Do you need me to draw you the bright straight line from Skype to Facebook or can you see it all by yourself?
OK, for those who refuse to live in a little place I like to call reality, let’s review the news coming out of eBay yesterday regarding its 2005 acquisition of Skype for the then unheard-of price of $2.6 billion.
The Internet auction giant declared the purchase of the once hot online telephone start-up a dud yesterday, taking an asset-impairment charge of $1.43 billion for the deal.
In addition, Skype founder and CEO Niklas Zennström was out. The move, said eBay in a filing, represented “updated long-term financial outlook for Skype.”
Quickie translation: Major buyer’s remorse.
While Zennström said he was “proud” of Skype’s performance of late (it has grown its users and revenue), the fact of the matter is eBay could not spin straw into gold with the acquisition and make the kind of money its lofty economics required for the once-hot VOIP leader. Thus, eBay only had to also fork over one-third of its $1.7 billion payout to investors, too.
While many were saying all this was due to who bought Skype–maybe it was eBay’s fault and other potential acquirers could have done better–Skype was once thought of as a giant killer in the telephony world, with many going on and on about its vast potential.
Sound familiar? Before Facebook sky-high valuation fans go nuts, I know there is a difference between the economics of a Web phone service and that of an ad-based, possibly target-rich interactive online environment.
But there was an awful lot of hype, I mean, hope back in 2005 that Skype could easily turn into a massive moneymaker by selling a wide range of goods and services beyond its core Internet calls offering.
Because advertisers and other services could target its motivated and highly trackable users, went the story, that meant the possibility of ladling on more revenue and profits.
In fact, by leveraging Skype’s exploding popularity, eBay had hoped to add premium offerings like conference calls and links to its own vast networks of sellers on its flagship auction site. There was a user-generated Yellow Pages and even an offering called Skype Prime that allowed callers to charge a variety of services.
All good ideas that just did not pan out with quite the results expected, all directly due to the exorbitant sum overpaid for Skype.
Revenues for Skype were only $90 million in the most recent quarter (out of eBay’s overall $1.83 billion), despite its adding 75 million more users since the acquisition to total 220 million.
As I wrote about Facebook’s talks with a variety of investors that value it at upward of $10 billion, Skype was a story about the difference between potential and actual when faced with the real-world difficulties of making a popular Web site into a truly profitable and sustainable business.
I am not sure how I managed to get to be the little rain cloud at the Facebook parade, but the simple act of questioning the possibility that it might not make the kind of money its cheerleaders envision, especially in light of the Skype write-down, seems prudent.
We all know it’s admirable–even astonishing–that its founder Mark Zuckerberg and his small team have grown the terrific and vibrant social-networking service into a 40 million-plus user base and growing with plenty of promise with regard to new kinds of advertising paradigm.
But the business, as it stands today, only has about $30 million in profits on $150 million in revenue.
More importantly, half that revenue comes from a sweetheart guaranteed revenue deal with its ad-partner Microsoft, which still is a non-economic wash for the software giant more interested in planting a flag and paying for some pricey education in the social-networking sector.
That has not stopped Microsoft from offering Facebook, according to sources close to the company, investment dollars in the hundreds of millions for a small stake.
Said those familiar with the most recent offer, such an investment would include a possible right to buy the company should Facebook decide an all-out acquisition is the way to go (doubtlessly a Microsoft preference).
Sources note that Microsoft is now blowing hot and cold about such a deal, which is being championed by CEO Steve Ballmer and Chief Software Architect Ray Ozzie, who lends the Seattle behemoth some much-needed Silicon Valley cred.
At Facebook, Zuckerberg is key to the talks, helped by such advisers as VPs Owen Van Natta and Matt Cohler and CFO Gideon Yu (whom we like to call “Death Cat” for his uncanny ability to cuddle up to hot Internet start-ups, much like that nursing-home feline who can sense death).
According to sources, Microsoft remains obsessed with keeping rival Google out of the picture and positing that the search part of the Facebook phenomenon is where the real gold is located.
While adding more robust search to the site seems fine, Facebook execs do not consider it a killer app and are perplexed by Ballmer’s laser focus on it in recent talks.
“We don’t want to be taken in by the siren song of search,” said one.
That’s especially true given the engaged nature of its users while on the site with, well, the site. After all, you don’t really want to search when you are hard at work stalking your “friends” on Facebook.
All kidding aside, that kind of motivated user is what has kept suitors lining up, including solo visits to Facebook HQ in Palo Alto, Calif., by Yahoo co-founder and CEO Jerry Yang (inquiring about doing some sort of deal–after its botched acquisition effort from last year–such as taking over Facebook’s international ad-serving business).
So, too, has Google come on by, not necessarily to invest in or buy Facebook, but to look more closely at a variety of ad and apps plays on the service (and, you have to guess, to drive Microsoft bonkers).
And others in droves, such as a recent visit by Viacom head Philippe Dauman, who just wanted to say hello to the Facebookers.
In all this hubbub, one has to wonder what Facebook wants and needs?
Here’s my educated and reported guess:
1. A redo of its ad deal with Microsoft, getting even more guaranteed dollars and more latitude over its own sales efforts. An extension would be fine, I guess, but perhaps not, given interest from others to sign up Facebook and make friends with it.
2. An international ad partner, although I don’t expect Facebook to hand over the store here in this critical arena for itself. While the site’s U.S. growth has been strong, its international aspirations will be key to its long-term success.
Possible partners here are obvious: Yahoo, Google, Microsoft.
3. An investment on its terms and not necessarily with Microsoft or Google or whatever giant media company that comes calling with glad hands and lots of shiny baubles to offer.
What Facebook must do is evaluate which partner actually benefits its goals of further growing its member base here and abroad, gives it access to new marketing opportunities and forks over the unencumbered cash and advice to create or buy new assets it needs to continually improve itself.
4. Zuckerberg has got to be looking at what happened over there at rival MySpace and probably wants to do things a little differently. While MySpace has grown a lot since its purchase by News Corp., it’s an open secret its founders Chris DeWolfe and Tom Anderson think they sold too soon and now are angling to be better compensated.
In addition, it’s nicer to be in charge of your own fate, if you can pull it off. Because even if Microsoft or any other buyer promises total freedom, when you sell (especially to an already public company), you instantly become an employee–a well-paid one, to be certain–and your fate is no longer in your hands.
And, like Skype’s Zennström, that fate can be “updated” once performance falls off. Which it will.
5. I think that Facebook is well positioned to stay independent and not sell at all, although it is clear it thinks taking big money is a good idea.
I am not so sure it is, for a lot of reasons (not the least of which are the complications now surrounding the valuation of its stock options–Section 409A!–and the ability to attract talent with a good package).
But if Facebook can pull it off in a way that gives it running room and relative freedom, I can hardly imagine it will resist.
“We’re not stupid over here, we want the right deal at the right time that fits into the right thing for us,” said one exec there.
Right.
Please see this disclosure related to me and Google.
