Over the past six years of covering Skype, there have been three “Masters” – the original founders – Niklas Zennström and Janus Friis (2003 to 2005), eBay (2005 to 2009) and the Silver Lake consortium (2009 to MS acquisition). And, once regulatory approvals and due diligence are completed, Microsoft will become the fourth later this fall.

But we’ve never heard the full background to some of these transitions. We knew there had been a major intellectual property issue – “you can’t drive the car without the engine”; we heard presentations on the Skype business model as Skype was presented to the investment community by eBay. But what happened behind the scenes that resulted in the many business decisions made to justify these ownership changes has never come out as one complete story.

At this past week’s Fortune Brainstorm Tech event in Aspen, a most interesting panel discussion revealed some of the history and reasoning behind this evolution, starting with, on John Donahue’s assumption of the eBay CEO position in 2009, eBay’s decision to “carve out” Skype as a non-core asset. On the Fortune event panel were three key players in this evolution: Skype CEO Tony Bates, Silver Lake Managing Director Egon Durban and Andreesson Horowitz cofounder Ben Horowitz.

It’s most interesting to watch the entire video but some highlights:

• Dealing with the dichotomy of a “wildly popular and deeply troubled” company that was in full blown litigation with its founders.
• How Skype continues to operate as an independent company and its sole responsibility to Microsoft during the due diligence period leading up to the closing of the Microsoft acquisition, expected in October, 2011
• Why Silver Lake, working with Andreesson-Horowitz, was able to execute on the two steps necessary to acquire Skype, in the process rescuing a “terrific asset that continued to perform, [had] fantastic network effects and continued to produce great product” from a “horrible cataclysmic outcome”. But seeing Skype as “resilient notwithstanding”, these investors recognized a unique opportunity that required a unique solution.
  • Yet they came up with a solution that would eventually give eBay investors a net gain on their initial 2005 investment in Skype.
• The internal Skype business issues that the Silver Lake consortium recognized and why they hired Tony Bates out of a senior executive position at Cisco to take over the reins.
  • In the course of this there is a lesson on how a private equity takeover can be highly successful and grow a business built around existing key resources. It’s a stark contrast to the more often publicized “slash-and-burn” approach of many private equity acquisitions where employee and product cuts become the recipe for repackaging a business investment for a subsequent sale.
  • There are some interesting comments mentioning one additional key asset, beyond the technology and user base, that made the Skype acquisition a “magical opportunity” when Microsoft was considering the acquisition last spring.
• What Tony Bates has done behind the scenes that has resulted in the release of five new products over the past six weeks¹– more than had been released in the previous two years.
  • What Tony Bates sees as a bigger revenue opportunity than SkypeOut calling.
• How the pending Microsoft acquisition of Skype will result in an entirely new business model for how Microsoft embeds an acquisition into it overall operations.

Bottom line: starting with the Silver Lake consortium acquisition, the Skype business case study is unique in how a wildly popular yet deeply troubled, engineering resource rich company can be converted into a an asset that will continue to be the “gold standard” for worldwide ad hoc communications in both the consumer and small business markets.

Watch the video; it’s a compelling – and revealing – story ….

Fortune: Lessons from Skype

¹Five new products:

• Comcast as a new platform for Skype calling
• Launch of video on Android phones
• SkypeKit public beta launch
• Mac 5.2 client announcement (post forthcoming)
• Facebook Video Calling

Related articles

• Skype CEO Teases In-Call Ads (mashable.com)
• Microsoft expects Skype buyout to close by October (electronista.com)
• Skype CEO promises brand will stay intact despite Microsoft acquisition (thenextweb.com)

So it’s finally resolved. The Skype spinout from eBay will involve Skype’s founders as investors and board members while contributing a cash investment. Skype finally owns the core intellectual property required for Skype to operate at its current cost levels. eBay gets the cash they were looking for but 5% less of the new Skype. Canadians still get to invest $16.75 each through the government operated Canada Pension Plan. Marc Andreesen gets involved with another major Internet play. Mike Volpi and Index Ventures are out of the picture. Lawyers and consultants are probably heftily rewarded for all the litigation activity leading to the final resolution. Incessant speculation on Skype Journal’s Skype 5.x Public Chat about how to get around JoltID’s Global Index software will finally cease (well, maybe).

While I have put links to several posts leading up to the resolution below it has been most interesting to read various bloggers comments on the resolution and the future direction for Skype:

Phil Wolff at Skype Journal sums up the numbers in his post, Sold! The Bullets and values the JoltID intellectual property at $275 million. (Phil gets credit for the graphic above, by the way.)

Om picks the winners and losers on My Thoughts on the Skype Settlement: Winners & Losers Scorecard. He points out the “great spin quote” from Silver Lake as a leftover from the “PR spin” days prior to the transparency that comes with social networking. Come on, guys. We’ve all seen the depositions and emails. As for the future, Om comments:

No Silver Lining?: One person who I totally feel for is Silverman, the current CEO of Skype. He gets to run a company which will have the looming presence of its founders.

Whatever the press spin might say, the new investor group is like a poisoned well. It will be a polarized group, always looking over their shoulders. Silverman is going to need to keep a lot of people happy, and those board meetings with nearly two-dozen people aren’t going to be fun, either. But as Biggie Small once said:

“It’s like the more money we come across, the more problems we see.”

Both Kara Swisher at All Things Digital, in All Is Forgiven: “It’s a Clean Slate,” Says Andreessen About Lawsuit-Mad Skype Co-Founders, and Dan Primack at PEHub, in 5 Skype Questions for Marc Andreessen, interviewed Marc Andreeson of Andreeson Horowitz. The common statement about his relationship with Niklas and Janus:

We have not been in business with them before, so we don’t have any baggage at all. Our view is that they’re two super-creative founders. We’ve known lots of legendary founders, and they are all different and have things that make them unique. We include ourselves in that from past experiences. We view ourselves as a pro-founder firm, so we like the idea of founders being involved. It’s a net positive.

Martin Varsavsky. CEO of FON, a company partially financed by many of the same players in the Skype sale, restricts his comments to his thoughts on the future of Skype – where is Skype vulnerable?, where are its strengths? – in Why it may make sense to buy Skype back. His overriding statement:

Skype is simple. Michael Arrington and all of Silicon Valley may find Google Voice amazing but is the average global citizen ready to use it? Massively use it? You download Skype, you find your friends on Skype, you talk. And, if you don’t find them, you Skype out. And when you talk you can also do video. I LOVE video calls on Skype. I used to use them for people I really cared about, relatives, close friends. Now I even do business calls on video with Skype. It just gives you more of a sense of what is going through the other person´s mind. And Skype is the leader on video quality. So simplicity plus video may be a good way to beat flat plans from telcos and avoid being Tivoed. If the video services can migrate to mobile phones Skype is on to something.

Andy Abramson, in The Skype Suit Is Settled-Now Business Can Get On, comments:

I’m just glad the suit is settled between eBay and Skype. Now a lot of things that have been held back can finally move forward. In many ways the settlement is a good thing. The return of the original founders means disruption will continue, and new ideas will flourish. It also means Skype as a business or brand will now have a chance to prove its worth.

Alec Saunders, in eBay’s big mistake; Why the JoltID license was inevitable, concludes:

The lesson in all this? Deals involving technology licenses and acquisitions are common in business. When acquiring a technology asset, buyers must acquire the necessary control needed in order to protect the business.  Either buy, or license in perpetuity, what you need to prosper. Unless your intent is to immediately begin work on a substitute technology, a license for core technology that needs renewal is a sure way to find yourself caught by the short-hairs in a future negotiation.

The bottom line is that Skype is now in a position to focus on building future communications software and services without the distraction of depositions, legal wrangling and media curiosity. Provided he can navigate through a 23-member board with diverse interests and experiences, Josh Silverman can build the real communications software business of providing infrastructure for conversations while having a wealth of technology and business connections available in an advisory role.

