Terrible Timing, eBay!

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.

Google is a Motley Fool Rule Breakers selection. eBay is a Motley Fool Stock Advisor recommendation. Microsoft is a Motley Fool Inside Value pick. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund owns shares in Vonage and Google, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like. The Motley Fool is investors writing for investors.


Read/Post Comments (22) | Recommend This Article (29)

Comments from our Foolish Readers

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  • Report this Comment On September 01, 2009, at 1:49 PM, plange01 wrote:

    a nice sale by ebay in a tough enviorment! it seems like you can get hedge(trash) funds to buy anything at any price! its amazing how poorly run these companys are....

  • Report this Comment On September 01, 2009, at 3:44 PM, saramel1 wrote:

    sale of Skype at 12 times the market cap of Vonage leads me to believe Vonage is underpriced!

  • Report this Comment On September 01, 2009, at 4:16 PM, tgauchat wrote:

    The lawyers and executives involved in this transaction will receive huge compensation bonuses long before the net outcome of it (positive or negative) is realized.

    Lawyers and Execs are paid to do one thing ... make money for themselves.

  • Report this Comment On September 01, 2009, at 4:53 PM, Dannysea wrote:

    I have not looked at the total sold items on eBay lately, but I see a surge in the amount of listings for sale, but find a single or no buyer the norm. Is this just a cash raising need?

    Paypal is a cash cow, but with consumers walking away from liabilities, how is the coming bottom line when these losses are actually not going to show up for another 6 months to a year or more?

    I think looking at cashflow will tell a lot right now...

    Looking at housing, and seeing how it has tanked in our area; that purchase to selling is not that bad for the times and where we sit right now.

    And, yes, there are always those who will make a buck off of any deal.

  • Report this Comment On September 01, 2009, at 4:55 PM, aiki10 wrote:

    A couple of technical comments on the article...

    #1) AT&T, Verizon, and most of the other large providers are *already* carrying much of their voice traffic over the "Internet Backbone"... I'm not entirely sure what the author means when he uses the phrase "Internet Backbone", as no such "structure" really exists, but much (if not all) of the voice traffic carried between "landlines" is transcoded to VoIP in the middle... Has been for years... VoIP was pushed out as a Verizon service to the "business curb" more than five years ago...

    #2) Skype is an awful tool... The protocol is largely proprietary, and without doing much more than a thumbnail assessment of the protocol, I can tell you that it's pretty inefficient. (Switch to Ekiga!)

    #3) The referenced article about Apple removing VoIP apps from the set of available iPhone apps... A quote... "AT&T can't be the only one worrying about its own highly profitable services being made obsolete by Google Voice" This assumes that the motivation was strictly financial... I can just as easily speculate that the issue was technical... The network resources that AT&T provisions for 3G service are built on a specific model. Perhaps supporting those apps, due to their potential scale (read "popularity") would cause an issue with network performance. As an iPhone owner, an Electrical Engineer, and someone who is both SUPER critical of gadget design, the iPhone is a pretty solid product. The net resources it uses are critical to functions other than support of VoIP (it's a cellphone...) If the 10 people standing around me are skittering around the "cell phone" charges by using a VoIP application, and causing *MY* iPhone not to be able to sync against my email services, I'm going to be much more irritated at AT&T for this than my inability to make free VoIP calls using Google Voice...

  • Report this Comment On September 01, 2009, at 5:21 PM, akaluna wrote:

    How could you discuss low cost Voice over IP providers and not mention MajicJack? Seems like they have the best value and I believe Ebay knows it. $20 a year for unlimited calls to any phone line including the Ma Bell copper lines!! New owners and new equity from an IPO will not solve the problem Skype has with MajicJack.

  • Report this Comment On September 01, 2009, at 5:27 PM, Qwoan wrote:

    Pure and simple, Skype was a distraction to eBay's core business and it never should have been purchased (even people who worked for eBay couldn't figure out why Meg Whitman wanted Skype). However, while eBay might not be getting the most for Skype, the fact that its gone will allow eBay to focus on a better auction and buy-it-now site and push PayPal into new areas.

