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September 12, 2005

Execs: EBay Plans To Keep Skype 'Separate,' For Now

Courtesy of TechWeb News

EBay executives, discussing their $2.6 billion deal to acquire Skype Technologies, said Monday they plan initially to position Skype closely with their PayPal unit and keep the VoIP firm separate. They noted that future payouts could bring the acquiring figure to $4.1 billion.

“(We) can offer PayPal to every Skype user,” said Niklas Zennstrom, Skype CEO, at a press conference broadcast over the Internet. “PayPal is already one of the largest payment providers on Skype.”

While Zennstrom and eBay’s chief executive Meg Whitman said Skype would continue as a separate operation and would complement PayPal, they added that the European-based VoIP firm would benefit eBay in the long term.

Reports that Skype was for sale had circulated for several days, although Skype denied the rumors. Wall Street took a negative initial stance on the acquisition as shares fell 4 percent on the rumors last week and continued dropping Monday.

With high-tech powerhouses Microsoft, Yahoo and Google beefing up their VoIP entries in recent days, Whitman addressed them head-on saying that Skype has “an enormous lead” in the area and its strong brand continues to be “generations ahead” of competitors. She noted that e-commerce is enjoying an annual growth of between 30 and 35 percent and eBay is working to beat that mark. Skype, she added, should help eBay’s growth.

Skype has enjoyed a phenomenal growth in two years reaching more than 54 million users of its free Skype-to-Skype service while its paid services including SkypeIn and SkypeOut have more than 2 million subscribers. More than 150,000 users are signing up for Skype on a daily basis.

The deal is not without some hurdles and, indeed, at the start of the press conference eBay released a litany of potential pitfalls that could throw a monkey wrench in the acquisition including that possibility it might not go through. However, most of the possible negatives are legal and regulatory caveats normal for proposed deals.

EBay executives indicated Skype will be broken out as a separate segment initially with eBay to invest heavily to build the Skype brand. The acquisition is expected to trim eBay’s earnings slightly until the end of 2006 when it should begin to add to eBay’s profitability, the executives said.

Skype expects to log $200 million in revenues in 2006 after recording about $60 million this year.

The combine will likely face an important challenge before the end of the month when the FCC wants to see progress from VoIP providers in delivering emergency 911 numbers. Addressing a question on e911, eBay called regulatory issues both in the U.S. and worldwide “a given” that were addressed in discussions with Skype.

Skype has more than four million users in the U.S. and FCC wants the firm and other Internet telephone services to provide emergency calling service. Skype has responded to the FCC dictum by saying it is an “enhancement service” to existing telephone service and is not a “replacement” service. The FCC extended its e911 deadline for VoIP providers until later this month.

Zennstrom also downplayed reports over the weekend that some public switched telephone operations in China appeared to be preparing to bar their users from using unauthorized VoIP. Zennstron said the reports appear to be “largely a rumor” and were not a major threat. There have been sporadic reports of smaller countries preparing to block VoIP because it drains revenue from their public switched telephone networks, although to date it has been more talk than action.

Skype’s business plan is aimed primarily at international markets and its service doesn’t compete directly with the leading U.S. VoIP firm, Vonage Holdings, which last week announced that it had signed up its 1 millionth customer. Skype has said that about one half of its customers are located in Europe, about 13 percent in the U.S. with the rest scattered around the world.

Skype was founded in 200 by Zennstrom, a Swede, and Janus Friis, a Dane. Its headquarters are located in Luxembourg.

In announcing the deal eBay said it believes Skype can increase “the velocity of trade on EBAY, especially in categories that required more involved communications such as user cars, business and industrial equipment, and high-end collectables.”

Although Skype is best known for its VoIP service, it has a robust instant messaging feature that will be integrated into eBay’s online auction business. Zennstrom said he believes Skype has the world’s largest open IM service.

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