Previous Posts:

Om’s trail:

• Skype, Founders Settlement in the Works (Nov. 1)
• Further Details Emerge As Skype & Its Founders Close to Settlement (Nov. 3)
• Skype Founders Fight Their Way Into the New Skype (Nov. 5)
• My Thoughts on the Skype Settlement: Winners & Losers Scorecard (Nov. 6)

Kara Swisher (All Things Digital):

• Volpi and Index Ventures Out of Skype Deal, the Lawsuit-Happy Founder Twins In (Nov. 3 with lots of links to related stories)
• I Love the Smell of Settlement in the Morning: Skype Founders Set to Get 10 Percent, Option to Buy Three Percent More and Two Board Seats (Nov. 3)
• All Is Forgiven: “It’s a Clean Slate,” Says Andreessen About Lawsuit-Mad Skype Co-Founders (Nov. 6)

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• Skype soap opera ends as founders set to regain stake ahead of $2B sale (dailyfinance.com)
• Lessons From the War Over Skype (bits.blogs.nytimes.com)
• Skype Cofounders Will Be Part Of Buyout Group; Index Ventures Is Out (paidcontent.org)
• Skype Founders Re-Found in Settlement (marketingpilgrim.com)
• Skype founders win back share (guardian.co.uk)
• Andreessen On Skype: “This Is One Of The Most Important Companies On the Internet.” (techcrunch.com)
• eBay’s Skype sale gets go-ahead with settlement (news.cnet.com)
• Confirmed: Skype Founders Settle With eBay And Others, Get 14% Stake In Skype, Not 10% (techcrunch.com)
• Skype Settlement: Zennström And Friis Have Won It Again (paidcontent.org)
• 17 Million Canadians Will Have an Interest in Skype’s Success (voiceontheweb.biz)

While participating in an interview session earlier today at the National Retail Federation’s annual Shop.org summit in Las Vegas, eBay CEO closed off questioning about the pending sale of Skype with “… there’s nothing new on that; this deal’s going to close.” AuctionByte’s Ina Steiner put out this video on her post, eBay CEO: Skype Deal Will Happen, Open to PayPal Spin-Off:

The Cy.Talk blog, in eBay CEO says Skype deal “is going to close”, reports:

Backstage after the presentation, Donahoe showed Reuters an excerpt of an email message he received that morning from eBay Chief Financial Officer Bob Swan saying no “show stoppers” were identified in the recent spate of litigation.

“We’re marching along,” Donahoe said, adding that he still expects the deal to close in mid-November.

Bottom line: It ain’t over til it’s over, but ….

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• Joost sues Mike Volpi and Index Ventures over theft of information used in Skype bid (venturebeat.com)
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• eBay chief says Skype deal ‘is going to close’ (financialpost.com)

OK, now I have your attention with a headline different from the “Skype sold for $2.75 billion” headlines so rampant in the blogosphere yesterday….

By now the web has been saturated with stories about yesterday’s announcement of the forthcoming acquisition of a 65% controlling interest in Skype by a consortium of investors, led by SilverLake Management LLC and including a $300MM infusion from the Canada Pension Plan Investment Board. At this point the main story is “old” news but a few comments:

Who is Canada Pension Plan Investment Board?

Since 1965 every employed Canadian contributes a % of their employment income (up to an annual income cap of about $37,000) to the Canada Pension Plan (“CPP”). Between the age of 60 and 65 qualifying Canadians can elect to receive a (taxable) monthly payment from this plan until death along with a “death benefit” to the deceased’s estate. The Canada Pension Plan Investment Board …

… is a professional investment management organization based in Toronto. Our purpose is to invest the assets of the Canada Pension Plan in a way that maximizes returns without undue risk of loss. The CPP Fund is $116.6 billion. Canada’s Chief Actuary estimates that CPP contributions will exceed annual benefits paid through to the end of 2019. Thereafter a portion of the CPP Fund’s investment income would be needed to help pay CPP benefits.

Over 17 million Canadians currently participate in the Canada Pension Plan either as contributors or recipients. So we each effectively have a $16.75 investment in Skype.

And Canada, with its own geographical challenge of servicing a market where 90% of the population lives within 160 km (100 miles) of the 6,000 km (4,000 mile) long Canada-US border, continues its long history of having an interest in communications innovation.

Why was there no Skype-eBay synergy?

Meg Whitman made the same mistake I witnessed at a previous employer where the CEO and Board bought up companies but never got “buy-in” within the acquiring company of any major acquisition that required a rethinking of the overall company business focus and execution.

As a result there were no internal champions within eBay for executing on the stated intentions of the Skype acquisition. And the statements of the day demonstrated that eBay senior executives (and Board) did not understand a basic principle of auctions – there is no role for “conversational negotiations” during an auction; this is critical to maintaining the integrity of the auction process. You see the goods and make a decision as to whether or not you want them badly enough to pay the final auction price; the auction process itself is the “negotiation” of a price. Bidders have no opportunity (and do not want) to communicate with sellers; the auctioneer (in this case eBay) is simply a neutral third party who moderates the transaction to establish a price.

Why is eBay still an investor?

Back in the spring when a potential IPO was announced, we learned that eBay expected to continue to have a minority interest in Skype. With a $1.9 million cash infusion and a remaining 35% interest, eBay can still hope to recover, over time, the approximately $3+ billion it has to date spent on the Skype investment four years ago. At the same time it allows eBay executives to focus totally on getting their struggling “markets” business back into a growth mode.

With this strategy eBay can assuage Om’s concerns in Skype Sale Nears: Why eBay Shareholders Should Be Mad. As a sequel, once the sale was confirmed, Om states:

So Donahue gets to say that he got the higher valuation of Skype, got rid of a potential legal nightmare and can get any upside that comes with the initial public offering of the stock. Seems like a win-win, but that IPO — don’t count on it. To be honest, this deal makes much more sense compared to all the rumors that were floating around earlier. [My italics]

What are the positives about the acquisition?

#1 – Keeping the current executive management team. In his eighteen months as President of Skype, Josh Silverman has brought a lot of business process and experience into the company with the result that business processes and programs are being built to build sustainable and increasing revenue streams. Two recent examples of this are the availability of the FREETALK Everyman headset designed to improve the user calling experience at a very low cost and yesterday’s launch of Skype for Asterisk. Expect much more activity and announcements along these lines of building a stronger Skype ecosystem during the fall. This momentum can only be sustained with a continuation of the current executive team. Skype needs to focus on execution at this point; it does not need any further high level restructuring activity to distract from execution.

Two statements confirm this is the case:

• Josh’s own post, A new chapter, concludes describing “a new group of owners who believe passionately in our mission and in the ability of our team to deliver on it”.
• Egon Durban, Managing Director at SilverLake, states: “Josh Silverman has done a strong job leading the company and we look forward to working with Josh and his team to grow the Skype franchise.”

While there are some “technology heavyweights” becoming involved as investors, the real challenge is to build an effective and synergistic relationship between those “heavyweights” (who will probably become board members and/or advisors) and the current management team. This is where corporate culture and value sets, as established at the executive level, can play a strong role in leaving individual managers the freedom to execute on their goals most effectively.

What are the gotcha’s?

• Resolution of the patent dispute with JoltID. No deal would have been done without some understanding of the part of the new investors of the outstanding issues and prospects for how this issue can be resolved. On the other hand, with the experience of the various new investors, many heads can be brought into the negotiation of a resolution. My take: this will never reach the High Court trial scheduled for next spring.
• Why the $125 million note? My guess: it’s escrow funds to cover costs arising with any litigation issues that may arise in closing the deal. Is a first guestimate of a settlement with JoltiID in the range of $100MM? Can Skype develop a replacement for JoltID’s  infrastructure technology so critical to Skype’s business model for under $125MM? Again from Om:
  

  If you think about it, what Donahoe just did was follow the golden rule of business: If you’ve got a problem, make it someone else’s problem. And the problem for the new buyers is that the legal issues of Skype are not going away. Some of my smart friends think that Skype can sidestep these problems by switching to a SIP-based infrastructure, but I won’t hold my breath.

  Any SIP-based infrastructure would sharply increase the need for building a massive global infrastructure. It would also mean working with partners (that make Skype devices) to re-configure their products and getting 400 million-plus users to switch to a massive new model. In other words — like skating in the middle of a semi-frozen lake underneath a brightly shining sun.

