eBay Wrestles With Skype Strategy, Takes $1.4B Charge

eBay shook up the top management of its Skype peer-to-peer communications unit Monday, removing its cofounder as CEO and saying it will take a US$1.43 billion charge in the coming quarter to cover the cost of incentives in the original acquisition deal and to reflect lower overall value for the unit.

Niklas Zennstrom, Skype’s cofounder, will give up his CEO seat and become non-executive chairman of the company’s board. Skype’s chief strategy officer, Michael van Swaaij, will serve as acting CEO while the company searches for a full-time replacement. In addition, Skype President Henry Gomez will return to the parent company as a senior vice president for corporate affairs reporting directly to eBay CEO Meg Whitman.

eBay has hired executive search firm Russell Reynolds Associates to help it find a new CEO for the unit, which it paid $2.6 billion for in September 2005.

Settling Obligations

As for the charge, eBay said $530 million was tied to the payment of incentives built into the original deal based on targets such as subscriber and revenue growth, a fraction of the $1.7 billion it could have paid in earn-outs had Skype really taken off.

That payment will settle all obligations under the original purchase, eBay said, giving the original acquisition a price tag of about $3.1 billion. “eBay believes the payment is reasonable, given the progress and anticipated rapid growth of Skype’s active user base,” the company said.

The rest of the charge reflects asset impairment charges, or a write-down meant to adjust the current value of the unit.

eBay shares were up slightly in late morning trading Monday to $39.33.

Shifting Sands

The shakeup at Skype comes as the VoIP (Voice over Internet Protocol) landscape continues to rapidly realign itself, with many of the startups that paved the way for the technology giving ground to more established companies that came relatively late to the game.

Over the summer, VoIP provider SunRocket folded its tent, leaving thousands of users in the lurch. The future is also uncertain for Vonage, which suffered its second major patent defeat last week and faces the prospect of paying royalties long-term to two major telecommunications companies — an obligation that could make profitability a pipe dream.

At the same time, Verizon and other telcos and major cable carriers such as Cablevision and Comcast, have rolled out their own VoIP offerings, bundling them with other services such as television and high-speed Internet.

“The firms that pave the way for new technology aren’t always the ones who are around to reap the benefits,” telecom analyst Jeff Kagan told the E-Commerce Times. “Over time, the big winners in the Web-based calling market may well be the companies that it was once believed were threatened by the rise of this technology rather than the startups like Skype and Vonage that brought it to market in the first place.”

Raised Eyebrows

While Skype has been embraced by early adopters and is a favorite low-cost alternative for those who make many overseas calls, eBay has tried to move it into the mainstream consciousness with partnerships such as one with Wal-Mart, which earlier this year began selling Skype phone gear in many of its stores.

At the time of the purchase, eBay’s Skype acquisition raised many eyebrows, in part because the Web-based voice and text phone tool seemed something of an awkward fit with the main eBay e-commerce platform, in contrast to its other major purchase, that of online payment service PayPal. eBay has said it would build Skype functionality into its auction platform, enabling buyers to quickly ask a question of sellers, for instance.

The hefty charge and the executive shakeup underscore what many investors already knew — that “the Skype acquisition never made sense strategically,” former Wall Street analyst Henry Blodgett wrote in his Silicon Alley Insider blog Monday.

“One reason Skype has struggled, we think, is that it is just a distraction to eBay, which which needs desperately to focus on its core commerce business,” Blodgett wrote, suggesting that eBay admit its mistake and sell Skype to a company already in the communications services business such as Yahoo, Microsoft or Google.

Stumble, Trip

Skype has been growing rapidly, with some 220 million registered users worldwide as of July. In eBay’s second quarter, Skype produced around $90 million in revenue, twice as much as the year before.

Still, it has stumbled recently. In August, a software patch and upgrade cycle caused an outage that impacted many users and just a few weeks later, security experts began to warn of a virus spreading through the Windows version of the product.

While critics pointed to those issues as evidence that VoIP isn’t as reliable as traditional landlines for voice calling, the outage came after years of uninterrupted service and Skype responded well to it, said Jupiter Research analyst Ian Fogg.

The way people use communications services now builds up backup systems anyway, Fogg told the E-Commerce Times. “In the digital communications era, it matters much less if one communication network is broken. Thirty years ago, when most people only had a landline voice phone, if that failed, then everything went with it.”

The outage is unlikely to stop Skype users from spending more time making calls over the service or prevent others from signing up, though it may give some reason to make it their only voice line to the outside world, he added.

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