VCs will be the winners in eBay/Skype deal

Wired on Friday: There is, it must be said, something of the stench of AOL-Time Warner hanging over the sale of internet telephony provider Skype to e-auctioneers eBay this week.

First, there was irrational exuberance of the price: $2.6 billion (€2.11 billion) - $1.3 billion was paid in cash - for a two-year-old company whose only asset is a computer program that lets people speak for free or cheap online, and those who use it.

That valuation works out at around $50 per current Skype user, and 20 times the company's entire revenue for 2005.

The numbers were, if anything, more ridiculous in 1999, when AOL merged with Timer Warner in an ill-fated $160 billion stock deal. But the parallels are strong.

The fit for that deal seemed, at first glance, ill-considered, and that first glance was later clearly shown to be right.

The mega corporation stumbled and fell between its two stools; its AOL management were deposed, and the corporation re-organised until there was hardly a trace of the merger.

But no one wrote their first impressions at the time. Instead, much column space in the Silicon Valley papers was used gamely attempting to rationalise a grand plan that would seamlessly and smartly dovetail everything.

Like players at a roulette table, market watchers struggled to create a sensible pattern that would make the seemingly random fit some logical business plan. After all, smart people cut these deals. There had to be a reason why.

You hear the same noises here about the eBay-Skype buyout. One side of the equation is an auction firm based in California. The other, a voice-over-internet "virtual company" with offices in London and developers in Estonia.

This week's analysts imagined simple Frankenstein-like hybrids of those two. Auctions where online bidders could talk to one another, say. That makes a crazy kind of sense, if you've never actually taken part in an eBay auction.

Voice has no place in eBay: the whole point of eBay is that all bids are mediated through the site, and over a period of days. At best, voice would make a charming gimmick for a range of more short-term auctions.

But if they wanted that, eBay needn't have bought the company, they could have just bought the software.

The same argument goes for anyone trying to mentally weld eBay's subsidiary, PayPal, and Skype together. Skype is a phone, PayPal is a payment system.

Perhaps an internet payphone? One that would let you easily pay for services online and on the phone? Once again, the mind scrambles to think of an application that wouldn't be either ridiculous, or just as easy to achieve with Skype as a customer of PayPal, rather than a division of it.

So if these ideas are so preposterous, what is the true thinking behind this $2.6 billion bargain?

I suspect it is the same as that underlying AOL and Time Warner and the same reasoning that lies behind every business deal. This is a deal that makes everyone involved happy.

The venture capitalists get their money - a ridiculous amount of it for those who invested $20 million in Skype - and the nervous boards of each company think they've attached themselves to the market of the future.

What happy salesmen can't guarantee is a viable outcome.

Buyouts like this are like two captains in a storm persuading one another to hitch their craft together. Both convince each other that they're seaworthy when they are not. Both are delighted with the deal, because in fact, their boats won't last without being drawn by a stronger craft.

Both, of course, sink.

Voice-over-internet protocol (VoIP) is certainly the wave of the future. Skype's management, however, has every reason to be nervous.

It's a market that's becoming increasingly cut-throat, with the entry of incumbent telecommunication companies and big figures like Google, Apple and Microsoft, all determined to get a slice of the new action before their own, century-old portion is eaten.

Skype has little stickiness on its own. Skype's users are computer users, not phone owners, and consequently have little loyalty. It's easy to be fickle when you can just swing out one telephone service, and boot up another. If Skype is to survive, it needs a big company's backing behind it.

Are auctions the way of the future? Well, yes: as are electronic payments, as provided by the PayPal division of eBay. But eBay's investors need growth, and growth is slowing in the auction market.

Better to hitch a ride on a new, burgeoning market opportunity like VoIP, even if it is several miles from your core competency.

It's a little harsh to compare this new combination to its dotcom predecessor.

We are not in the boom now, although the Valley's investors are certainly caught up in the excitement of a mini-boom. The fit is not quite as ugly as that of AOL and Time Warner, the complexities required to weld the companies together not as tricky, and the right management are still in charge.

But the new deal is still just as counter-productive as the old. Skype and eBay worked better as separate companies, and the only reason why they are lashed together now is because all the true captains of these ramshackle boats - the venture capitalists - have different agendas than those sailing on them.

It's hard not to believe that they see these shipwrecks coming and use the distractions and remunerations of a merger to jump ship entirely.