EBay's Skype Bubble Bursts

The shakeup and $1.43 billion charge confirm eBay's irrational exuberance as well as Skype's struggling Web-calling business model

by Olga Kharif

When eBay (EBAY) bought Skype Technologies for $2.6 billion in late 2005, few could fathom why the online auction company saw so much in a money-losing Internet phone service. Two years later, eBay is admitting it made a mistake.

On Oct. 1, eBay confirmed that it overpaid for Skype—by nearly $1 billion—and that the popular Web-calling business has not performed up to the rosy forecasts set back in 2005. In announcing a $1.43 billion charge against profits, eBay also revealed a broad management reshuffle in which Skype co-founders Niklas Zennström and Janus Friis will be leaving their posts.

About a half-billion dollars of the charge is for a payment to Zennström, Friis, and other early Skype investors. Although it might sound like a plump farewell present, that payout is well short of the $1.7 billion those shareholders stood to receive from eBay if Skype had met the targets for users, revenue, and profits set in the 2005 buyout agreement.

Management Shuffle

While Zennström is leaving the CEO post immediately, he'll become nonexecutive chairman of Skype's board of directors. Friis, who has been working on new initiatives at Skype part-time for the past year, will no longer have a role in the company. The executive shuffle doesn't end there: Geoffrey Prentice, who developed Skype's original business plan and found the seed financing that got it off the ground, will leave his post as overseer of strategic partnerships, corporate development, and business operations. And Skype's president of only 10 months, Henry Gomez, will return to eBay as senior vice-president for corporate affairs.

EBay stresses that Zennström's departure was his decision. "This was his choice. He could have stayed and run the company," says eBay spokesperson Hani Durzy. No doubt Zennström's newest venture, a Web TV service called Joost that is set to launch within the next week, will keep him busy. But given the magnitude of the other decisions that accompanied his departure, it appears eBay is less than satisfied with Skype's direction.

Considering Skype's rapid growth since the acquisition, it can't be an encouraging sign that its founders and early investors are cashing out well before the clock has run out on the original performance goals. When eBay bought Skype, it agreed to pay Skype shareholders as much as $1.7 billion extra if Skype met certain user growth and financial targets in 2008 and 2009. In accepting $530 million, those investors agreed to forgo any future payments, suggesting that none were likely. eBay plans to record that payment, plus $900 million more, as an impairment charge recorded in the third quarter.

Diluted Market

A major strategic change may be needed to turn the company—now profitable but generating less than $100 million in sales a quarter—into the moneymaking machine eBay envisioned. The way the business is run today, "they are not making their numbers, and they are not going to," says Henry Dewing, an analyst at consultant Forrester Research (FORR).