Skype's Life after eBay: Free in More Ways Than One
Published : September 16, 2009 in Knowledge@Wharton
The last four years at Skype have been anything but dull. In a $4 billion deal in 2005 that raised plenty of eyebrows, eBay bought the popular serviceprovider which enables free phone calls anywhere around the world via the Internet. EBay's bold dream? To merge Skype's communications network with eBay's e-commerce acumen. But it wasn't meant to be, as a bevy of external deal watchers predicted at the time. Thus, with eBay's $2.75 billion sale of Skype to an investor group on September 1, one whirlwind era closes and another one begins.This is a single/personal use copy of Knowledge@Wharton. For multiple copies, custom reprints, e-prints, posters or plaques, please contact PARS International: email@example.com P. (212) 221-9595 x407.
The good news is that although Skype wasn't eBay's best acquisition -- that would be its 2002 PayPal purchase -- both companies have emerged relatively unscathed. EBay "got away with a blackeye," receiving a reasonable selling price despite its struggle to manage the startup, says Saikat Chaudhuri, a management professor at Wharton. As for Skype, it became a profitable unit under eBay's ownership. "The best thing about the whole deal is that eBay didn't damage the company," notes Wharton business and public policy professor Gerald Faulhaber. With Skype being set free, the future isarguably even brighter today than when it was a hot startup in 2003. But while it has the most subscribers of any telecom provider in the world, Skype still needs to hone its growth strategy as competitors such as Google and Microsoft loom, say experts at Wharton. Now, it must find new ways to monetize a service that most of its customers are used to getting for free. Will eBay Make Money? EBayhad previously planned to spin off Skype in an initial public offering, but a lawsuit threatened to delay those plans into late 2010. EBay and Joltid, a company controlled by Skype founders Niklas Zennstrom and Janus Friis, are suing each other over the licensing of the "peer-to-peer" technology that Skype uses to distribute calls. (Peer-to-peer technology pools individual PCs connected over theInternet to share computing power and data resources.) In addition, Joltid, along with Zennstrom and Friis, filed a copyright lawsuit this week against eBay, claiming the company illegally used and shared a peer-to-peer technology called "global index," owned by Joltid, that forms the basis for Skype's Internet calling software. The suit, which also names the investor group planning to purchaseSkype, seeks damages that could rise as high as $75 million a day, according to press reports. Meanwhile, it's unclear whether eBay will make money from Skype should the deal close later this year. Not surprisingly, John Donahoe, eBay's CEO, put a positive spin on the sale, noting in a statement, "This deal achieves our goal of delivering short- and long-term value to eBay and its stockholders,without the possible delays and market risk of an IPO.... Selling Skype now at this great valuation, while retaining an equity stake [of 35%], makes sense for [eBay]. And it allows us to focus all of our energies on the opportunities in front of PayPal and eBay." As part of September's agreement, eBay will receive $1.9 billion in cash and a $125 million note from an investor group, whichincludes private equity firms Silver Lake and Index Ventures as well as Andreessen Horowitz, a venture firm created by Netscape's co-founder Marc Andreessen and his long-time business partner Ben Horowitz. And because eBay retains a stake in Skype, it will benefit in the event of an IPO or another sale. EBay paid $2.6 billion for Skype in 2005, with another $1.5 billion for "performance-based...