Sk(h)ype? eBay drops the call

When eBay decided to acquire Skype a few years back the deal made no sense to me. Nothing in eBay’s arsenal matched with the quick-moving, free-talking high spirits of Skype. You may recall the deal terms were up to $4.3 billion, depending on how well Skype hit revenue and earning targets. eBay hyped the deal as if it made strategic sense, which it didn’t.

eBay reported its results the other day and the data agrees – it showed Skype generated $90 million revenue for the quarter. Not bad.  That’s about $400 million a year.  But it wasn’t enough for eBay to justify paying more than $4 billion for Skype. Even though eBay probably dropped the ball here.

The problem in my experience is not Skype but eBay. It was never a marriage made in heaven in the first place. What does a free calling service have to do with auctions? The basic question nobody at eBay asked.

The real reason I believe eBay acquired Skype was not to get into letting buyers and sellers talk to each other but to take Skype out of the hands of competitors. In other words, I always saw Skype as a defensive buy for eBay to keep it out of the hands of Google, Yahoo or Microsoft. Buy ‘em and bench ‘em.

The ones who got shortchanged there in my view are the founders and investors in Skype. Skype had the potential to be a big IPO and even bigger public success with its stock as currency to consolidate the VOIP space.

The question now is “what’s Skype really worth?” and “what does it do?”

The service reports 220 million registered users. On any given day about 5 million to 10 million use it (you can log in and see the active users in your Skype window).

Second question: if Skype was run more as a business than a free talking service what could that mean to revenue and earnings? Currently Skype generates cash from call outs from Skype users who pay to connect to plain old boring telephone service their ancestors use.

Skype path to more revenue and profits:

1) get into the “voice” business (as apart from the “free to talk” business). Voice is more than talking. It is a function around which information, entertainment, communication, love, etc. flow. Voice is the centerpiece for many metaphors.

2) get into the wi-fi cell phone business in a more direct way (rather than an obscure way which it is now). Everybody hates mobile phone companies for charging exorbitant sums (I pay more than $200 month for cell phone usage, which is more than my TV service). Cell phone companies deliver poor service and even poorer customer service. Skype wi-fi would be popular with consumers. Skype wimax would be even more popular, video calls or calls with movies or music attached.

3) With a broader wi-fi access the services business opens up with free info. via voice.

4) Most important, get the entrepreneurial zeal back. Hard to do when Skype is part of eBay’s conglomerate sludge fest. An independent Skype could probably move faster and be more motivated. How many eBay employees care about Skype? Their stock options say “EBAY” not “SKYP”.

5) Get more local. Services to local businesses.  Sponsored listings for results.

6) Skype as platform for others. Facebook is a much smaller animal than Skype with just 20% of the users.  Yet Facebook is making moves that Skype should have with its API and platform.

What’s Skype worth?

Would you agree that each registered user may command a “fair value” of $20 over the course of their Skype usage? In other words, each Skype user could be valued at $20 to Skype from call outs, ads, services, etc. that Skype sells it?

At $20 per user that values Skype at $4.4 billion. eBay pays more than $40 for every new registered user on eBay, much of it paid to Google to send it new users.

Let’s look at this another way: there’s no reason why Skype couldn’t generate more than $1 billion revenue and 20% profit margins annually.  On 10x revenue that’s $10 billion valuation, not unreasonable if we look at valuations of Yahoo, Google (especially Google), and other dominant players in the web industry.

Skype is the dominant free voice company today. That potential is slowly being eroded by being part of eBay, which has its own battles to fight on the auction and free classifieds fronts.

Solution for eBay: spinout Skype to the public or a buyout group. Keep 20% for upside.