At today's eBay earnings conference call with analysts, eBay CEO Meg Whitman reported with respect to Skype:

• Higher revenues and ongoing operating profitability for Skype in Q3
• Less pleased with user metrics: flat (SkypeOut) or declining (Skype) usage minutes
• Earnout placed the wrong incentives on how Skype should grow its business
• Not enough focus on "Delight the User"
• Confidence in Skype as a long term investment
• New CEO search has generated strong interest from candidates both inside and outside eBay, largely due to the Skype brand

The Earnout's Consequences

In response to questioning from an analyst, Meg responded that the earnout effectively placed focus on meeting revenue and gross profit objectives at the expense of attracting and engaging users. Her summary statement: "we tried to monetize Skype too early", especially when Skype's original value proposition was "you can talk for free". She specifically mentioned user interfaces and customer support as areas that had suffered as a result of the earnout focus; in addition, profits at Skype had actually exceeded their original 2007 business plan. But they had dropped too much profitability to the bottom line instead of focusing on using their unexpected profits in 2007 to drive early user engagement through additional investments in marketing and customer support.

She certainly expressed relief that eliminating the earnout meant they could move forward by doing the things that are really required to build the business such as improving the user experience, driving user adoption and developing new products and features.

Personally my observation with earnouts is that they fail to create the win-win situation all parties think they are heading towards at the time of an acquisition. The goals in earnouts tend to defocus from the goals needed to truly build a business and create disincentives to innovation and team building somewhere along the line. My speculation: a big part of Skype's problems probably can be tied to the fact very few internal employees, especially at the management level, had any direct interest in the earnout. Yet I have to say that Skype employees I have met are self-motivated by knowing that they can make a difference in their users' lives through inexpensive real time conversations.

Going Forward

While my Skype Primer series has provided significant background on where Skype is today, going forward Skype has three key assets:

• Strong brand recognition
• Significant new product development and partner relationships
• A very keen, enthusiastic employee base

I have found these three factors have been the foundation for successful reorganizations in the past; ineffective baggage has been discarded; the new CEO can start with a clean slate. Analysts are more interested in knowing that processes, such as eBay's annual strategic planning exercise over the summer, were in place to facilitate the decision to make changes as opposed to arbitrary, irrational decision making. The challenge now is for eBay's board to select the right CEO.

Earlier Meg had stated the overall objectives for Skype going forward would include:

• Prioritize resources
• Refocus the team
• Ensure Skype users will continue to enjoy and benefit from "this great technology"
• Renew efforts at finding synergy with eBay and PayPal
• Make Skype available across many platforms (such as MySpaceIM)

As for eBay's divesting its interest in Skype, forget it. Get ready for the ride.... may the incentives and atmosphere for innovation at Skype be restored.