On September 12, 2005, eBay agreed to buy Skype for $2.6 billion. The move was seen as a win-win for both companies. The purchase allows eBay to move into new business areas. Skype could tap into eBay’s vast customer base and provide them its Voice over Internet Protocol services (VOIP). Both were darlings of the early 2000s Tech industry. A lot of these companies were merging or being purchased by each other and they thought these mergers were a good idea.
Bigger was better, was the universal theory. What could go wrong? Two years later, eBay writes down the value of Skype by $1.4 billion. Two years after that, eBay would sell 65% of Skype for $1.9 billion to a group of private investors. That’s a loss of $700 million for eBay. To add injury to insult, Microsoft would later buy Skype for $8.5 billion, two years after eBay’s sell. Talk about a giant swing and miss by eBay! What Happened? Like always, there are lessons to be learned in disastrous business deals.
1. Total misevaluation of customer wants and needs.
One of the main theories behind eBay’s purchase of Skype was that eBay users would use Skype’s technology to conduct eBay transactions. That seems good in theory, except eBay users didn’t want to video chat with each other. Email was and still is fine for most eBay users. The person buying Star Wars collector cups doesn’t want to video chat with the seller about the condition of the cups. The person selling counterfeit Air Jordans on eBay doesn’t want to video chat with potential buyers. Anonymity is an essential feature of eBay. Just let me buy my obscure used item in as much privacy as possible!
2. Culture clash and rapid turnover
EBay was a conservative bank like culture, whereas Skype’s goal was to make video chat as accessible as possible to anyone who wanted to use it It was the new odd couple to say the least. Both company’s values were different, and therefore couldn’t see eye to eye on how to make the merger work.
Skype went through several management teams during its tumultuous 4 year “partnership” with eBay. When you have that level of turnover at that high of level it’s not a surprise when things don’t go well. Think of sports teams who hire and fire coaches every few seasons. These teams are usually stuck in mediocrity, unlike the more successful teams who keep the same coach and management team for years, decades even. Think of the New England Patriots, Pittsburgh Steelers, or the San Antonio Spurs. All dynasty level teams with sustained success over multiple years.
EBay sold Skype when it was at its lowest possible value. The smart move would have been to wait out the storm, then sell Skype when its value started increasing again. You see this blunder repeatedly in the business world. Corporations get angry and frustrated by the lack of progress in the new endeavor and just want to wipe their hands clean of the situation. Unfortunately, this usually results in selling at a loss.
If eBay would have just waited two more years, it could have been making it rain all over Silicon Valley. Instead, I’m writing this article about how poorly it handled Skype. For eBay, reality hits you hard and fast.
Originally published at https://mwmblog.com on April 23, 2020.