eBay Unhappy Over Skype Performance, Unit’s CEO Out

Call it a disconnect between reality and expectations.

On Monday, eBay said it would eat about $1.4 billion in third-quarter charges to wrap up its Skype acquisition and establish a more realistic valuation for the Internet VoIP provider’s long-term prospects.

eBay shelled out more than $2.6 billion for Skype in October 2005. Now, however, the company said it would write down $900 million in goodwill, due to lowered performance expectations for the unit.

That’s in addition to $530 million it said it would also pay former Skype shareholders, as part of a lessened earn-out plan that also had been linked with the VoIP company’s performance.

Furthermore, eBay announced that Skype co-founder Niklas Zennström has resigned as the company’s chief executive. Zennström will remain as a non-executive chairman of its board of directors, and Michael van Swaaij, eBay’s chief strategy officer, will serve as Skype’s interim CEO until a permanent replacement is found.

In an e-mail interview with InternetNews.com, Zennström said his departure had been anticipated.

“My plan was to leave the company when I thought it was ready for the change and when the earn-out had been paid,” Zennström said. “The company now has a solid plan and I’m pleased with the earn-out settlement.”

Perhaps not coincidentally, Zennström is also the co-founder of Internet TV play Joost — which had its official launch today after a five-month closed beta. He is also co-founder of venture capital firm Atomico, and of course, first landed on the Internet scene as co-founder of the KaZaA file-sharing service.

eBay spokesman Hani Durzy also told InternetNews.com that the Skype CEO’s departure was “by his choice” and that people shouldn’t read too much into the fact that eBay announced the hefty charges and his resignation on the same day, and in fact, within the same press release.

“He’s an entrepreneur,” Durzy said. “It appears he wants to spend more time on Joost and Atomico. He’s leaving the day-to-day operations for someone else to shepherd Skype’s next phase of growth. I want to be very clear. He could have remained.”

One thing that’s clear, at the very least: It won’t be business as usual for whoever fills Zennström’s shoes.

In a Securities and Exchange Commission filing today, eBay indicated that it would take a hefty $900 million charge related to the Skype acquisition — signifying a far lowered valuation for the Luxembourg-based VoIP firm.

“We think Skype is an incredibly valuable asset,” Durzy said. “That being said, we are disappointed with the impairment charge we have to take. We’re disappointed Skype hasn’t performed as well as could have in the short term. It’s not an acknowledgement that we overpaid. It’s more that, at this point, it’s probably worth less than what we paid for it.”

Durzy said Skype, which now has more than 220 million registered users, added 175 million new users since the 2005 acquisition, handled more than 60 billion minutes of conversation and generated more than $168 million in sales in the first half of 2008. He said the company achieved profitability earlier this year and is “on track” for hitting internal sales targets for the year.

The growth has been “nothing short of phenomenal, especially for a four-year-old company,” Durzy said. “But we believe that Skype could have done a better job of finding other areas for growth and monetization. It hasn’t done that to the extent we’d hoped to date.”

Zennström, meanwhile, said he had been pleased with the unit’s progress in the years following its co-founding with Janus Friis, with whom Zennström since founded Joost.

“I look back at my years as CEO of Skype with great pride,” Zennström said. “Since 2003, when Janus and I founded Skype, we have seen the number of Skype users grow at an indescribable pace — now having more than 200 million users worldwide.”

“And while developing world-leading products and service offerings, which have truly changed the communications landscape and benefited millions of people, we have also been able to generate significant revenue streams that were unthinkable in our industry just a few years ago,” he added. “As I leave the CEO position, Skype is the global leader in Internet voice communications.”

In spite of that view, its parent eBay’s lowered estimations of Skype’s value mean that the VoIP company’s initial investors will have to be satisfied with a payout far lower than once might have been expected.

eBay said in its SEC filings that it expects to pay an additional $530 million to Skype’s former shareholders, ending a payout agreement established at the time of the acquisition. That deal had a ceiling of $1.7 billion based on the unit’s performance.

Instead, given the unit’s apparent shortcomings, Skype’s former shareholders will now pocket about 30 percent of that sum. In its filing, eBay said the payout figure was based upon specific active user, revenue and gross profit targets that were to be achieved in 2008 and the first half of 2009.

“eBay believes that the €375 million ($530 million) payment is reasonable given the progress and anticipated rapid growth of Skype’s active user base,” it said in the statement.

Monday’s news appears to validate some of the concerns raised by analysts and industry pundits shortly after the deal closed. At the time, Vamsi Sista, an analyst at New York-based ABI Research, told InternetNews.com he questioned the benefit of the purchase, considering its high price tag.

Evidently, not much seems to have changed since then. Gartner analyst Elroy Jopling said today that Zennstrom’s resignation and the enormous write-offs prove eBay is still struggling to integrate Skype’s technology and features with its existing auction and PayPal online payment platforms.

“It’s fairly obvious that Skype hasn’t been doing well per se,” he said. “Point two is there hasn’t been significant integration with their platforms. One that stands out to me is Skype Find and Skype Prime. Those are two applications that are very much in tune with what eBay is all about. To see those come out without being part of the eBay envelope? That’s the Queen Mary — that’s the boat they should all be on.”

Ironically, the news about Skype’s apparent deficiencies come as the company is looking into new efforts to better monetize its platform, chiefly by wooing developers and improving its ability to work with other applications.

During a presentation last week at its San Jose office, Skype outlined a plan to launch its first Web service for developers, aimed at helping them build revenue-generating mashup applications in the Skype environment. The company also said it intends to improve its developer tools as part of this initiative.

Additionally, Skype officials said they are working to incorporate more payment options into the Skype platform, facilitating transactions for users willing to pay to play games or purchase widgets and other Skype-based applications.

Durzy said Monday’s announcements would have no impact on these sorts of ongoing business initiatives.

Others aren’t as confident, however.

“It’s one of those things where you have to watch that you don’t read too much into it,” Gartner’s Jopling said. “But at the same time, where there’s smoke, there’s usually fire. If I’m eBay, and I don’t see the integration that I’d expected, I’m going to have to sell it. And if it’s not generating enough revenue on it’s own, I’m going to have to sell it or spin it off. I don’t think the decision has been made yet, but I think it will be made in the next year or two.”

eBay shares closed up 64 cents, or less than two percent, to $39.66 a share in Monday trading that saw the Dow Jones industrial average close above 14,000 for the first time since mid-July.

Despite having given up much of his duties at Skype, former CEO Zennström is likely to be kept plenty busy, thanks to his other ventures. Joost, after netting millions in financing earlier this year and inking partnership deals with content heavyweights like Viacom, today threw open its doors to the public after an invite-only testing period.

“I’m an entrepreneur first and foremost, and while Skype will always be important to me, I now want to spend more time on Joost and Atomico, and I want to pursue other projects,” Zennström said. “For me, the earn-out agreement opens new opportunities, in which I can create value focusing on other companies.”

Like Skype, however, Joost will have its work cut out for it, with some of the large television networks also making strides in Internet-based television and content distribution. The Disney-ABC Television Group, for instance, announced plans to distribute full-length primetime TV episodes on AOL Video.

Even Microsoft is renewing its efforts to take a bite out of the online video market. Last week, the company announced a free, ad-supported video download service, with content partners including MSNBC and Fox Sports.

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