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Buy high and sell low! … Wait, what?
As wrongheaded as that investment strategy sounds, that's how eBay (Nasdaq: EBAY ) is handling the Skype Internet phone service. According to The New York Times, Skype is spinning off and going private. eBay will keep 35% ownership of Skype while selling the rest for $1.9 billion. That puts a $2.75 billion total value on the unit. It’s a bad deal for eBay any way you look at it.
When eBay bought Skype for $3.1 billion in the first place, the move left lots of people scratching their heads. Why would an auctioneer want to become a virtual telecom and compete against giant new rivals like Verizon (NYSE: VZ ) and AT&T (NYSE: T ) ? As it turns out, eBay's management never had a great answer to that question, and the unit was put up for sale this spring.
The buyer is a conglomerate of private equity firms, reportedly including Silver Lake Partners, Index Ventures, and Andreessen Horowitz. Given that Skype reported $600 million of revenue last year and guided to $1.1 billion in sales for the 2011 fiscal year, Skype's growth engines are far from dead, and the new owners will likely guide their new baby to an IPO somewhere down the line. That's how equity firms make their money, after all.
Internet telephony has its charms -- at least for the consumer. Skype calls are free from one Skype-enabled computer to another and cheap when dialing up a traditional phone number. It's also not the only game in town: Vonage Holdings (NYSE: VG ) sells an Internet-based voice service that replaces your old Ma Bell land line, and Google (Nasdaq: GOOG ) is in the game through its handy Google Voice service. You can even make the argument that Yahoo! (Nasdaq: YHOO ) and Microsoft (Nasdaq: MSFT ) compete in the voice-over-Internet-protocol (VoIP) market with their assortment of voice-capable instant messenger programs.
That healthy field of competitors tells me that Skype isn't alone in overturning a century of telephony traditions. Eventually, even the wireless carriers will yield to the VoIP revolution and start using the Internet backbone to route their calls. AT&T seems to be afraid of this inevitable change, and for good reason. But that doesn't make the change any less inevitable or obvious.
In other words, Skype is sitting pretty in a blossoming market that will grow exponentially for years. You could argue that eBay is getting rid of Skype too early, or that the company had no business buying Skype at all. Either way, eBay's timing is horrible. Wake me up when Skype goes public, though. That's a Rule Breaker in the making.
Will eBay be better off without Skype, or did the auction house just make a terrible sale? Discuss in the comments box below.