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eBay's Partial Failure

There was a lot of spilled milk in Fool HQ the day eBay (Nasdaq: EBAY  ) announced it would be paying more than $2.6 billion for Skype. Most of it was launched through nostrils and onto computer monitors and desktops, if I recall correctly.

"Synergy! Synchronicity! Cross-selling! Value add!" Those were the buzzwords being tossed around in support of the ridiculous valuation. The story everyone wanted to believe was that eBay's big user base would all begin using Skype to talk auctions, maybe upsell to the non-free Skype services, yadda, yadda.

To me and many of my colleagues, it looked like just another example of an aging Web company chasing a hot new Net name -- never mind the fact that this one, like so many others, was engaged in an Underpants Gnome business model. (Step 1. Collect users. Step 3. Profit?) After all, Skype had proven only one thing: People like getting stuff, including substandard Internet telephony, for free.

Now, 25 months later, it appears we skeptics were right. Skype wasn't worth nearly as much money as eBay paid, and now we have the writedowns to prove it. eBay is hitting shareholders with an impairment charge of $900 million, more than a third of the original cash 'n' stock price. Oh, and they're paying the original Skype crew a $530 million bonus -- pardon me, "earn-out" -- for their success in bringing this money-sucking Internet telephony product to eBay.

That comes to $1.8 billion worth of shareholder cash (and another $1.3 billion in free shares) wasted on a product that brings in, as of eBay's last 10-Q, some $0.40 in revenue per user per quarter.

Why hasn't this worked out better? A little thing called competition, maybe. Everyone is offering some kind of voice-over-Internet product these days, including the old telcos and cable companies, as well as Google (Nasdaq: GOOG  ) , Yahoo! (Nasdaq: YHOO  ) , Apple (Nasdaq: AAPL  ) , and Wall Street washout Vonage (NYSE: VG  ) . Microsoft (Nasdaq: MSFT  ) offers a pile of different VoIP solutions, including on the Xbox, and so do an increasing number of games (World of Warcraft, for instance).

Quite simply, Internet telephony is already pretty much free, and it's only getting cheaper. It's a precious few companies that can figure out a way to earn profits by giving away something for nothing. For that reason, I expect we haven't seen the last of the Skype write-offs.

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