Technology Financials
Chris Green looks at the latest technology company financial results and examines what the companies are doing right and wrong in their efforts to maintain the bottom line.
Thursday 3 September 2009, 11:40 AM
Skype sell-off: eBay dodges a bullet
Having bought Internet telephony and messaging service Skype for $2.6 billion (£1.4 billion based on exchange rates at the time) in September 2005, online auction house and storefront provider eBay has conceded defeat, selling the majority of its stake in a deal that values the whole business at just over $2.75 billion (£1.68 billion at today’s exchange rate).
The actual terms of the deal are impressive, considering the torrid time eBay has experienced during its tenure as Skype’s owner. It is selling a 65 per cent stake in the business in a cash and debt deal worth $2 billion. The bulk is in cash, with the remaining nominal amount of $125 million in the form of a loan note to eBay.
This injection of cash will be a welcome shot in the arm for eBay’s balance sheet, which took a hammering after the Skype purchase. Including additional fees and payouts due to Skype’s founders, the deal ended up costing the firm nearer $3 billion, while the subsequent write-down on the investment meant the asset was worth just $1.2 billion on the books without contributing to the bottom line. Putting $2 billion back in the bank, with the prospect of more on the way if and when it eventually sells or floats its remaining stake, will restore confidence in eBay and allow its new management team to concentrate on the core business of running a marketplace and the bolt-ons that complement that operation. Acquisitions such as electronic payments service PayPal proved to be a perfect and profitable fit with the marketplace operation, Skype did not, with efforts to integrate Skype calling services into eBay auction and store pages receiving little interest from buyers or sellers.
Few will argue that the acquisition of Skype was a bold move that caught everyone by surprise. However, it was a deal that landed the firm with a complex business that simply took eBay's former management team too far outside of its comfort zone and area of expertise.
Right now, Skype is costing money to run, leaving eBay exposed to a potentially serious cash drain on the business in much the same way that YouTube has become a financial burden for Google. Both companies have wrestled long and hard to monetise these businesses to a point where they become cash flow positive. So far, both have failed. Google is getting closer to this goal, thanks to the sale of advertising both on the YouTube site and overlaid on the actual videos it hosts. Pilot projects to launch paid-for premium services such as online movie rentals could, if executed correctly from the outset, push YouTube over the line and into profitable operation.
Skype doesn’t have the advertising option, meaning that all its revenue needs to come from call connection and termination fees, recurring subscription payments for calling plans and from licensing deals for its codec technology and software code. Deals such as the one it has with mobile phone service 3 showed promise, but did not spawn worldwide adoption of the service on mobile devices as hoped. In fact, the mobile phone represents the biggest competitor to Skype, as mobile operators such as T-Mobile continue to sweeten their bundled minutes deals, most recently including international calling in the list of call types that will deduct from your bundled minutes rather than being billed. Even landline services are competing. Both BT and Sky in the UK have recently added 0870 numbers to their standard off-peak free calls offer, while also introducing a low-cost monthly subscription deal for free peak calls and free international calls in direct competition to the subscription deals on offer from Skype and other VoIP providers.
With 405 million registered users of Skype, the prospects for the service should be good. However, it remains unclear how many of these registered users are actively using the service and how many are using it for revenue-generating calls as opposed to free Skype-to-Skype calls. It is also unclear how much credit the Skype user base has on deposit. In the interests of full disclosure, I have £8.84 in my Skype calling account, which I use for calling colleagues in the US and South Africa.
There is no question that Skype is a popular service and that it offers a great set of features to users. It also has great appeal to small businesses and sole traders, allowing users to run their entire business from a laptop. The key for the new owners, which include original Skype investor Index Ventures, along with Andreessen Horowitz (founded by Netscape founder Marc Andreessen), Silver Lake and the Canada Pension Plan Investment Board, will be to target existing and new user communities that can generate larger chunks of revenue. The medium to large business market will be a hard one for Skype to break into, but promises significant revenues is the service can make inroads into the corporate space.
The actual terms of the deal are impressive, considering the torrid time eBay has experienced during its tenure as Skype’s owner. It is selling a 65 per cent stake in the business in a cash and debt deal worth $2 billion. The bulk is in cash, with the remaining nominal amount of $125 million in the form of a loan note to eBay.
This injection of cash will be a welcome shot in the arm for eBay’s balance sheet, which took a hammering after the Skype purchase. Including additional fees and payouts due to Skype’s founders, the deal ended up costing the firm nearer $3 billion, while the subsequent write-down on the investment meant the asset was worth just $1.2 billion on the books without contributing to the bottom line. Putting $2 billion back in the bank, with the prospect of more on the way if and when it eventually sells or floats its remaining stake, will restore confidence in eBay and allow its new management team to concentrate on the core business of running a marketplace and the bolt-ons that complement that operation. Acquisitions such as electronic payments service PayPal proved to be a perfect and profitable fit with the marketplace operation, Skype did not, with efforts to integrate Skype calling services into eBay auction and store pages receiving little interest from buyers or sellers.
Few will argue that the acquisition of Skype was a bold move that caught everyone by surprise. However, it was a deal that landed the firm with a complex business that simply took eBay's former management team too far outside of its comfort zone and area of expertise.
Right now, Skype is costing money to run, leaving eBay exposed to a potentially serious cash drain on the business in much the same way that YouTube has become a financial burden for Google. Both companies have wrestled long and hard to monetise these businesses to a point where they become cash flow positive. So far, both have failed. Google is getting closer to this goal, thanks to the sale of advertising both on the YouTube site and overlaid on the actual videos it hosts. Pilot projects to launch paid-for premium services such as online movie rentals could, if executed correctly from the outset, push YouTube over the line and into profitable operation.
Skype doesn’t have the advertising option, meaning that all its revenue needs to come from call connection and termination fees, recurring subscription payments for calling plans and from licensing deals for its codec technology and software code. Deals such as the one it has with mobile phone service 3 showed promise, but did not spawn worldwide adoption of the service on mobile devices as hoped. In fact, the mobile phone represents the biggest competitor to Skype, as mobile operators such as T-Mobile continue to sweeten their bundled minutes deals, most recently including international calling in the list of call types that will deduct from your bundled minutes rather than being billed. Even landline services are competing. Both BT and Sky in the UK have recently added 0870 numbers to their standard off-peak free calls offer, while also introducing a low-cost monthly subscription deal for free peak calls and free international calls in direct competition to the subscription deals on offer from Skype and other VoIP providers.
With 405 million registered users of Skype, the prospects for the service should be good. However, it remains unclear how many of these registered users are actively using the service and how many are using it for revenue-generating calls as opposed to free Skype-to-Skype calls. It is also unclear how much credit the Skype user base has on deposit. In the interests of full disclosure, I have £8.84 in my Skype calling account, which I use for calling colleagues in the US and South Africa.
There is no question that Skype is a popular service and that it offers a great set of features to users. It also has great appeal to small businesses and sole traders, allowing users to run their entire business from a laptop. The key for the new owners, which include original Skype investor Index Ventures, along with Andreessen Horowitz (founded by Netscape founder Marc Andreessen), Silver Lake and the Canada Pension Plan Investment Board, will be to target existing and new user communities that can generate larger chunks of revenue. The medium to large business market will be a hard one for Skype to break into, but promises significant revenues is the service can make inroads into the corporate space.
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