• Employee motivation: what will be the stock option opportunities for employees now that Skype has effectively gone private?
• Financial reporting news: by effectively going private, Skype also has no investor reporting obligations. On the other hand if these investors intend to exit via an IPO in a couple of years, they must provide some level of financial reporting. (By being a minority investor, eBay no longer needs to report on its Skype investment any more that it does on its craigslist investment.)

What do Canadians want?

Now that 17 million Canadians have an investment in Skype can we expect to get;

• Skype Online numbers? Canada’s 911 regulations provide a roadblock. (Note to CRTC – when lightning struck my home’s Rogers and Bell communications lines two weeks ago, for four days Skype was my only landline service.)
• Skype for iPhone? Requires resolution of a G729 codec patent issue. (Sorry folks, it’s not a Rogers issue.)
• Skype for BlackBerry? Given that Research in Motion has become Canada’s leading technology company.

Bottom Line: With this acquisition Skype is finally free of what Andy Abramson describes as “an extremely conservative, bank-like culture”. Yes, Andy, “Skype is about the democratization of voice”; I would extend this to say that “Skype is about the democratization of conversations – whether voice, chat and video”. I certainly look forward to innovation and a much stronger Skype ecosystem as a result of this change of ownership.

Other posts of note:

• Omar El Akkad provides a great summary overview in today’s Globe and Mail: EBay hangs up on Skype Strategy.
• Globe and Mail Report on Business: What is Skype and Why is it important?
• Om Malik on GigaOm: Skype Sold for $2.75 Billion
• Andy Abramson at VoIP Watch: (after the announcement) Skype Sold, JoltID Suit Still Remains In Place As of Now; (adding to speculation prior to the announcement) Is Skype in Play?
• Update Sept. 4: Dan York, on returning from IT Expo adds his comments in Onward the disruption – Skype’s sale to private investors is a great step; includes Phil Wolff’s Skype Journal graphic showing the ownership post-acquisition based on Om’s reported numbers.

And previous Voice On The Web Posts;

• The Skype IPO: “It Ain’t Over ‘til It’s Over”
• Skype – eBay: Passive Separation

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• Skype sold: it’s all about risk mitigation. (saunderslog.com)
• EBay’s Statement Announcing Skype Deal (blogs.wsj.com)
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• Skype – eBay: Passive Separation (voiceontheweb.biz)
• Stealthing Skype into Larger Businesses (voiceontheweb.biz)

With the announcement of the Skype IPO a few weeks ago we are starting to see the devolution of any previous attempts at Skype – eBay synergy. Yesterday Phil reported on eBay’s removal of Skype voice and chat buttons in eBay listings effective June 10, 2009.

My major introduction to Skype personnel and the Skype ecosystem was the 2006 eBay Developer’s Conference at the Mandalay Bay Hotel and Convention Center in Las Vegas in June, 2006. One to two hundred developers interested in exploring how they could work with the Skype Software Partner program showed up. Some common themes developed in terms of developer needs. But other than to have a common meeting location, there was really no cross-pollination of eBay developers (who tended to focus on building eBay reseller websites) and Skype developers (who were deep into programming “Extras” for Skype, hopefully to establish a partner business for themselves).

This week I received a “snail mail” postcard inviting “Alumni” to attend this year’s eBay – PayPal Developers Conference – at eBay’s headquarters in San Jose. No mention of Skype anywhere. And no enticing Las Vegas (2006) or Boston Convention Center (2007)location but rather at the eBay home office location in San Jose. At the same time eBay Live 2009, eBay’s annual event for eBay resellers that normally ran immediately after eBay DevCon, was cancelled about a year ago.

Not simply a sign of eBay weaning off Skype but also a sign of the challenges eBay Markets is currently experiencing as they work their way through the current economic conditions and the challengers to their domination as the Internet’s leading e-commerce site. It’s all about rebuilding the eBay franchise. (Did anyone notice that eBay’s quarterly reporting in April led off with PayPal – with its ongoing success – and eBay being second?)

With Skype’s restructuring and the appointment of Jason Fischl as Director of Developer Relations, can we expect a dedicated Skype Developer Partners event to be forthcoming?

Yesterday eBay held an analyst event at its San Jose headquarters location with a keynote by eBay CEO John Donahoe followed by presentations by various eBay executives and Skype President Josh Silverman.

Josh’s presentation broke a lot of new ground for Skype addressing issues such as:

• How does Skype generate revenue?
• What drives Skype’s cost model?
• How will a software company change real time communications in ways that legacy telcos cannot?
• How is Skype structured to address its various market opportunities?

In a long-term financial outlook issued by eBay in conjunction with this event, they state:

Skype is expected to more than double its revenue to over $1.0 billion in 2011. With more than 400 million registered users currently, Skype’s metrics continue to accelerate as the company further establishes leadership in free and paid Internet-based voice and video communications, with growth opportunities in core consumer, mobile, businesses and platform. Skype’s leadership position has strengthened over the past year, driven by a new management team and the launch of many innovative products.

The overriding aspect of Josh’s presentation was repeated emphasis that, fundamentally, Skype is a software company. As verified by many of the presentations at eComm 2009 last week, Josh stated that there is a communications paradigm shift going on where hardwired networks and devices are gradually being replaced by software-based networks and flexible devices. Skype’s “opportunity is to become the world’s leading communications software company.” Josh’s analogy: It was not the railways that invented air travel; in a similar manner, software will drive the future of real time communications innovation and efficiencies going forward, not the existing telcos. To reinforce his point, Skype will not simply be on familiar telephony devices, it will show up in intelligent TV sets, car dashboards and intelligent public access terminals such as bank ATM’s all tied to a common network.

Josh continued: Communications is no longer just about voice; it’s now multi-modal: mood messages, chat, voice calling, multi-party calling, video calling (did I also hear him mention multi-party video calling?) and online screen sharing. Where and how we communicate is expanding: laptop, mobile phone, flat panel TV’s – “any connected computing device with the addition of software becomes a communication device”.

He went on: With hardware and network access becoming a commodity, the opportunity for margin is to capture it at the application layer. Software companies will drive the innovation in the industry, drive the demand for new hardware and better access. (Did he effectively read from the Voice 2.0 Manifesto?) Solutions must be device and network agnostic.

How big is the market? The $300B EBITDA of the $1.4T communication industry revenue is almost equal to the total revenue of global ecommerce and Search.

How did Skype build its business last year? Inherent reliability; it “just works”. While so much of Skype’s operating environment stands outside Skype’s control, yet Skype must try to provide the ability, through its software, to readily adapt to these conditions, especially at the user end point.

How does Skype make money?

• From user services:
  • What’s free (at no cost to Skype)? Skype-to-Skype calling, video calling, Chat/IM, Multi-Party calling, File Transfer
  • What’s Paid? Subscriptions (unlimited calling), SkypeOut (pay-as-you-go), Online Numbers, Voicemail, SMS
• From a partner perspective, licensing opportunities. The Skype-Nokia and Skype-MySpace relationships are two examples. Hardware royalties are another source. Carrier relationships, such as the 3 Skypephone example discussed below, are a third source for what are effectively licensing revenues.
• The third leg of revenue generation comprises some advertising opportunities that have arisen.

Yet Skype has inherent fundamentals that have made it profitable for the past six quarters:

• negligible customer acquisition costs (mostly word-of-mouth; compare with Vonage whose customer acquisition costs are in excess of $250)
• negligible capital expenditures and network maintenance costs (being peer-to-peer it’s Skype’s users who invest in capital items, such as PC’s, routers and Skype hardware, and in network maintenance through their Internet subscriptions)
• pre-funded accounts which result in negative working capital where subscriptions and Skype credits are paid up front but the revenue is recognized on a pro-rated quarterly basis (Have you ever noticed there’s no “phone bill” sent for payment once a month? – Skype has no collection costs)
• strong free cash flow conversion ($1.00 of EBITDA for Skype is almost $1.00 of free cash flow)

The results: Skype’s profitability has grown to the point where they achieve 20% “segment margin” an amount that Skype contributes to eBay’s overall profitability (segment margin makes no allowance for allocation of eBay corporate costs).