  • Report this Comment On September 01, 2009, at 6:17 PM, PressClub wrote:

    Terrible timing? Not really, after all, they still hold a 35% interest in the service. If these private equity firms actually can make a go of the service and get it to IPO, this will not be such bad timing at all.

    At a time where getting credit or investment in a worthy project is very difficult, eBay managed to scrape up nearly 2 billion in capital through this transaction.

    Heck, I was just looking for $2 million to save my promising spin off company which had been developed in 2006 and operating until it blew up in Dec 2008. No, eBay won't be needing credit lines from banks anytime too soon. Bad timing? I say great deal for them and hopefully the Skype buyers too.

  • Report this Comment On September 01, 2009, at 6:24 PM, MrMighty wrote:

    While Skype offers an excellent service and seems to be making some money now, VoIP services really don't have much barrier to entry. By combining offerings from other sources into one interface, anybody with deep pockets could compete with Skype. Eventually, big ISPs and phone companies looking for a competitive edge will be getting into this market.

    I think eBay sees the dangers and wants to get something back for their investment while it's still worth something. The portion they retain still allows a nice profit if things go well for the next few years or there's a successful IPO.

  • Report this Comment On September 01, 2009, at 6:36 PM, plange01 wrote:

    selling skype instead of spinning it off ebay was able to continue to keep its existing stockholders from making any money!

  • Report this Comment On September 01, 2009, at 6:49 PM, misterrobinson wrote:

    Bad sale? NO!

    Bad purchase, YES!

    The fact that eBay paid a ridiculous $3.1B for Skype a few years ago doesn't make this $2.75B sale a "bad move". The bad move was made long ago, and this is a pretty good recovery from that crazy blunder.

    I wouldn't be surprised if there are some little clauses in the deal that make eBay's face saving 35% remaining stake subordinate to the new money.

  • Report this Comment On September 01, 2009, at 7:25 PM, riwaterman wrote:

    Wouldn't you expect that a purchase from eBay would be a low price?

    8)

  • Report this Comment On September 01, 2009, at 9:20 PM, Melaschasm wrote:

    Skype was a great company when Ebay bought them. However, Ebay hasn't done a good job of developing Skype. The VOIP market is full of competitors, Ebay is to distracted to make the decisions and investments to help Skype dominate the market.

    Ebay has sold Skype for as much as they were likely to get. Even with the current growth rate, Skype would be a cash drain for years to come while it fights for market share. A few years from now, Ebay would be lucky to get the same price, after considering what they would need to invest in the company to keep it growing.

    Hopefully the new owners will be able to make the right choices, and help Skype become a market leader. If this does occur, then Ebay will still enjoy a nice bump to their bottom line from the 35% stake they have retained.

  • Report this Comment On September 01, 2009, at 9:42 PM, Zonker wrote:

    Buy high and sell low! … Wait, what?

    This sounds an awful lot like the Fool's own Million Dollar Portfolio real money newsletter. They should do an article on this newsletter on its 2nd year anniversary. Many stocks bought at the highs of the 07-08 markets and sold at the March lows causing substantial losses for its subscribers. Reminds me very much of this article. Doubt they will though, refusing to even post the performance on its website.

  • Report this Comment On September 01, 2009, at 9:45 PM, Budmiller1959 wrote:

    I am not savy as to the income generation from this website. I use it only as a way to communicate with my friends worldwide. I PAY NOTHING TO TALK? How does skype generate revenue? Why is this being sold at such a high price and why are there expected revenues in the future.

    Sign me ignorant?

    Thanks, Brad.

  • Report this Comment On September 02, 2009, at 2:03 AM, partsfeeder wrote:

    Yeah, My wife used to use Skype to talk to people overseas. She says the service was full of problems, static with the reception, etc. I don't know, it could have been the equipment she was using.

    That would be a heck of a PE Ratio with their current income compared to sales price. Operating expenses are not listed anywhere. I'm sure it would be a loss with $600 mil income.

    I myself was considering getting the MajicJack

    (they have a great advertising scheme, unlike Skype) for $20 a year and Satellite TV and get the Verizon mobile high speed internet. The services would cost about the same as I'm paying right now with the Cox bundle of all 3 services. Benefit being more channels & mobile internet.

