eBay buys Skype

September 12, 2005 7:24 AM

The bizarro dot-com deals of the 90's are back, baby! eBay, the company whose business model is to monetize what people otherwise throw out or give away, is buying Skype, who gives away what everyone otherwise pays for.
posted by mkultra (33 comments total)

Press releases here and here.
posted by mkultra at 7:26 AM on September 12, 2005

Agreed. An estimate of Skype's revenues are ~$50-100m with Om Balik estimating at $72m. Given that, eBay's offer is 57 times revenues. We really can't be sure, as their finances are private.

Not only that, but all eBay wants to use it for is as a trust-enabler: You as a buyer would have one-click access to *speak* to your seller.

Now, for the future, with eBay having eleventy-billion users, they have a pretty powerful userbase to feed more (VOIP-based) stuff to...
posted by rzklkng at 7:32 AM on September 12, 2005

VOIP has been the new fight for the year.
posted by Dean Keaton at 7:41 AM on September 12, 2005

I just don't get this at all. Can someone explain to me how it makes sense?

It's like if Microsoft bought Purina Foods, or something.
posted by selfnoise at 7:45 AM on September 12, 2005

For those with access, the WSJ article

I don't think this is quite 90s, as instead of creaming themselves investors are taking a step back:

Since news of a potential deal surfaced last Thursday, market participants have questioned the strategic value of acquiring Skype, particularly for such a high price tag, and have expressed concern about the potential for dilution of the company's shares. EBay's shares fell a cumulative 4.5% the last two sessions, ending Friday at $38.62 on the Nasdaq Stock Market. The stock is down from near $60 at the start of the year.

This is definitely a risky move for eBay and arguably outside their mission statement. I'm always wary of companies moving way outside their mission statement, as it's not what they do. If eBay were positioning itself to be a holding company and trying to compete with traditional companies (AT&T, Verizon) using their technological advantage, I'd say go get them.

From the press releases it sounds like they're doing this not to compete on the low-cost international phone call market but as basically an e-mail enhancement. The first article linked discusses why this is possibly a stupid idea.
posted by geoff. at 7:46 AM on September 12, 2005

Seems smart to me.
posted by xammerboy at 7:48 AM on September 12, 2005

Exactly, selfnoise. Skype is clearly a very promising business, but I don't see at all why eBay would be a good fit. It's like some kind of affiliate deal gone haywire.
posted by mkultra at 7:49 AM on September 12, 2005

This makes sense. Look at it this way - imagine that Skype has a revenue of of 50 million USD. This is after barely two years of service and absolutely no high profile advertisment. This is also a mere 6 months or so after it launched its pay services.

Ebay already has a huge customer, particularly in people that are ready to _pay_ for things. Ebay reaches the older people, and not just the chatting teens.

By introducing Skype to the eBay masses, using just the current pay services (skype in and skype out), eBay could triple the revenue of Skype.

Furthermore, Skype can be used to move people into using Paypal. You may just want to make a short cheap call, but if for that, you sign up for paypal, next time you see a paypal payment link, you will be tempted to use it.

Skype is free, and skype is an instant messaging platform. LOTS and LOTS of people use skype, and will never pay for Skypeout or for Skypein. But if Skype is associated strongly with eBay, then everytime these people open Skype, they are by proxy seeing ebay. After a while, they will go check out what eBay is.

In lots of countries in the world, there is no eBay yet. With skype, the brand is going to be created long before the product arrives.

Skype gains 155 thousand people a day. eBay can forcefeed their advertisment into these people daily. This is a HUGE advertisment opportunity, not only for eBay Auktions, but also for Paypal.

Buying Skype is not a stupid move.

