Skype's "Aha!" Experience

Co-founder Niklas Zennström explains why he and Janus Friis overcame their initial skepticism and sold out to eBay

Eyebrows were raised from Wall Street to Warsaw when online auction giant eBay (EBAY ) revealed on Sept. 12 it would acquire Internet telephony darling Skype for $2.6 billion, and cough up an additional $1.5 billion if certain performance goal are reached (see BW Online, 09/12/05, "eBay Opens a Whole New Channel"). Incorporated in Luxembourg and based in London and Tallinn, Estonia, Skype may well have been the fastest-growing Internet service ever, piling up an eye-popping 54 million users in just over two years.

Rumors were rampant in recent months that media heavyweights such as Google (GOOG ) and News Corp. (NWS ) were dangling lavish offers in front of the sizzling startup (see BW, 09/26/05, "Skype: How a Startup Harnessed the Hoopla."))

Still, when the purchase finally came together, both the buyer and the price tag caught even seasoned tech observers off guard. But after much initial confusion -- and a hit to eBay's stock -- the rationale for the hookup began to make more sense. Skype will help pull eBay into parts of the world where it's weak, while eBay could extend Skype's relatively limited reach in the U.S.


  Adding a Skype button to eBay auction pages will open up a whole new channel for spoken communication among buyers and sellers. That could be especially important in cultures more accustomed to bartering than auctioning. eBay also stands to rake in referral fees for driving calls to sellers -- in effect, the verbal equivalent of paid-search advertising links that have turned search engine Google into a cash machine.

Other potential synergies haven't even left the lab. Analysts say Skype may add video to its free PC-to-PC communication service. With video panes added to eBay pages, online sellers could get closer than ever to approximating live shopping, while buyers could well gain increased confidence from being able to see moving pictures of items for sale.

Down the road, eBay could even harness Skype's pioneering peer-to-peer architecture. Skype, whose founders also created the KaZaA peer-to-peer music-download technology, forgoes centralized servers to switch phone calls, instead relying on a mesh of connected Skype users.

Skype CEO and co-founder Niklas Zennström spoke to BusinessWeek's European technology correspondent, Andy Reinhardt the day after the eBay deal was announced. To gauge how far Skype has come, see a conversation between the two from July, 2004. Edited excerpts of the Sept. 13 conversation follow.

Selling Skype to eBay seems like a pretty different strategy from what you were doing before. How did you get to this point?

When we started Skype, our vision was to create a business that could fundamentally transform the telecommunications industry and have a big impact, by letting the whole world talk for free. We wanted to create a great, sustainable communication business.

After we launched, we saw that we were getting very good traction. We met or exceeded the objectives we set for ourselves. We were one of the fastest-growing companies on the Internet ever. Over time, we came to realize there was an increasing likelihood that we would achieve our vision.

We started to think about what this meant, from the company and shareholder point of view. We wanted to increase our chances to become the largest and most successful online communication company worldwide. Of course, you could do that as a stand-alone company and maybe have an IPO.

But we could also do it by creating the best possible platform from which we could operate. After all, this is just the beginning of the journey, and the further we go, the more risks are involved. So we realized that if we found a home, we could create a platform and increase our likelihood of being successful.

I thought you were shooting for an IPO?

Our objective in life was not to have an IPO, to do road shows and deal with analysts. Our objective was to build the business. That what's Janus [Friis, Skype's co-founder] and I are interested in.

So, given how many companies you talked to, how did you end up with eBay?

When we met Pierre [Omidyar, the founder and chairman of eBay] and Meg [Whitman, eBay's CEO], we found that we had a lot of the same philosophy and shared the same kinds of principles. To me, both eBay and PayPal are among the best examples of pioneering Internet companies. Both are truly taking advantage of network effects and increasing-return businesses, very similar to what Skype is doing.

When we started to talk to them, we realized that there were a lot of potential synergies -- for instance, integration between Skype and PayPal, to increase the number of paying customers we have. Some of the things we are launching, like digital content and paid voice services, are very similar to the kind of business model eBay operates. We think that by combining Skype and eBay, it'll give us access to a bigger platform.

I have to admit I was a little baffled by the combination of eBay and Skype when I first heard about it.

Well, the funny thing is that before we met with Pierre and Meg, we didn't think we had anything in common. We were already working with PayPal, but we didn't really think there was a big opportunity together. And apparently they did not think that either. But when we started talking, we had an "Aha!" experience in the meeting. We both kind of went crazy on the whiteboard, mapping out ideas.

There were rumors about other potential deals -- News Corp., Google, maybe even Microsoft (MSFT ).

I can't comment on the specifics. We retained Morgan Stanley (MWD ) to help us out to see what the different options were. But I won't comment on specific companies.

Still, the take-out price for Skype seems to have gone up during the period you were meeting with folks like Google and eBay.

We were not simply trying to maximize the value of the company. It wasn't a matter of seeing how much we could sell it for. You know, somebody congratulated me on the deal yesterday and said, "Great exit!" I thought, "What are they talking about?"

For me, this is about moving to the next chapter in the Skype story. Janus and I and other members of our management were able to negotiate a very substantial earn-out structure, so we are fully motivated in making Skype long-term successful. We told Meg that we believe we are going to create a hugely successful business, and we think there's a lot of value that's going to be created in the future, so therefore we wanted to construct a deal where we could be successful on the upside.

How soon are you and eBay going to start cross-promoting each other on your respective Web sites?

The links are already up. And yesterday we hit an all-time high in number of new registered users, with 185,000 in one day, vs. normally 140,000.

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