    Is this a good time to short cable companies?

  • Report this Comment On September 02, 2009, at 2:07 AM, emet25 wrote:

    Skype is great. Not only can I speak with my son in Japan and with other friends and relatives throughout the US, I can see them and they can see me. Free. My grandkids here can wave at their Uncle Mike in Japan, and he can comment on how they are growing. He can even show me his receding hairline.

    Other websites may allow me to do the same thing, but no one that I know has been promoting them. But I tell my friends who have relatives in other states or countries about seeing Mike as we talk, and they simply log on and download the free software so that they can talk with their own Mikes and Mildreds.

    Unfortunately, while Skype allows me to do voice conferencing, video is only one on one.

    The problem is, as Brad notes above, where is the revenue? If they could make video conferencing an inexpensive paid option, I can foresee SME on-line business conferencing.

    Or given the ability of the buyer to see the merchandise in real time and to communicate face-to-face with the seller, E-Bay could have incorporated Skype into their core business, perhaps as a paid enhancement.

    Indeed, they might even have made E-Bay into a live auction.

    I wouldn't write this one off just yet.

  • Report this Comment On September 03, 2009, at 2:32 PM, TransitionCo wrote:

    The success of eBay’s decision to sell off Skype hinges on two things: the right buyer and the right timing. The Transition Companies, Dallas-based experts in the sale of privately-held companies, believes that two of the top ten mistakes made when selling a company is selling to the wrong buyer and selling at the wrong time. eBay has struggled to see the value in Skype since they acquired the company and now only time will tell if the time and the buyer is right to make this sale a success.

    Gene Sartin

    President & CEO

    The Transition Companies

    http://www.transitioncompanies.com

    gsartin@transitioncompanies.com

  • Report this Comment On September 04, 2009, at 12:33 PM, MrMighty wrote:

    As mentioned earlier, much of the income comes from their pay services. While most users simply use the free voice/video features, many business (and even home) users are finding the pay features a compelling value.

    For less than $40/year, I can make unlimited calls to North American phone numbers. For another few dollars a month, I can get a phone number in one of several countries, including the US, that people can call me at. Even if you don't buy a subscription, calling land lines costs about 2 cents a minute for many countries. Where I work, my boss is happy to pay for our skype subscriptions, as it's a lot cheaper than adding phone lines and paying long distance to Europe.

    I have no idea what their margins are like, though.

  • Report this Comment On September 05, 2009, at 10:56 AM, Maddashell wrote:

    When Ebay bought Skype a few years ago, I thought, What the hell is Ebay thinking? What does a phone service company got to do with an auction service? Then they started a big push to get their sellers to sign up for the Skype service and take phone calls from prospective buyers with questions on your auctioned items. That's all I need, calls from all over at all times of the day and night asking inane questions that would be answered if the caller would read the auction description completely. When John McCain said he would appoint Meg Whitman to his administation if he was elected President, I winced. She doesn't know what the hell she is doing with Ebay.

  • Report this Comment On September 06, 2009, at 5:04 AM, PeterBradshaw wrote:

    All my phones (landline & two cell phones) are keyed into a VOIP service (Tel3) that lets me phone about anywhere in the world for Skype-like rates. I get only local service on my POTS (AT&T), everything beyond local service goes via VOIP. All cell-phone international calls are via VOIP service. Only problem is sending faxes to long-distance fax-phone lines. I save about 2/3 of our original pre-VOIP costs. No wonder AT&T is worried!

  • Report this Comment On September 06, 2009, at 5:13 AM, JimCanuck wrote:

    A final attempt; apologies for the bad HTML. (A Preview button would help.)

    As for those asking how Skype generates revenue, <a href="http://voiceontheweb.biz/2009/03/skype-business-model-reveal... Skype Business Model Revealed at eBay Analyst Event </a> provides an outline based on an analyst presentation by Skype President Josh Silverman back in March.

    And I have put some commentary on this transaction in <a href="http://voiceontheweb.biz/2009/09/17-million-canadians-will-h... 17 Million Canadians Will Have an Interest in Skype’s Success </a>, including links to several other bloggers' perspective on the sale.

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