October 2, 2007, 12:00 AM

eBay recognizes it paid the wrong number for Internet phone company Skype

EBay will take a $1.43 million charge relating to Skype. That includes a $900 million reduction in the book value of the Internet calling service that eBay bought in 2005 for $2.6 billion. Skype’s top executives are being replaced.

When eBay acquired Skype two years ago, the vision was of eBay buyers and sellers using the Internet telephony service to chat during auctions. That hoped-for synergy has yet to blossom, and eBay says it will take a $1.43 billion charge in the third quarter related to Skype and replace Skype’s top executives.

“It indicates that Skype is not living up to the company’s expectations, although it is growing very rapidly,” says Rob Haley, an analyst at brokerage firm Gabelli & Co. “But eBay is still a very strong company, and Skype is a small piece of the whole.” Skype generated $90 million in revenue in the second quarter, less than 5% of eBay’s $1.83 billion total revenue.

The write-down of Skype’s value did not come as a surprise because eBay has been breaking out Skype’s revenue each quarter, Haley says. He notes eBay’s share price rose slightly Monday after the Skype charge was announced, although that came on a day when most stocks rose and the Dow Jones index reached a record high. Skype had 220 million registered users at the end of the second quarter, up 94% from 113 million a year earlier. But because users can make some Internet calls for free, more users does not always translate into more revenue.

The $1.43 billion charge consists of a $900 million write-off of Skype’s book value and $530 million in payments to certain Skype shareholders to fulfill incentive clauses of the acquisition agreement. EBay had agreed to pay those shareholders up to $1.7 billion, based on revenue, gross margin and user goals, and the $530 million payment is an indication that Skype’s performance fell well short of the high end of expectations. With the $530 million payment, the total price for Skype rose to more than $3.1 billion; by writing off $900 million, eBay reduced the book value of Skype by 29%.

At the same time, eBay announced major changes at the top of the Skype unit. Niklas Zennstrom, who co-founded Skype in 2003, resigned as CEO of Skype and will become non-executive chairman of the Skype board of directors. Michael van Swaaij, eBay’s chief strategy officer, will serve as Skype’s interim CEO until a permanent replacement is named. Henry Gomez also is stepping down as Skype’s president, returning to eBay as senior vice president for corporate affairs.

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