Additional data provided:

• Skype continues to add over 350,000 new account registrations per day
• account registrations are distributed geographically as shown on the map to the right; he labelled North America as a “developing” market with rapid growth
• A year ago Skype celebrated support of over 100B cumulative calling minutes since its launch; in 2009 Skype expects to do this same number within the year
• Over 8% of the world’s international calling minutes are on Skype
• from December 2007 to December 2008, video calls increased from 27% to 34% of calls
• due to its peer-to-peer architecture only Skype can deliver a video experience for free, and at performance levels unequalled elsewhere.
• while active users rose 39% in Q4 2008, engagement, defined as ‘calling minutes per active user’, rose by 72%
• while calls under 2 minutes duration dropped from 41% to 33% comparing October 2007 to October 2008, calls in excess of 10 minutes rose from 37% of calls to 47%. Josh attributed this to higher reliability and call quality.
• small changes make a huge difference:
  • increasing penetration of paid products by 1% brings in $60MM of additional revenue
  • to be a billion dollar business, Skype needs its existing paying users to make just one more call per day
• Skype’s marketing approach was to drive awareness through embedding Skype into the “popular culture”, where it has been used on Oprah, Who Wants to Be a Millionaire?, CNN and other news reports.

Going forward Josh talked about three markets where Skype has barely scratched the surface: core consumer (size: $240B), mobile (size: $603B), and business (size: $203B).

For the consumer market, Skype has four approaches:

• continue driving new users (by building “communities” or leveraging social networks)
• better promote its paid products (make it obvious, upon registration, where paid products can be found – not buried three levels deep in the “My Account” tab)
• increase revenue per paying user (encourage adoption of revenue services based on calling patterns; continued focus )
• monetize free users via advertising (but be smart about it, do it tastefully and carefully all the while protecting the core business)

[Author’s note: Execution on the last will be interesting, given some experience with “free” voice services that have attempted to “blatantly” introduce advertising into calls themselves.]

Josh went on to discuss mobile, but that’s the subject of a separate post. However, take a look at the Skypephone on 3 success story:

• Over 500,000 units have been sold; this generates a monthly revenue stream to Skype
• 3’s margin on Skypephone is 20% higher than their average margin across all handsets
• 79% of Skypephone customers are new 3 customers

As for Skype’s business offering:

• 35% of users use Skype primarily, or often, for business
• adoption into business often grows out of individual employees using  Skype to call friends and family when on the road, start using Skype for multi-party calls, do video calls with customers and vendors
• leads to a call to Skype from IT managers who are getting pressure from their colleagues’ experiences (and, by the way, you can charge for it)
• needs to expand from being a product to being a solution that fits with other PBX and software solutions they are already working with
• create the infrastructure required to provide service and support services (revenue opportunity)
• build out a channel that reaches out to businesses that are familiar with dealing with VAR’s

Going forward:

• Act 1: (completed) one platform (PC’s), one revenue stream (SkypeOut), one market segment (long distance calling), one primary service (voice), one primary market (mature Internet markets – Europe and Asia) and one target user (consumers)
• Act 2: (now to 2011) is about “Many” – many platforms (PC, mobile, TV, web), diversified revenue streams (subscriptions, licensing, advertising), including business subscriptions; many conversation modes (voice, video, chat, collaboration tools), many regions and many target markets
• Act3: (2012 and beyond) “Any” – any mode, any platform, anywhere, multiple market segments, established products, regional ubiquity and mature target markets.

Josh’s forecast for 2011:

• More than double revenue in excess of $1B annually
• Maintain segment margins of 18% to 20%
• More diversified revenue streams: telecom, service and licensing fees, advertising)

His summary:

• Accelerating growth, outstanding fundamentals
• Attacking an enormous opportunity and positioned to win
• Business is getting stronger

Bottom line: For the first time a CxO level Skype executive has put out an extended set of benchmarks and guidelines against which their activities can be measured by all; the challenge now lies in the execution. And analysts finally get a more detailed view into this “mysterious” and oft-questioned Skype acquisition by eBay in 2005.

The audio recording and complete sides can be found for 30 days: click here and then select “Analyst Coverage” in the left sidebar. (viewer registration and Windows Media Player or Real Audio Player required). Or go directly to this link. Josh’s portion starts at 2:37:15 into the recording.

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Software developer and publisher PamConsult pioneered third party software development for Skype, having provided the initial German translation of Skype and then launching the first Skype Extra, Pamela in 2005. Two weeks ago PamConsult released Pamela 4.5 for which a review is forthcoming. Their PamFax offering won accolades as the 2007 Skype Partner mashup competition.

But the PamConsult team has also been busy developing software that interfaces home TV sets with Internet-based services. A recent announcement provides a window into how consumers will interact with these services simply through their TV’s remote control.

Just a little over two years ago, the Pamela team linked up with Scendix, publisher of “digital home” software for Windows Media Centre, to form PamConsult. For instance, mceAuction allows you to bring eBay onto your TV screen via Windows Media Centre; mcePhone for Skype provides easy access to Skype from your TV. More recently Scendix released Jaast for Wii, leveraging their mceAuction technology into the Nintendo Wii console. Scendix also developed an eBay Skype Tab used in German and French versions of the Skype for Windows client. While attending CeBit in Hannover two years ago I had the opportunity to experience these offerings first hand; the simplicity of their user interfaces via a TV remote control opens up new opportunities for consumer access to eBay and Skype.

Last Thursday, Philips announced a new line of LCD TV’s which will include a new feature, called Net TV, that will deliver Internet-based services and modules to the viewer’s screen via the remote control. From the Philips press release:

The Net TV feature will be available on all Philips televisions in Europe in the 8000 series, 9000 series and Cinema 21:9 from Spring 2009 onwards. Through Net TV, Internet content is tailored for the best possible viewing experience on the TV screen, and is easily accessed through the TV’s remote control, without the need for extra set top boxes or service subscriptions, or for starting up a laptop.

PamConsult, leveraging their Scendix experience and technology, yesterday announced that they will be providing the eBay channel for Net TV, designated as “eBay, Powered by Jaast”:

Internet with remote control on TV/Media Center/Wii are things we have been working on for years and thus we are proud to say that eBay and Philips have selected us to provide an eBay channel on the new sets.

Based on our mceAuction technology we have adapted the eBay content to work seamlessly on the new Philips systems.We will provide the channel via our Jaast brand.

eBay navigation on the TV is very simple, the same intuitive way of browsing eBay as with mceAuction on Microsoft Media Center and Jaast on Wii.

Given Scendix’s experience with Skype, how long will it be before their mcePhone for Skype technology could be showing up on Philips’ offerings? More importantly does this provide a path for Skype to deliver “Skype Everywhere” through TV as Skype announced at their CES 2009 press conference?

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• PamConsult Has a “Fantastic Year” (voiceontheweb.biz)
• World’s largest Windows Media Center remote control (istartedsomething.com)

Amidst all the macro economic turmoil of 2008, there are businesses that have stuck to their knitting and had a quite successful year. Pioneer Skype Partner PamConsult recently reported on their 2008 achievements where they have both built out their product line and provided consulting services that have resulted in a stronger development team and enhanced product offerings.

PamConsult comprises two business divisions: Scendix for software product offerings, such as their widely accepted Pamela utility for Skype (the first Skype Extra going back to 2005) and PamFax, and PamConsult for development consulting where, for instance, they developed Skype for Salesforce.com under a contract with Skype. Some highlights:

• A major accomplishment has been the ongoing growth of PamFax. During the year they built out the infrastructure to provide the robustness and scalability such that PamFax now supports over 130,000 registered users. They have announced plans for a fax-in service as well as Mac support in 2009.
• Pamela has now had over 5 million downloads; early in 2009 they expect to release version 4.5; mcePhone, their Skype integration tool for Windows Media Center, will soon see version 3.
• Finally, PamConsult continues to provide eBay offerings, including the eBay Skype tabs licensed to eBay Germany, eBay France and eBay UK. At last year’s eBay Live event, PamConsult won an eBay Star Developer award for their Jaast for Wii, which brings eBay to your TV via Nintendo’s Wii console.

It will be interesting to see how PamConsult’s Skype partnership evolves in 2009 as the new executive team introduces a comprehensive technology roadmap and revamped partnering programs.