Also remember, they are paying for half of it in stocks, and stocks are just potential money.
posted by markesh at 7:50 AM on September 12, 2005

markesh, optimistically, you're right...they are buying Skype for what it could be, not for what it is. There is NO WAY it's worth $4b currently. Now if Google offer's free WiFi and VOIP (wireless) takes off with appropriate hardware, then I'm in. Getting people's feet wet with the technology via eBay is a good way to get it out there, but what's the business model? Surely not advertising supported telephony chained to the desktop...
posted by rzklkng at 7:58 AM on September 12, 2005

I think it's much more likely that eBay wants to tie up Skype with PayPal, not eBay itself. Skype's rates kick butt especially internationally but payment is a bit problematic (with credit cards). Conversely PayPal is a lot less popular overseas, as it doesn't have the eBay platform to use as a springboard. Now, put the two together (and note that PayPal recently changed their fee structure to allow payments for less than $1) and they may just be aiming at expanding their reach internationally. Still at $2.6B/2.6M users = $1000/user, this is too expensive...
posted by costas at 8:11 AM on September 12, 2005

Building on what others have said, this makes perfect sense. Ebay's business model is not to "monetize what people otherwise throw out or give away" but to put sellers in touch with buyers who they otherwise would not have found. In economics terms, Ebay solves a coordination problem and allows people to realise the true market value of their possessions.

Anything that improves communication is complementary to this aim.
posted by godawful at 8:24 AM on September 12, 2005

I dunno about synergy. I think that eBay is facing slower organic growth and needs to buy a high-growth company to keep its finance number pleasing to the street. Nothing more strategic than propping up the top line.
posted by GuyZero at 8:31 AM on September 12, 2005

Yeah people, they're paying $1000 per user What are the chances each user will ever pay that much into them? (not much, I suspect).

Still, its quite a coup for the founders, so good for them.

costas's analysis makes sense. Tie Skype to Paypal and use it to go international. Other then that, it just dosn't make sense.
posted by delmoi at 8:33 AM on September 12, 2005

I read a pretty astute /. comment (color me 5: Shocked) that I think nailed it. Forget about tying EBay to Skype. Tie PAYPAL (EBay) to Skype.

Paying for Skype calls is kind of a pain the butt right now. Also, PayPal has an obvious leverage of scale that could allow them to process micropayments.

So either coming (Running your own Pay-per-call hotline) or going (calling Bangladesh), now just keep a few dollars in your Paypal account and you are GTG.
posted by cavalier at 8:36 AM on September 12, 2005

markesh, perhaps I do not understand what Skype is exactly. What is the value added besides being able to hear a person's voice? Is that really that much greater than an e-mail? Personally for archival and legal purposes I'd rather have an e-mail than making a phone call.

I can see where the tie-in with PayPal will help but using Skype as a marketing vehicle for e-Bay and vice versa seems somewhat presumptious. I think the money could be better spent for tackling fraud in e-Bay and making PayPal a little more legitimate as a service.

It appears to me that Skye's greatest benefits will come from third world countries whose state-runned or monopolized telecom industry makes phone calls prohibitive. I'd be afraid of the regulatory taxes that such countries would put on VoIP services.

This is still an industry in its infancy and while I don't believe Skype will go the way of Pets.com, I don't think e-Bay got a deal on this by any means. A partial buy out or something similar would have been much more prudent in my thinking. I only hope that e-Bay has some sort of plan for Skype that they're not releasing yet. Maybe they'll pull a Google and do something really great with this and make it available to the masses.
posted by geoff. at 8:51 AM on September 12, 2005

Here's the Slashdot thread referenced above. His case seems to be that this globalizes the marketplace for services over the phone. I'm still weary that such a large market exists for micropayments to make this profitable. The Paypal-Skype marriage makes a lot of sense, but the example the Slashdot poster gives is somewhat dubious, it goes something like this:

A computer whiz in Mumbai can cheaply call Baltimore and provide his services. This is basically a small business version of whats happening now. The only problem is that the Mumbai guy is facing the same problem many large companies are facing now. Namely the language and cultural barriers that make calling overseas so frusterating.
posted by geoff. at 8:58 AM on September 12, 2005

Geoff, we (or some posters here) reached that conclusion in this thread as well.
posted by delmoi at 9:13 AM on September 12, 2005

geoff: The thing with internet products is that once it reaches critical mass, it is likely going to stay there. ICQ was technologically surpassed a long time ago, but LOTS of people are still using it. The same with Skype - Skype has about everything you need for a call, there are not many more _critical_ things that can be added.

