Ebay writes down Skype value by $1.4bn as ambitions fall short

Ebay yesterday conceded that its controversial acquisition of the internet telephone service Skype had fallen well short of its hopes, as it wrote down the value of its investment in the company by $1.43bn - or nearly 50 per cent.

At the same time Niklas Zennstrom, one of the founders of Skype, quit as the unit's chief executive after missing out on a pay-day that could have earned him and a handful of other shareholders an extra $1.2bn.

The write-down and management upheaval come two years after Ebay unveiled its controversial plan to make Skype the third leg of an expanding internet conglomerate, alongside its e-commerce and online payments businesses.

However, while the internet telephone service has continued to add users at a fast rate, it has so far failed to produce the sort of e-commerce and advertising revenues that Ebay had hoped for.

"At the time, we thought strategically it didn't make a lot of sense and the price seemed excessive," said Scott Kessler, an analyst at Standard & Poor's, echoing a view of the deal that was widely held on Wall Street.

Yesterday Ebay continued to insist its long-term hopes for Skype were unchanged, and said that it had no plans to sell the business.

The news represents a big setback for two of Europe's most prominent technology entrepreneurs.

Skype has been the most successful of a string of high-profile start-ups by Mr Zennstrom and partner Janus Friis, whose other ventures have included peer-to-peer music service Kazaa and the online video venture Joost.

Ebay said the management change was amicable, and that it was looking outside the company for a new Skype CEO.

Ebay agreed two years ago to pay $2.6bn for Skype and spend up to €1.2bn ($1.7bn) more if the unit hit certain performance targets over the following three years.

In the event, the company said it had made an early payment of only €375m to end all its obligations, taking its total purchase price, based on current exchange rates, to about $3.13bn.

The partial payment of the "earn-out" provision reflected Skype's success since the acquisition in building its base of users to 220m, an Ebay spokesman said.

Skype revenues reached $168m in the first half of this year, but the company admitted that this was shy of its short-term goals.