Not quite a billion, but $900 million is still a lot of money. Therefore it will be interesting to see if and how eBay's management explains its decision to write down the value of Skype with $900 million in addition to the earn-out payment of $530 million when eBay reports its Q3 results later this month.
With Skype making about $350 million in revenue this year and growing at an annual rate of about 100 percent, it is not obvious what the business is worth. Big Internet companies (Yahoo, Amazon, Google and eBay) currently has quite rich valuations, with price/earnings ratios between 30 and 100. If we for sake of argument would assume a net margin of 10 percent for Skype, the company would be making a profit of $35 million in 2007. Using the multiples of the publicly traded Internet companies, the current valuation would range from about $1 billion to $3.5 billion. Assessing fair market value and taking an impairment charge in such an environment is clearly as much an art as a science.