Skype Hype Syndrome Wears Off

On September 12 of last year, commenting on EBay's acquisition of Skype for $4.3 billion, I wrote:

Meg Whitman is one of my favorite CEOs, so it pains me to see her with what appears to now be a chronic case of Skype Hype Syndrome. In the acute phase of this delusional illness, Skype Hype causes the patient to feel compelled to dole out billions of dollars for a random collection of Internet traffic for no apparent reason. If allowed to progress to a chronic state, the patient is unable to either cut losses or refocus on her core business. Both phases of the illness are accompanied by constantly mumbling, "Synergy, synergy, synergy."

Skype the Internet telephone network pioneer, is a poster child for The Three Curses of Internet Success. Cursed with success without revenue, success without profits and success without barriers to entry, the Skypers correctly followed our prescription for such a business: "First mover or not, there is no substitute for a credible business plan that spells out a scalable business model that includes revenue and profit. Failing that, the plan should be for more of a proof-of-concept business model and to be acquired as an early exit strategy." Getting a couple of billion dollars from eBay with a potential kicker of a billion or so more was a rare coup. AOL at least had revenue and profit when Time Warner went off the deep end.

This Skype reality is soberly spelled out in the Business Week article, Skype Goes for Broke. Well after the eBay acquisition, they are still cursed with success. Henry Gomez, Skype's North America GM says of a recent price promotion, "It's really about turbocharging our growth and solidifying our market position here before others catch on." Yes, that's it! Under eBay, Skype seeks even more success without revenue or profit, before others catch on and emulate their success. What clever folks eBay's Skype managers are!

If you do not buy my Skype Hype Syndrome diagnosis, perhaps you subscribe to the more common theory for eBay's Skype acquisition, that is was caused by a different paranoid delusion. This theory comes in various formulations, but they net down to this: eBay believes it is strategically threatened by any large community of Internet traffic. Thus it had to take out Skype, and that is just the beginning. If true then eBay is doomed, because it cannot mount a strategic defense against Google, Yahoo, Microsoft, Amazon, YouTube, Baidu, Facebook, Flickr, Wikipedia, Vonage and on and on. The Internet is going to generate oodles of high traffic companies in the future. A little paranoia may be a healthy thing, but this fear is irrational because eBay has successfully erected too many impressive barriers to entry to feel so randomly threatened.

Well, today EBay announced that it was writing down the value of the deal by $1.2 billion. Skype co-founders Niklas Zennstrom and Janus Friis resigned their executive positions. This stunningly confirms that EBay paid way too much for Skype. Don't fret for Zennstrom and Friis, they made out like bandits. Meg Whitman, whom I admire greatly, really blew this one.

Copyright © 2007 Philip Bookman

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