eBay & Spyke..

The Skype hyper

Oct 4th 2007
From The Economist print edition
Meg Whitman's career at eBay suffers “an impairment write-down”

Reuters

AMONG the many lessons that Margaret (“Meg”) Whitman has picked up during her three decades as a businesswoman, three stand out, she told an audience at Stanford's business school last year. And those three lessons, she implied, explain why she, as boss of eBay, the world's largest online auctioneer, was right to buy an internet-telephone company called Skype for an astonishingly high price in 2005.

The first lesson, which she learned in 1979, was that attention to detail is all important. At the time, she was fresh out of Harvard Business School and just starting her first job at Procter & Gamble. She was charged with figuring out whether the nozzle on shampoo bottles should be half or three-eighths of an inch wide. Despite the tediousness of the task, “I decided I was going to do the very best job that had ever been done at the Procter & Gamble company”, on whose board she now sits. Bring that sort of “execution” to a firm with as much potential as Skype, she suggested, and the sky would be the limit.

The second lesson occurred in 2002. As boss of eBay, she had noticed that a lot of the sellers and buyers on its site were using an online-payment service called PayPal as a sort of virtual wallet, so she decided to buy it. She negotiated for a year, during which the price kept rising. She concluded that in the internet industry one bids early, boldly and pre-emptively high. That is what she did with Skype.

The third lesson was that in such a fast-moving realm “the price of inaction is far greater than the cost of a mistake.” In any case, mistakes can always be corrected. In other words, it did not matter that the “synergies” between a telephone service and an online flea-market seemed few and far between. In her view, eBay was right to buy first and look for the answers to such concerns later.

Collectively, these three lessons have led to disaster. On October 1st eBay conceded, in the language of book-keepers, that the purchase of Skype was just that. It had paid $2.6 billion up front, and agreed to cough up yet more if Skype met certain targets. It did not. This week eBay said that it would take a $1.4 billion charge in relation to the purchase. A portion of the payment is a settlement that absolves eBay of any further obligations to Skype's original owners. But the bigger part, a so-called “impairment write-down”, represents eBay's loss on its ill-fated investment.

Ms Whitman does not even seem to have remembered her own lessons. In terms of the first, eBay's “execution” in integrating Skype with its main business has been poor. Skype's service has deteriorated: it collapsed completely for two days in August. The second lesson—bid early and high—was observed to a fault. As for the third lesson, the mistake has now been admitted, but not fixed.

Ms Whitman should have known better, because Skype became and continues to be a revolutionary technology precisely because it does not extract much revenue from its customers. “We want to make as little money as possible per user,” Niklas Zennstrom, Skype's co-founder, has said. Skype's breakthrough, in his view, was to point the way towards a time when all voice communication would cost the consumer nothing at all. This week Mr Zennstrom stepped down as Skype's boss; he plans to spend more time on his next disruptive technology, called Joost, which brings television to computer screens.

The rest of Silicon Valley has greeted Ms Whitman's misfortunes with Schadenfreude. But the gloating may be short-lived. By buying Skype, the internet phenomenon of 2005, eBay started a bubble. Google, with its purchase of YouTube, the cyber-star of 2006, inflated it further. And Microsoft and Google now appear tempted to add more froth by investing a silly sum in Facebook, the latest big thing. All three—the internet telephone firm, the video site and the social network—make almost no money. EBay's disappointment with Skype is a timely reminder of where this fad might lead.
Down to earth, but with a thud

Until now, Ms Whitman has not faced serious public criticism. The press, The Economist included, has churned out many an unquestioning paean to her. In part, that is thanks to her sensible, down-to-earth demeanour, an endearing contrast to the self-aggrandising swagger of other Silicon Valley bosses. Ms Whitman loves to go fly-fishing with her sons; she also enjoys recounting how embarrassed they were when she was voted onto a list of “worst-dressed billionaires”. People want to love her, one analyst argues, which might explain why eBay's shareholders allowed her to throw a desperate “Hail Mary pass” at Skype, in the words of another.

Shareholders at eBay, at any rate, will surely now start asking what on earth Ms Whitman, a seasoned executive, was thinking. Certainly, she felt pressure from Wall Street to come up with a big idea to maintain the firm's breakneck growth. Its main business, brokering auctions, has been slowing. In the year to June, product listings on its site fell for the first time ever, by 6%. Like Yahoo!, its neighbour in Silicon Valley, eBay may be gored by Google, the ubiquitous search engine. Increasingly, people with goods to sell set up their own websites and find buyers by advertising on Google's search pages. Google has also begun offering online payment and telephone services that compete directly with PayPal and with Skype.

Ms Whitman also mentioned a fourth lesson during her talk at Stanford. Her main job as boss, she said, is to put “the right person in the right job at the right time”. She emphasised the word “time”, since a manager who was right a few years ago may no longer be today. It is a lesson her own bosses, on eBay's board, will doutbless soon be reviewing.