Last April, Skype seemed as good as gone from the eBay stable. Word was that the parent company wanted to spin out the unit as a multi-billion dollar IPO to partially recoup the $3.1 billion former CEO Meg Whitman had spent on the deal. So it was odd that there was no mention of a Skype IPO in eBay's quarterly earnings conference on July 22. Rather, the auction giant's execs said they were "making progress" on separation.
That said, with $170 million in revenues in the last quarter and compound annual revenue growth rate of roughly 25 percent, Skype is only a year or so away from becoming a $1 billion revenue company. What's more, Skype likely boasts stupendous, software-like gross margins. With legal problems still casting a long shadow over eBay's Skype assets, could present eBay CEO John Donahoe be shelving IPO plans?
The rationale for the IPO -- or for getting rid of Skype -- is simple. eBay has been embroiled in litigation with Skype's founders and their software company Joltid, which actually still licenses key portions of the software back to eBay. And Skype never really managed to tuck into eBay's stable of properties, despite the logical assumption that Skype would be a perfect way to more closely connect merchants and customers on eBay's auction platform and other merchandising properties. As a result of these failings, the fast growing Skype unit was feeling more like a thorn in the side than an asset to eBay
That's because Skype isn't like other phone companies. The Skype system piggybacks on top of users broadband connections. Skype has virtually zero equipment costs: it does not have to lease fiber from telcos; it does not even have to keep massive server farms running. Rather, Skype users do all the heavy lifting with their own PCs and broadband connections. This takes the formerly capital-intensive telecom business and turns it on its head, transforming it into a pure-play software business that scales effortlessly.
Then there are the revenue models. Skype is a classic freemium play, charging for a portion of services while giving away voice, video and file-sharing capabilities between existing Skype users. Skype charges for calling outside of Skype, for getting an assigned phone number that functions on Skype clients, for selling Skype-enable handsets and headsets, and for a nascent advertising business targeting free Skype users. For people paying to use the phones, Skype sells credits upfront. This means no collection or billing costs -- it's all online and all pre-paid. This adds up to a nifty business.
A few months ago Wall Street analysts had valuations on Skype ranging from a low of $1 billion to a high of $2.2 billion. Donahoe said that Skype was worth much more and he may be right. All of which leads to the simple question of whether Donahoe, who is facing tough sledding in the turnaround of eBay's core merchant units, is willing to forgo such a fast growing unit or if he is rethinking Skype's exit.
Keeping Skype around could possibly shield him from angry shareholders if the unit continues to grow this quickly and Wall Street valuations remain well below what Donahoe thinks are fair. And waiting for further warming trends in an IPO market that still remains chilly could be a smart strategy, assuming that eBay doesn't end up losing the litigation over software rights with Joltid, a catastrophic prospect for Donahoe.
Is eBay waffling on Skype's departure?