• The Wall Street Journal, Tuesday, October 2, 2007 11 AM

eBay's purchase of Skype for $2.6 billion in 2005 has been a bust. The Web telephony provider contributed just $90 million to eBay's total haul of $1.83 billion in the second quarter, prompting the online auctioneer to take responsibility for paying too much. As result, eBay has told investors it will take a $1.4 billion third-quarter charge related to Skype.

It also announced that co-founder and chief executive Niklas Zennstrom would be stepping down--presumably to focus more on Joost, Zennstrom's online video project that came out of beta this week. He will be temporarily succeeded by former Chief Strategy Officer Michael van Swaaij until a permanent successor is named.

So what is it that failed? Skype's business model or its relationship with its parent company? Both. Skype doesn't charge for calls made over the Internet, and it charges very little for Internet to land-line or cell phone calls. While that model builds tremendous user loyalty, it won't generate huge business until Skype corners the Web phone market. The future of calling is on cell phones, not PCs, and Skype won't be able to penetrate that market unless eBay shells out multi-billions to build a wireless network. Meanwhile, the marriage of an Internet telephony company to an online retailer never made sense.

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