Other posts:

• Radio Free Asia: A Skype Facilitated Broadcasting Service
• PamFax: Adding Click-to-Fax

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The Motley Fool has become a popular and widely respected  investment community site since the origins of the commercial Internet in the mid-90′s with the objective of helping people take control of their financial lives. It has evolved into a multi-media financial services operation; they have free and premium services; suggest portfolios and try to pick recommendations, host discussion forums amongst other activities. “The company’s name was taken from Shakespeare, whose wise fools both instructed, amused, and could speak the truth to the king — without getting their head cut off.”

In a post yesterday about “5 Free Internet Winners” they discuss the five biggest winners if free WiFi comes to pass as a result of anticipated rules for forthcoming spectrum auctions in the U.S. Google, Logitech, Amazon, Nintendo and “eBay | SkypePal” are the selections. Why SkypePal?

Forget eBay.com itself. By the time free access hits the masses, PayPal and perhaps even Skype will be bigger parts of this portfolio of verbs. Heck, even the name eBay may be toast as you crack open the 2012 annual report of SkypePal Incorporated.

Skype and PayPal will be the biggest winners of blanketed coverage. Skype remains the global voice chat leader with 370 million users worldwide. If you don’t think that Skype will replace a few landline telephone accounts once connectivity is pervasive, you may as well Skype me to tell me otherwise.

PayPal is already the leader in micro-payments. It will become an even bigger force in real world transactions under Martin’s scenario of access for all.

Certainly an opinion contary to all those thinking that eBay is about to run out and sell Skype. And it reinforces my long held opinion that the new executive team has one primary goal – to drive up the value of Skype to the point where eBay can not only fully recover its over $3B total acquisition cost of Skype but also provide a reasonable return, whether as an ongoing operation or through an exit involving a sale or IPO. Motley Fool goes further and feels that Skype will become one of the primary value drivers of eBay shares going forward, given that eBay’s online operation is struggling to find new ways to grow.

As for more reliable indicators of Skype’s current growth than Skype’s published number of accounts (not subscribers, not users), check out the peak number of users daily shown in the Skype client, Jean Mercier’s note on the tripling of Skype downloads and Hudson Barton’s “Real” User tracking showing that Skype is has returned to a growth rate comparable to its 2006 rate.

But in the background the new executive team has been working on the restructuring discussed in Skype Journal’s interview with Skype President Josh Silverman. In a recent “Home Improvement” post, Josh gave an update on the the efforts required to “right the ship”:

Excited as we are about bringing new colleagues aboard, there’s more to reorganizing our structure for continued growth. Back in the summer, we set out to be smart about it. And transparent. And fair.

Which is why we held numerous workshops to gain input from the team on how our structure and ways of working need to change. Change that we hope will lead to sustained growth, better products and an even more empowering work life at Skype. One of the things we’re doing is to create smaller “companies” within the company: consumer-, business-, mobility-, and developer-focused business units vaccinated against shackles that curb innovation and risk-taking. Each new business unit is designed to emulate the feel of a start-up and to cultivate a deeper sense of ownership.

This is just a low-resolution snapshot from what’s a continual journey of change. There’s much more to it, of course. Replotting our roles, responsibilities and accountability takes time. While we think that we’ve done most things right, some won’t come through as intended. Tweaking them for a few months should make life at Skype work well for everybody.

And he concludes with:

Our structural rethink isn’t about change for change’s sake. From day one, everything at Skype has boiled down to delighting the customer. With a bit of home improvement to support further growth and innovation, we’re just making sure it stays that way.

At least Motley Fool and the Skype executive team are in sync with respect to the primary goal at Skype. The next few months and the subtle indications of forthcoming new product and service announcements will tell if the foundation is being built to achieve these goals. From restructuring will now come the challenge of execution.

Tags: Motley Fool, eBay, Skype, PayPal, Josh Silverman

While doing a broad search through an agency for its new CEO, eBay went internally to announce this morning the appointment of shopping.com CEO Josh Silverman as Skype’s new CEO effective in four weeks (March 24). From the eBay press release:

Silverman, currently CEO of Shopping.com, an eBay company, brings more than nine years of experience in running hyper-growth global consumer Internet companies. Silverman will join Skype on March 24, 2008 and report directly to John Donahoe, President and CEO-elect of eBay Inc. Michael van Swaaij, who was appointed interim CEO in October 2007, will stay actively involved with Skype.

Josh is an eBay veteran, having served, prior to his Shopping.com role, as General Manager for Marketplaats.nl and been involved with building eBay’s classifieds business in Europe. Prior to joining eBay in 2003, he was a co-Founder and CEO of Evite, a social event planning service that I have used several times successfully, most recently for my high school’s 50th anniversary reunion.

Josh does get blogging; He’s already put up his first post:

So what can you expect from me? That I’m serious about wanting to build the greatest products — and the greatest company — on Earth. That doing so means listening well, being willing to think different and take risks. And in everything we do, one thing is certain: we’ll always have the best interests of the Skype community at heart.

I’m the new guy, and have a lot to learn. To really understand Skype’s cultural and technological DNA, my number one priority is to do a lot of listening and learning. With my wife and kids about to begin their adventure in Estonia as well, I have all the support I could ever need. I want to know everything about the technology, the team and the community. And I hope to share some of my observations on this very blog and see what you think, too.

So, with their business headquarters having been in London, but the primary development team in Estonia, the questions arises as to why he is planning a move to Estonia? Is this a precursor to moving out of that expensive London real estate?

And my second question has to be, given you want some time to learn-and-listen,: “How many days do you have to be on board to make some significant statements on the forthcoming direction of Skype?” (Recalling, tongue-in-cheek, Jerry Yang’s “100 Days” at Yahoo that eventually resulted in an unfriendly offer from Microsoft.)

Welcome, Josh! You have your challenges, but if you succeed, Skype can become one of the most powerful communications forces going for building a peaceful world as we witness power shifts from centralized enterprises and organizations to the individual. We wish you luck as you take on your responsibilities.

Tags: Skype, eBay, Shopping.com, Josh Silverman

Ever since eBay’s acquisition of Skype over two years ago, there has been speculation as to how eBay and Skype should be “integrated” to enhance the auction process. While not the world’s most active eBay participant, I have used it several times to acquire items not normally available in Canada and to sell (ironically) a “surplus” Nortel PBX a few years ago. But I have also had the opportunity to attend a couple of eBay Live events and gain some of the flavor of the extent of the Ebay domain and the enthusiasm of its resellers, especially the several hundred thousand who run a full time business through eBay.

During these eBay Live sessions I have noted two key facts:

• There is very little Skype awareness amongst the eBay reseller community.
• When one or two Skype training sessions are available over the three days of eBay Live, they are well attended with an eagerness to learn more about Skype

My primary question has always been, how would one maintain the integrity of the auction process while engaging in real time conversations. It appears there are several stages to the auction process:

• Setting up the individual item’s auction information
• Executing the auction, accepting bids and “Buy Now” requests
• Finalizing the payment transaction
• Delivering the item, and
• Exchanging buyer and seller feedback.

The key for the first two stages is to enhance the integrity of the auction itself by ensuring that information exchanged between seller and bidder is available to all potential bidders. Real time one-on-one Skype chat and voice conversations have the potential to violate the integrity sought. Yet, with Skype there are two solutions:

1. Establish a Skype Public Chat that can be joined by any bidder who is on Skype; the reseller can manage who remains on the chat to eliminate “spammers” and others wh go off-subject..
2. Establish an ongoing asynchronous voice conversation using Evoca’s hosted voice recording and playback services. This allows all (potential) bidders to have an asynchronous, ongoing conversation with the seller incorporating all the additional information disclosed as a result of bidder queries..

For the last three stages, standard Skype conversations (voice, IM chat and video) can be used to provide customer service and support, as appropriate to the individual auction. Should their business be ongoing with sufficient transaction volume, even OnState’s ACD Call Center solution can be invoked (at $38 per seat per month – no capital costs) to ensure calls are directed to an appropriate party.

