Skype Hype Falls Short

It was reported today that Ebay is taking a $1.4B charge related to Skype and replacing Niklas Zennstrom as CEO.   Missed financial targets for the earnout portion of the original deal meant that certain Skype shareholders left $1.2B of the maximum $1.7B on the table – only $530M of the total is to be paid.  Additionally, eBay wrote off another $900M in goodwill, which is an accountant’s way of saying “we paid too much” when eBay acquired Skype in October 2005 for $2.6B plus the earnout.

First, kudos to Niklas for creating a blockbuster product that changed the world and helped restart the VoIP industry, which was withering in many ways before Skype brought it back.  All of us in this industry owe him a tremendous debt of gratitude.  And kudos to Skype’s investors, who, along with Niklas, no doubt played a part in negotiating the extraordinary price that eBay paid for the service.

People will spin this news in many ways.  There is plenty here for the pessimists.  Skype now joins Vonage as evidence that there is limited potential for financial success in the consumer VoIP market.  Skype is hugely successful at getting customers, but Skype is free.  What the eBay announcement says is that the money-making part of Skype isn’t panning out.  I think we all knew this anyway.  Consumer VoIP is a race to the bottom as far as price is concerned.  And most consumers are going mobile anyway – many people don’t even bother with landlines any more.  The San Francisco Chronicle reported some very telling statistics in May.

This will also further spook the venture capital community, which means that funds for new consumer VoIP plays will dry up even more than they already have.  Bad news for entrepreneurs with the next big vision for consumer VoIP, and bad news for consumers that want to see more innovation and competition rather than counting on the big cable and telco companies of the world.

Optimists (myself included) see some positive aspects.  We are still only a few years into a revolution that will change the technology of making phone calls forever.  But maybe people aren't ready to change the way they make those calls, at least not yet.  People still like phones and phone numbers, and they want solutions that let them use them if they are going to pay for them.  Smart entrepreneurs and investors should focus on ways to enhance the existing phone calling experience, rather than require dramatic changes in behavior like using user ids and headsets -at least if they expect people to pay for it.  For voip startups targeting consumers, that means focusing on improving the mobile phone experience and making it cheaper.  For voip startups targeting businesses, that means focusing on ways to make office phones easier to set up and use, provide more powerful features, and integrate better with the software and websites that small businesses use to get their work done.