Implications of Skype's IPO for eBay-Skype & Wireless Net Neutrality

Given that eBay's announced spin-off/IPO of Skype in 2010 is a material market event, this high-profile IPO represents a potentially tectonic development in eBay-Skype's (and FreePress') push for wireless net neutrality/Carterfone regulations and applying the FCC's broadband principles to wireless providers for the first time. There are much broader implications of this market development than many appreciate.

Some brief background information is helpful to understand the broader implications:  

• Reports suggest that eBay's plans for a public IPO in 2010 is a result of eBay not being able to get a high enough private market price ($1.7b) for Skype and the fact that current market conditions are not ripe for initial public offerings. (eBay originally paid $2.6b for Skype and added an additional $500m later, then subsequently wrote down $1.4b of Skype's value.)
• eBay-Skype unsuccessfully petitioned the FCC in 2007 to apply monopoly-era Carterfone regulations to wireless. The FCC did not grant the petition.  
• The issue resurfaced again in Washington as FreePress, in a 4-2-09 letter to the FCC, argued that net neutrality should apply for the first time to wireless networks and specifically that Skype's voice application should be able to make calls over carrier's 3G networks.     

So how does eBay-Skype's pending IPO change the landscape?

• First, Skype's public push for wireless net neutrality is highly material to the valuation of the Skype IPO and eBay going forward.
  • The financial purpose of the IPO is to unlock value for eBay shareholders, potentially billions of dollars over time, and to harvest a higher value for the Skype spin-off-IPO, potentially in the hundreds of millions of dollars.
• Second, under SEC regulations eBay-Skype have to be forthcoming to public investors that the perceived prospects of their public push for wireless net neutrality could have a material impact on the value and offering price of the Skype IPO.
  • Even a perception facilitated by eBay-Skype that the FCC somehow would grant Skype forced access to wireless carriers' private competitive networks for free, would mean that Skype investors could be led to anticipate a future profit windfall, because such a decision could materially accelerate Skype's growth in minutes, revenues and profits.
  • Now that the intention to pursue an IPO has been formally announced, eBay Skype has to be careful to fairly represent the prospects for wireless net neutrality regulation at the FCC.
  • Moreover, when eBay decides on a date to register the IPO in late 2009 or first half of 2010, eBay-Skype will be tightly restricted in their public comments under SEC "quiet period" regulations. That would include material public policy comments that could affect the value of the IPO. These SEC regulations exist to prevent a company from inflating the perceived offering price of the IPO to the detriment of public investors.  

• Third, the pending IPO will complicate eBay-Skype's ability to continue to publicly lead in the public relations/policy push for new wireless net neutrality or wireless Carterfone regulations.
  • In the past, Skype has maintained the PR facade that wireless net neutrality was not about Skype, but only about enhancing user freedom to access the Internet content of their choice.
  • Now the pending IPO, makes it clear that Skype has maybe the single biggest monetary stake of any company in the outcome of wireless net neutrality.
  • In other words, eBay's business decision to maximize the value of  eBay and Skype in an IPO while simultaneously pushing for special regulatory dispensations, makes obvious that Skype has a big financial stake in the public policy outcome of wireless net neutrality.
  • Skype's advocacy can no longer solely be cloaked in a user freedom message, but must now also include an admission that forced wireless net neutrality would effectively tip the competitive playing field to advantage eBay-Skype and effectively put the FCC in the position of choosing one company and one technology as the winner in the marketplace.
  • FreePress is now in the thorny position of appearing to advocate for a public policy provision that many of its members may view as a de facto public bailout of eBay for its mistake in buying Skype for the inflated price of $3.1b.
• Fourth, the public spin-off/IPO of Skype will put renewed scrutiny on Skype's stand-alone business model. Several important facts will emerge over time as Skype is put under the public spotlight.
  • Skype's business model is pure arbitrage. It attracts customers by effectively offering the network services of its competitors for free, then monetizing value-added services. 
    • At core, Skype's business model is uneconomic without arbitrage, because it enjoys the benefits of a physical world communications network without having to pay for the costs of using those networks. All of Skype's business success and profitability depends on the arbitrage of cost avoidance.  
    • I explained how the "uneconomics" of Skype's model is anti-market-based-competition in an earlier post: "Skype's Anti-competitive Uneconomics."
  • Skype's voice/video app is by far the dominant player in that Internet market segment. 
    • Skype is reportedly the world's largest provider of long distance communications despite having no physical long distance network.
    • Like the Internet network effects we have seen elsewhere on the net that produce world dominant players, e.g. eBay commands 95% share of online auction listings, and Google commands a rising 70% share of search advertising, Skype is the runaway dominant player in Internet long distance voice/video communications.  
  • Upon closer examination, can anyone compete with a world dominant communications provider long term that already has four times more customers than the largest American communications provider, and more importantly that does not have to pay for the cost of benefiting from their competitors's network facilities?    

Bottom line: eBay's decision to make a public offering of Skype in an IPO in first half of 2010, has much broader implications than many may have appreciated.