Skype: Evolution from “Wildly Popular and Deeply Troubled”

eBay-Silverlake-MicrosoftOver the past six years of covering Skype, there have been three “Masters” – the original founders – Niklas Zennström and Janus Friis (2003 to 2005), eBay (2005 to 2009) and the Silver Lake consortium (2009 to MS acquisition). And, once regulatory approvals and due diligence are completed, Microsoft will become the fourth later this fall.

But we’ve never heard the full background to some of these transitions. We knew there had been a major intellectual property issue – “you can’t drive the car without the engine”; we heard presentations on the Skype business model as Skype was presented to the investment community by eBay. But what happened behind the scenes that resulted in the many business decisions made to justify these ownership changes has never come out as one complete story.

At this past week’s Fortune Brainstorm Tech event in Aspen, a most interesting panel discussion revealed some of the history and reasoning behind this evolution, starting with, on John Donahue’s assumption of the eBay CEO position in 2009, eBay’s decision to “carve out” Skype as a non-core asset. On the Fortune event panel were three key players in this evolution: Skype CEO Tony Bates, Silver Lake Managing Director Egon Durban and Andreesson Horowitz cofounder Ben Horowitz.

It’s most interesting to watch the entire video but some highlights:

  • Dealing with the dichotomy of a “wildly popular and deeply troubled” company that was in full blown litigation with its founders.
  • How Skype continues to operate as an independent company and its sole responsibility to Microsoft during the due diligence period leading up to the closing of the Microsoft acquisition, expected in October, 2011
  • Why Silver Lake, working with Andreesson-Horowitz, was able to execute on the two steps necessary to acquire Skype, in the process rescuing a “terrific asset that continued to perform, [had] fantastic network effects and continued to produce great product” from a “horrible cataclysmic outcome”. But seeing Skype as “resilient notwithstanding”, these investors recognized a unique opportunity that required a unique solution.
    • Yet they came up with a solution that would eventually give eBay investors a net gain on their initial 2005 investment in Skype.
  • The internal Skype business issues that the Silver Lake consortium recognized and why they hired Tony Bates out of a senior executive position at Cisco to take over the reins.
    • In the course of this there is a lesson on how a private equity takeover can be highly successful and grow a business built around existing key resources. It’s a stark contrast to the more often publicized “slash-and-burn” approach of many private equity acquisitions where employee and product cuts become the recipe for repackaging a business investment for a subsequent sale.
    • There are some interesting comments mentioning one additional key asset, beyond the technology and user base, that made the Skype acquisition a “magical opportunity” when Microsoft was considering the acquisition last spring.
  • What Tony Bates has done behind the scenes that has resulted in the release of five new products over the past six weeks1– more than had been released in the previous two years.
    • What Tony Bates sees as a bigger revenue opportunity than SkypeOut calling.
  • How the pending Microsoft acquisition of Skype will result in an entirely new business model for how Microsoft embeds an acquisition into it overall operations.

Bottom line: starting with the Silver Lake consortium acquisition, the Skype business case study is unique in how a wildly popular yet deeply troubled, engineering resource rich company can be converted into a an asset that will continue to be the “gold standard” for worldwide ad hoc communications in both the consumer and small business markets.

Watch the video; it’s a compelling – and revealing – story ….

Fortune: Lessons from Skype

1Five new products:

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About Jim Courtney

Bringing over thirty years' experience in the sales, marketing and management of cutting edge technology businesses.

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