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eBay Taps into Internet Phone Market With Dollars-4.1bn Skype Deal

Posted on: Tuesday, 13 September 2005, 09:00 CDT

EBAY yesterday agreed to acquire Luxembourg-based start-up Skype Technologies for up to dollars-4.1bn (GBP2.3bn) - a surprise move that enables the online auctioneer to enter the fast-growing market for internet-based telephone services.

Skype, which is privately held among its founders, venture capitalists and other backers, allows users who download its software and register for its service to talk to one another free over the internet through their personal computers with VoIP (voice over internet protocol) .

Skype was founded in 2002 by Swedes Niklas Zennstrom and Janus Friis, who also founded Kazaa, the controversial file-sharing service.

The detail of the founders' personal windfall was not disclosed last night, although it is expected to be in the multimillions of dollars.

The total value of the deal is based on "potential performance- based consideration, " over three years, eBay said.

eBay said it will purchase all outstanding shares of Skype for a total of dollars-2.6bn. In addition, it will pay out up to dollars- 1.5bn in 2008 or 2009 to the holders of around 60-per cent of Skype's shares, if the company meets its performance targets.

Holders of the remaining 40-per cent of shares chose an upfront payment without performancebased incentives.

While some analysts were confounded by the acquisition, not just for the lofty price tag but also for what many consider the companies' dubious compatibility, eBay said the combination of the online auctioneer, its online payment firm PayPal and Skype will create "an unparalleled e-commerce and communications engine" for internet users world-wide.

VoIP, allows users to make telephone calls using a broadband internet connection instead of a regular phone line with the use of a headset or microphone and speakers.

Low-cost internet phone providers such as Skype are creating upheaval in the telecoms industry. Many European telecoms groups including BT, Deutsche Telekom and France Telecom have already started adopting VoIP in a bid to retain customers and stop haemorrhaging revenue.

Skype, which is only two years old, has already amassed an impressive global following with 54 million registered users in 225 countries.

In a letter on the company's website last night, Zennstrom said: "Hello, when Janus and I originally created Skype, we had a vision of creating the world's largest communications company to revolutionise the way everyone communicates . . . It seems to have caught on. . . . We have some great ideas about what happens in the next chapter and think we have some powerful friends to help us realise our dreams."

The firm's telephony software has been downloaded 162 million times, and it says it has as many as three million people using its service at any one time.

Skype's financial growth has also been little short of meteoric. It generated approximately dollars-7m in revenues in 2004, but the company anticipates it will generate an estimated dollars-60m in revenues in 2005 and more than dollars-200m in 2006.

About two million Skype customers have signed up for a premium pay service that allows them to use their personal computers to make calls to regular phone numbers as well as receive calls from regular phones.

In spite of the fact that some analysts have been skeptical about eBay's need to become a VoIP provider, online buyers and sellers who already communicate with each other via e-mail before transactions are complete, will now presumably be able to add voice to such chats with Skype.

EBay said Skype would "strengthen eBay's global marketplace and payments platform, while opening several new lines of business".

Meg Whitman, eBay's chief executive, said: "Communications is at the heart of e-commerce and community. We will create an extraordinarily powerful environment for business on the net."

About five million e-mails are exchanged between eBay users every day, she added.

The deal came as a surprise to many because Skype previously held merger discussions with the News Corp and Microsoft - only to abandon those talks.

FREE AND EASY COMMUNICATION

Skype was co-founded by Swedish businessmen Janus Friis and Niklas Zennstrom as an internet service which offers voice over internet protocol, or VoIP, a technology that allows users to make telephone calls using a broadband connection instead of a regular phone line.

Zennstrom also created Kazaa, the controversial filesharing software that allows users to download music from the internet for free and caused much pain to record companies.

He sold the Kazaa name in 2002 amid a growing number of court cases - but kept the technology.

Several European telecoms groups, including BT Group, Deutsche Telekom, France Telecom and Swisscom, have already started adopting VoIP to retain customers and stop haemorrhaging revenue.

In May, Zennstrom made public his views that Skype was not planning to go public or sell out - but did not exclude the possibility of floating at some point.

Luxembourg-based Skype had by October 2004 raised dollars-24m mainly from venture capital firms.

Source: Herald, The; Glasgow (UK)

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