I don’t really have anything to say about this that hasn’t already been said but I did find the following article in the New York Times entitled EBay’s $4 Billion Lesson in the Value of Hype worth sharing. Juicy bits excerpted below
As Microsoft mulls putting up to $500 million into Facebook at a $10-billion-plus valuation, it may want to consider the fate of eBay’s adventure with the Internet phone service Skype.
When eBay bought Skype in 2005, it boasted that Skype had 52 million users and was adding 150,000 new ones a day. Even though Skype only had $60 million in revenue that year, eBay figured that with so many users it would be able to profit somehow — both by charging fees for communication services and through links to its auction and payments services. Today, eBay admitted this was a whopper of a mistake, and is taking a $1.4 billion charge to reflect the gap between what it paid for Skype and what it turns out to be worth. EBay paid $2.6 billion in cash two years ago for Skype and said it would pay up to an additional $1.5 billion based on how the company performed.
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- Just because a company has a huge and growing audience doesn’t mean it can find a huge revenue source. Skype’s appeal is that it offers services free or very cheap. That limits its ability to raise prices. And it turns out that there are limited opportunities for advertising or add-on services.
- It’s almost impossible to pay for a deal through “synergies.” EBay executives talked about how Skype would be useful to connect buyers and sellers in its marketplace. This always seemed to be hooey. The eBay market is already full of chatter, mainly by e-mail, and sometimes by phone. Sure, some of that might well be handled by Internet phone, but how much and what value was created by eBay owning its own voice chat system? Not much, it turns out.
I can't imagine any metric under which it made sense for eBay to pay over $2 billion for Skype, let alone the $4 billion which was the potential final price. This deserves to go straight to the top of the List of the Worst Billion Dollar Internet Acquisitions of all time.
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