But then there is a bigger challenge beyond simply installing Skype and creating Skype accounts: training eBay Resellers on how they can implement and use Skype to their business’s advantage. It is not sufficient simply to make Skype buttons available for eBay Resellers. The Skype ecosystem not only offers basic real time conversation support but also, through its Skype Developer Partners, call recording and conversation archiving as well as collaboration and conferencing tools which may be useful for certain categories of resellers. But they need training to realize the full potential of Skype.

And then there is the missed viral opportunity yet to be fulfilled.

Tags: Skype, eBay, Skype Developer Partners, Skype Public Chat, Evoca, OnState

Skype revenue up, profitable for 2nd consecutive quarter, but usage down?

eBay’s quarterly earnings conference this afternoon revealed little about Skype; we got the usual numbers:

In the more detailed presentation by CFO Bob Swan, he provided two additional numbers:

• Skype-to-Skype Minutes: 7.1 million, down from 7.7 million in Q1
• SkypeOut Minutes: 1.3 million, flat from Q1

and stated that Skype’s activation numbers were not where they would like them to be. In her earlier summary presentation, eBay CEO Meg Whitman mentioned the WalMart retail partnership, three objectives for Skype:

• build the user base
• expand the Skype ecosystem
• improved call quality,

and closed with the single remark Skype “needs more user activity” as an issue to be addressed in Q3. During the Q&A with questions from analysts, who are supposed to be tracking the company’s activities, there were NO questions about Skype. Maybe being 5% of the overall eBay revenue, yet profitable, is the formula to not attract their attention.

Over the past 24 hours I (i) attended my 10th Research in Motion Annual Meeting in Waterloo (makers of the Blackberry) where I came away with a very detailed understanding of RIM’s business activity and where they are going and (ii) this afternoon listened to the eBay earnings conference where I came away with little additional understanding of eBay’s Skype business. So here’s my take:

The positives:

• sustained revenues and a second consecutive quarter of profitability
  • update: impact of new pricing (see link below)
• US user registrations grew 20% to 25% compared to 12% overall growth
  • based on the assumption above tying revenue to user registrations
  • is this a direct result of the WalMart retail effort?

The concerns:

• user voice activity is in decline
• US revenues remain in the 15% to 16% range
• total user accounts becomes more of a meaningless number. In my experience with direct marketing, you know that customer databases became stale over time.

Om questions “how is the revenue growing when everything is either trending down or flattening”? Update: Alec Saunders reminds us that Skype introduced a couple of pricing changes which had minimal impact for those of us who primarily use Skype’s Unlimited North American calling plan but have do help to explain both increased revenues and lwoer usage.

While eBay provides the bare minimum of information required under SEC regulations, many companies will provide additional information that does not compromise their overall competitive position. Based not only what I heard from RIM but also what is provided by other telecom carriers here is what I would like to hear in their quarterly earnings report:

• actual number of active accounts at the end of the quarter
  • accounts that actually placed at least one call during the quarter
• % breakdown of revenue by communications services, hardware royalties, partner software services and other
• Skype margins and the three usual cost lines: Sales & Marketing, R&D, G&A

eBay has to be an analyst’s nightmare, given there are three basic businesses: marketplaces, financial services and telecom services, each of which have different financial models and financing requirements. At least these numbers for each of eBay’s units would provide better shareholder and analyst guidance in valuing the company. AT&T does it (requires Excel); RIM does it: 76% devices, 16% service, 5% software, 3% other.

And when I asked at the RIM meeting why they had shipped 2.4 million units but only had 1.2 million activations, it came out that the difference can largely be attributed to users buying upgrades. So effectively it comes out that there is huge loyalty amongst Blackberry users, so much so that new features and services are driving a significant portion of their hardware revenue. In my mini-analysis above, it come out that Skype’s US user growth is substantial (even if the actual numbers are off by as much as 10% to 15%). What other information could we learn about Skype without giving away the business from having these types of numbers?

I’ll leave it to another post for my suggestions as to how to increase user activity; but suffice it to say I had three Skype partner experiences today to suggest that they look hard at the Skype Developer Partner program as a key element for driving new user registrations. Oh, and read the Voice 2.0 Manifesto. SunRocket didn’t; Vonage hasn’t. Skype’s Developer Partner program now has the Voice 2.0 seedlings to be positioned for success.

Tags: eBay, Skype, Voice 2.0 Manifesto, SunRocket, Vonage

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To: Meg Whitman,
CEO, eBay

That was quite the quarterly report; lots of good news. Congratulations to the entire eBay team (including Skype, of course). But there is the Skype monetization issue to address. Following up on my other post Wednesday, I think I found one way to contribute to this while at CES. Bottom line: it can bring in more Skype registrations of eBay members (@ $0.38 Skype revenue per account per quarter), increase the fun and enthusiasm associated with participating in eBay auctions while minimizing desktop real estate and probably is the most virally intuitive way to justify the Skype acquisition.

In Wednesday’s post I drew attention to the eBay Tab for Skype available for eBay U.S. members. It has significant usability issues and definitely results in a negative user experience. You mentioned in the analyst conference call Wednesday that priorities for 2007 include a focus on improving the user experience and experimenting with Skype to increase the fun and excitement associated with an auction. (BTW, Jordan Banks, Managing Director for Canada, at a presentation in Toronto last night, reinforced that theme when he talked about the importance of understanding user behavior and finding an action point within 2 clicks.)

One of your eBay and Skype developer partners, Germany-based PamConsult, has already developed a solution. (Their Pamela-Systems Call Recorder is ranked third in terms of Skype Extras Downloads.) In fact, their eBay Skype Tab has been licensed by eBay Germany, eBay France and eBay U.K. Based on the slide show of screen shots below enhanced by an accompanying video and a discussion with one of the principles of PamConsult at CES, their eBay Tab for Skype:

• provides a positive user experience,
• allows an eBay member to carry out ALL their major eBay activities within a Skype Tab and
• basically elevates their eBay activity to the level of Skype IM activity within the Skype client both in terms of delivering real time information and creating a truly interactive experience
• has the potential to virally drive Skype subscriptions by eBay members.

BubbleShare: Share photos – Easy Photo Sharing

The user experience provided by this version of an eBay Skype Tab brings to the table:

• a user login that is accessible and visible — note the same screen also shows the day’s top auctions
• an eBay search capability for logged-in members
• complete item descriptions with the Tab itself (no need to open a web browser)
• a bid confirmation screen
• real time notification of the upcoming end of an auction
• options for user determined parameters
• as well as access to My eBay
• appeals directly to both buyers and sellers (whereas SkypeMe buttons are targeted at sellers to install on their listings)

To provide a more real time experience (pardon the German but you get the flavor):

Bottom line is that all eBay members can participate interactively in the full eBay auction process within the Skype client, obtain real time information and switch quickly between eBay and Skype activities. Did I mention it also saves on desktop real estate? And, most importantly, it has viral potential.

Merging and integrating acquisitions is not trivial; been there, participated in that! But, aside from generating more revenue for both Skype and eBay, this situation demonstrates: the developers of a product must be passionate about what they are doing. The Pamela team understands both eBay and Skype infrastructure as well as the Skype and eBay user cultures in a way that would take months if not years for an internal synergy between eBay and Skype to develop. (I have had experience with situations where “big” companies thought they could do a better job than a dedicated solution provider on an infrastructure task and eventually came back to the solution provider to get the job done right.) And it did not go unnoticed that this solution has been licensed by the two eBay European subsidiaries whom you highlighted in the analyst conference call Wednesday.

Let me do a calculation associated with monetization: Skype generates $0.38 per registered account per quarter (~$1.52 per year). With 97 million eBay U.S. members that represents a minimum sustainable market size of $148 million for Skype. Now, if one could just raise the revenue per registered account! Or considering the North American Unlimited Plan, at $29.95 per year, the market size to consider booms to over $1.4B!

BTW, PamConsult was participating in the AMD booth demonstrating eBay auctions through an ATI set top box via the Windows Media shell within Windows Vista. Imagine eBay auctions for the SuperBowl championship clothing immediately after the game!

Have a great Weekend-Before-SuperBowl!

