic price increases for Skype In numbers only amplify concerns people have about eBay’s history of jacking prices. It’s tough to invest in a Skype phone number when eBay might mug you in an alley at any time.

Skype shows signs of a headless business unit, where he drive and inspiration is gone and the show is managed by competent stewards only. It’s not reaching for anything. It has no direction. Not surprising, given most of what I hear about working at eBay.

With a few tweaks and moderately inspired leadership Skype could perform at many times its current level. In the right hands, it should be able to meet eBay’s expectations. Just probably not under the current eBay management team.

@rons (No. 4), I am not trying to harp on this, just came across some new information suggesting what the earn-out target was. That number has not been reported to my knowledge, so I felt it was worth sharing this informed speculation in a post.

Regarding your CNet scenario, if we couldn’t produce 30K new readers in a week, then Mike and I should definitely be fired

I just still do not get the fact that to use a over the internet/VOIP it takes an awkwardly long 3 to 8 seconds.

I am starting to think that Skype isn’t dead… it just needs more time and an aquisitor that takes it seriously. Unlike many other funded companies, Skype is making a profit that I can only see increasing over time. The fault lies with eBay, not Skype for the “lack” of “guessed” targets.

Jon

It’s hard to use a program that goes down for days after a windows update. How can any company invest in a Skype system if they don’t know how stable it is?

Poor guy. He only walked out with $500+ million. How will he ever manage to put food on the table for himself and his family?

@Jon:

You’re definitely right about Skype. It’s not a losing company. It was the first company that became widely known in its field. Whether it was in fact the first company ever is irrelevant–perception > truth.

Karim Baz