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Phil and I listened in on the eBay conference call this afternoon; obviously announcing a successful quarter and year for eBay as a company and by several measures for Skype.. Some of the highlights, especially with respect to Skype:

• If we heard it once, we heard it multiple times: the number one challenge for Skype is monetization and the associated drive to develop new sources of revenue. The one Q4-06 “downer” was the lower than expected monetization of Skype. For the full year Skype brought in $192MM revenue (against what has been thought to be a target of $200MM).

• eBay CEO Meg Whitman expressed as the major achievement for Skype during the quarter the market share lead they had built up within the VoIP competitive space and how the gap between Skype and the others was growing.

• Notice within those numbers how the quarter-to-quarter SkypeOut usage doubled in Q4 to 400 million minutes from the 200 million minute growth of the previous three quarters. Was some of this the full impact of free SkypeOut in North America resulting from increased North American subscriptions?

• They feel that SkypeMe buttons are showing success both through increased conversion rates by eBay sellers who use SkypeMe and increased SkypeMe availability for over 150 categories in 20 markets. Basically they are letting eBay sellers determine if and when they introduce SkypeMe and letting the viral feedback from successful outcomes drive adoption.

• One of eBay’s overall priorities for 2007 is to improve the user experience. To this end they transferred an executive from Germany to manage the auction business. One of his goals is to increase the fun and excitement of the auction business; including “experimenting with Skype”. (In my second post tomorrow on an eBay-Skype viral opportunity I’ll be including one recommendation.)

• Over 25% of Skype’s payments are now coming through PayPal. As an aside, in response to a question about Google CheckOut’s impact, Meg mentioned how the publicity for Goolge CheckOut had actually given a bump to market leader PayPal in both users and transactions. She also mentioned how PayPal has many more ways to make payments than Google CheckOut which she described as a wrapper for Visa and MasterCard.

• In response to one question on Skype’s incorporation into Google Pack, Meg described how Google had taken an agnostic view of the best features of the web in coming up with an introductory package of products and services for “newbies’ to get acquainted with what one can do on the web.

Overall 2007 goals for eBay included:

• improving the user experience through a better integrated experience, simplified sites for buyers and improved ease-of-use and voice quality for Skype
• extending their leadership position in all businesses
• continue to innovate
• apply financial discipline

Two indications of eBay’s financial health and confidence in the business were (i) increased guidance to investors for 2007 and (ii) expanding their share buyback program to double its initial goal of $2 billion.

Now if they would just eat their own dog food and do their next quarterly conference call using Skypecast or one of their partner’s conferencing services!

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Ever since eBay’s acquisition of Skype sixteen months ago, speculation has abounded on why the acquisition and, more importantly, what synergies exist for integrating eBay, (PayPal) and Skype. While we have seen stabs at eBay “SkypeMe” buttons for premium auctions and a PayPal button in the Skype Outlook Toolbar, nothing has really taken hold virally with eBay users. In fact, Ken Camp has taken issue with eBay’s entire Skype strategy, stating that Skype has become just another phone company, questioning the entire deal. On the other hand I am seeing the number of Users Online, Skype’s most telling statistic, increase — to the point where this morning (EST) over 8.8 million users were online. (We should have some further guidance on North American usage from eBay’s quarterly report due out this afternoon.)

At Skype’s CES press conference, in response to my question about building North American awareness for Skype, Don Albert, Skype’s North American General Manager, responded to the effect that Skype North America would largely be relying on “viral” activity to build out awareness:

• Will enough users tell their friends about a service that provides toll-free North American long distance for $14.95 ($29.95 effective next Thursday, Feb. 1) per year — not month?
• Does Skype have any strategy for building usage amongst its North American eBay and/or PayPal user base?
• I do see that X10, infamous for its ongoing banner ads and daily newsletters, now offers Skype as an option for customer service; will Skype build partnerships or even awareness with other vendors that encourage the use of Skype for customer service and support?
• How will Skype make users aware that Skype is more than simply voice communications, incorporating other real time communications such as Text Chat, SMS Messaging, File Transfer and, via the Extras, Desktop Sharing (Unyte).

One direction where we thought Skype and eBay were working together was reported by Phil last June just after the eBay/Skype Developers Conference. Check out the post “Skype Gets eBay Tab; Catches up with Microsoft, Google and Yahoo“. At the time I felt that, given how many eBay members track their activity in real time on mobile devices, incorporating an eBay Tab into Skype would also have the potential to drive viral adoption, given that auction activity can have a high requirement for “real time” information, especially as the end of an auction approaches.

As a result of some of my conversations at CES two weeks ago I came home and tried out Skype with an eBay tab. Don’t bother trying it even though it has been upgraded to work with Skype 3.0 (but lacks the Skypecast Tab). From what I can learn it appears this “Tab” was developed somewhere within eBay U.S. by a team that obviously has little knowledge or understanding of Skype, let alone having a “gut feel” for a user interface that drives viral adoption. Succinctly put, its operation is an embarrassment to Skype (and eBay).

My career has involved many experiences involving user testing and beta testing of software. I often measure a company’s ability to manage a software-based business not only on the quality of the software but also by observing their process for quality assurance. We certainly know, as reinforced by the experience with Skype 3.0 Beta, that Skype appears to have not only well above average Quality Assurance processes and, again from experience — I was a beta tester for the Skype Email and Skype Web Toolbars — that Skype seeks out a positive, simple customer experience. Unfortunately it appears that eBay brings a different QA culture to the table, at least when building Skype mashups. Here is what I found:

The initial screen on the Tab has no obvious way to do a user login; in addition, one of the graphics simply will not come up.(Also note that the eBay logo is not appropriately sized and positioned within the Tab itself.) And I am certainly not “new to eBay”; having used eBay several times over the past five years. But there is a Search bar so let’s try it; I am interested in the Canon Rebel series SLR cameras so I enter a Search request. I do get the listing page within the eBay tab but it all goes downhill from here. If I click on View Item, it opens the relevant eBay page in my default web browser (Firefox 2 in my case), not in the eBay Tab; If I ask to “Watch” the item I am asked (in the web browser) to log in and the item is added to my eBay Watch List. Then I can click on “Watching” in the eBay Tab to see the item. Other circumstances may bring up the Login screen in the eBay Tab.

However, it gets interesting when I am logged in and trigger a new Search. In this instance I have now asked for another Canon camera but I simply get “0 items found ….” as shown on the right; check on the eBay via a web browser and it finds the requested item. No matter what I search for I get the same result. Sort of defeats the whole purpose of the Tab in that if I am logged into eBay I cannot do a search. If I log out and do a search I can get a result. Recall that graphic in the initial screen above: it fails to come up beyond a place holder in any of the Bidding, Won or Selling sub-tabs.

Bottom Line: this version of an eBay Tab in Skype is not going to drive any viral adoption of Skype by eBay members. If anything, it will be a discouragement to try out Skype (even though Skype had little, if any, control over its development).

But at CES I learned that there is a solution available for accessing eBay through the Skype client; in fact, eBay members in Germany, France and, soon, the U.K. have access to it. More to come in a post Friday. But, most importantly, they have a solution that will help drive viral adoption of Skype amongst eBay members.

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Finally got to do some floor visits Tuesday over lunchtime and spent Wednesday afternoon visiting Skype hardware partner booths in the Sands Expo Center. Items that may become posts:

• Will the Skype-eBay integration become much more viral with an eBay tab in your Skype client?
• Will any Skype hardware vendors figure out how to get their Skype hardware into North American retail channels?
• How can you have a mobile platform (that includes Skype) that has Windows Media Player and Internet Explorer but no Windows Mobile 5 OS?
• How can you have phone numbers in several cities that all come back to your favorite mobile phone.
• What is the market positioning for (i) Dual Mode Internet phones and (ii) Desktop Internet phones? Target markets, demographics, key features, etc.
• What role Skype plays (and can play) in Windows Vista? (All BlogHaus participants had an opportunity to obtain a copy of the forthcoming Vista release.)
• What is the most popular mobile communications platform actually in use by CES attendees? How can you text message without paying for carrier data plans?

What I can say briefly is that Skype is permeating the offerings of many more vendors that I had anticipated. Off to another day visiting exhibits in the Las Vegas Convention Center and our more detailed reporting will start tomorrow when we are giving some weary legs a rest.

One of the “joys” of being a US-controlled public company is that SEC requires the breakout of International from domestic sales. So today’s 3rd quarter report from eBay provides some information that allows us to look at Skype registrations coming from the U.S.

With over double the registrations from two quarters ago, it certainly demonstrates that the free SkypeOut within North America is probably helping to build some traction but Skype remains essentially a non-US business with over 84% of registrants outside the US. This is corroborated when you compare the % revenue increase with the % user increase; certainly some of the difference can be attributed to absence of revenue for SkypeOut calls within US/Canada..

The results are even more impressive when you consider there has been very limited marketing of Skype within North America – Phil has noticed some media ads in the Bay Area; there are some Skype ads on the eBay website.

These result also reveal some other interesting information:

• Skype has grown to a $200MM annual business; however, it would be a stretch to expect them to his $200MM in calendar 2006. That would require a $70MM quarter. What could drive that increase?
  • Royalties from the launch of new Skype devices such as the cordless phones shown at Fall VON and the Sony Mylo but it’s still early in those products’ life.
  • Increased SMS revenue, especially when driven by programs such as Skylook which will drive Skype Chat messages to your mobile phone via SMS if you are Away or Not Available.
• Skype’s overall revenue growth is slowing; however, it is still the quarter-to-quarter % revenue growth star for eBay where both auction (Marketplaces) and PayPal (Payments) revenue essentially stagnated (+2%, +3% respectively). On the registrant side, Marketplace accounts grew 5% while PayPal accounts grew by 8%.

Looking at the overall results, eBay has to be a nightmare for financial analysts to figure out and forecast. You have three (or more) totally different business models that have different financing and margin requirements. For instance, PayPal is essentially a financial transaction business that should be compared with, say, credit/debit card companies while Skype is a mix of high margin royalty and low margin communications transaction businesses. However, we don’t get to see the margin breakdown by business unit; that would certainly provide a much better handle on how each of their business units is doing.

In a press release issued this morning, Google and eBay announced an agreement which comprises “two primary components involving text-based advertising and “click-to-call” advertising functionality”;.In the course of the press release there are several implications for Skype; however, let me draw attention to where Skype already has incorporated Google searches, namely, as an option in the search icon of the Skype Toolbar for Internet Explorer and Skype Toolbar for Firefox:

Other options in this Skype Toolbar’s search element include Yahoo, Ask Jeeves, eBay and Shopping.com.

Lisa Leff at AP provides a good overview; combined with the press release we can see the following implications for Skype:

• Google will become the exclusive provider of text-based advertising for eBay outside the U.S. This complements the Yahoo-eBay deal last June that applies only to the U.S.
• “Click-to-call” integration involves both eBay and Google platforms worldwide “using Skype or Google Talk”. It remains to be seen how this will play out but certainly with over 100 million registered users, we can see where Skype’s strength lies here.
• Skype will soon offer its users an option to download the Google Toolbar to which Skype will add a custom button. Probably won’t look a lot different from the Skype Toolbar for IE or FF shown above.
• The most interesting comment from a Skype observer’s viewpoint is the statement: “The companies will also explore interoperability between Skype and Google Talk via open standards to enable text chat and online presence.” Does this mean that Skype will execute on its opportunity for IM Federation Leadership and take up Alec Saunders’ challenge issued when the Skype code cracking story broke:

Skype should take a leadership position in publishing those protocols, and encourage others to build upon them. The Skype client becomes the first, and possibly the best, way to use the Skype protocol, but not the only way.

This agreement also recognizes the “international” aspect of Skype with over 72% of all users having registered a language other than English as their primary language:

• Skype has developed a universal Phone Number Recognition API component that Skypifies any phone number recognized on a web page or in an e-mail. In fact the PNR has been incorporated not only into all the Skype Toolbars but also into the latest release of Skype (ever wonder why you now see a flag associated with phone numbers in Skype 2.5?).
• Skype has just announced a localization support utility for its third party developers comprising a list of more than 2600 phrases translated into Skype’s 27 supported languages.

Today Alec hypothesized on where the money is in “Click-to-Call”. Jaanus Kase, Skype’s Chief Blogging Office, has commented on the interoperability item above. Andy has thrown in his perspective, including what he hears about Google’s “weak” pursuit of PSTN termination. I’m sure we’ll see lots of other coverage, especially given I first heard the story on various morning television shows that are viewed at my fitness club. However, the final proof of this agreement’s value and impact is going to take a few years to play out.

Using Bubbleshare (well, you’re all tired of Flickr, right? and it’s a local product coming out of the Toronto area), I have finally organized my pics from the eBay/PayPal/Skype Developer’s Conference two weeks ago.

Double click on any picture for a larger version and the slide show in a separate window. Enjoy!

BubbleShare

Aplogies for not taking full advantage of BubbleShare and putting words in people’s mouths…;-)

On reviewing my notes from last week’s eBay DevCon and eBay Live, some interesting numbers came out in the various sessions:

• eBay: last year sold a “Gross Merchandise Value” of $44B, representing 14% of all ecommerce on the Net.
• PayPal’s highest growth is in “off-Ebay” commerce. Last quarter (Q1-06) “Off-eBay” transactions grew by 59% while overall PayPal growth grew by 43% to $8.8 billion of transactions. On PayPal $1.5 billion of stored value is turned over every three weeks.
• Skype, in Q1 of 2006, provided infrastructure for 6.9 billion minutes of long distance calling; representing 7% of all long distance call minutes worldwide.

Developers:

• eBay – 30,000 whose work contributes to 25% of all eBay transactions
• PayPal – 2,500 supporting 350,000 web integrators
• Skype – 3,500 delivering 350 applications and over 400 hardware devices

As mentioned previously, eBay developers and Skype developers have two totally differentiated motivations: eBay developers serve as micro-IT departments to eBay resellers producing customized Seller websites while Skype developers produce Skype-embedded applications for resale to the general public.

User numbers:

• eBay answers 22 billion SQL queries per day across 2 Terabytes of data storage.
• Last weekend eBay passed 200 million registered members (only four nations have larger populations: China, India, U.S. & Indonesia)
• 1.3 million eBay sellers rely on their eBay activity as their primary or secondary source of income
• 15,000 eBay Sellers registered for eBay Live; this was the first time it was sold out (and two weeks before the event at that).
• PayPal services 105 million accounts in 50 countries; PayPal provides the payment mechanism for 67% of eBay transactions. (PayPal has more accounts that Amex and Discover combined.)
• Shopping.com has 40 million products in their “catalog”
• Skype (as we can see every morning around 11 a.m. Eastern Time), now supports over 6.5 million concurrent users on its peer-to-peer backbone.

Internationalization:

• To support the conversation on localization triggered by Nicole Simon (with comments by Scoble and Segal) on what it takes to build international markets for products, 72% of Skype users use one of the 26 non-English versions of Skype. (Nicole, can we assume you are a heavy Skype user?)
• PayPal currently supports seven currencies in 50 countries with a goal to support 20 currencies in 100 countries within the next six months.
• 15% of all eBay transactions are across international borders.

Implications for Skype:

• It was readily apparent that eBay resellers have little or no knowledge of Skype. In fact, recruiting eBay resellers would be a good test of Skype’s ability to appeal to a non-technical consumer market. Apparently Meg Whitman’s speech Tuesday evening generated lots of interest at the Skype eBay Live booth for the next couple of days.
• eBay Sellers and Buyers also provide potential customers for Skype Partner products such as Skylook, Unyte’s web conferencing or any of the USB phone hardware. Will be interesting to see if, for instance, eBay Resellers develop Power Point (or equivalent) presentations to complement their Skype communications activity with desktop sharing. (More to support one-on-one conversations with prospective premium product customers as opposed to doing webinars.)
• As a two way payment mechanism, Skype has the potential to provide communications support for the PayPal trust network for monetizing any transaction activity whether it be loyalty programs, contextual advertising placement and response, expert services (such as JyvePro) or exchanging real value for a virtual currency (as is currently available with Second Life).

Skype Journal would like to acknowledge the assistance of Multi-Link, Inc. in facilitating our attendance at eBay Live.