This means skype will always have a market share. Skype also spreads virally - to call somene else, they also have to have skype.

So eBay has bought a hugely expanding advertisment opportunity. eBay has bought the ability to reach a lot of people through an unrelated and free service.

eBay is a company that will need to expand. It will come up with new ideas and services in the future. Those services have to be pushed to people. Skype is what will do this.

The estimate is $1000 per existing skype user, but with the stocks removed, this is $500 per user. At a growth rate of 150,000 users a day, in two years, this value will be running at under $100 per user.

The eBay and Paypal fees I have paid over the last 3 years have probably exceeded $1000. If Skype would have got me hooked on any of the two services, it would have been worth it.

Buying skype for $1,2 billion does not make sense if the company were to be run independently. But it makes sense once all the companies are linked together.

In my opinion, the paypal link should not be too emphasized. Paypal is not a _very_ high growth market, it takes time to convince people of new payment methods, and most countries have got laws that would block paypal, or have got banking systems that do not allow easy paypal adoption.

I think that the short term strategy is to maximise skype revenue, as well as make skype a platform for pushing current ebay products. The medium term strategy would be to build on top of skype.

eBay has a profit of 400 million annually. Skype would add 150 million to that. It also has cash reserves that it raised from being publicly traded.

eBay is a mature company. It has practically maxed out the Auktion market, there is not much more to do there. It needs to either burn this money or invest it. You see, eBay revenue is around 3billion, and their profit is 300 million. Their operating costs are really not that high. eBay is marking revenue money as investment capital, so as not to declare it as profit, and this money needs to be disposed of. That's why the'yd prefer to overpay for a company rather than give it up.
posted by markesh at 9:38 AM on September 12, 2005

Snark all you want, guys -- ad hoc VOIP has a huge future, and Skype will be a conduit for billions of consumer dollars before the market stabilizes.

geoff: What is the value added besides being able to hear a person's voice? Is that really that much greater than an e-mail?

[pause /]

Not to sound too sarcastic, but: It's a phone call. Remember phone calls?

eBay's talk of synergy is all window-dressing. They're really not looking for or expecting any more synergy than they get from their own muscle, as markesh suggests. Ad hoc VOIP (i.e., stuff that's not tied to a specific geographical location) is going to make a shitload of money -- it's starting to make it, now. They're positioning to play. That's it. Maybe it's smart ("gaining a first-mover advantage"), maybe it's not (incurring the liabilities of being a first-mover) -- I lean toward the former, in eBay's case and from the viewpoint of 2005.
posted by lodurr at 9:40 AM on September 12, 2005

Direct advertising via the rapidly growing Skype.
A novel way for eBay users to communicate and negotiate. (Now that will be a change.)
Buying your long-distance minuets via PayPal.

It might not be that stupid an idea after all.
posted by generichuman at 9:45 AM on September 12, 2005

eBay does two things, it gets people in touch (advertises stuff), but it's also a bidding or deal-making mechanism. Given cheap and easy voice-comm, won't certain segments of their user base just start talking to each, making deals directly, rather than plodding through the online bidding process? In a way isn't this sort of a return to pre-eBay days when folks did business on the phone? eBay then retains it's basic advertising function but the deal-making price-setting part becomes less important than now? Maybe they see a day coming where, for some types of deals, their current model will be replaced by cheap and easy voice comm services anyway and are just trying to postition themselves to evolve along with the market?
posted by scheptech at 9:46 AM on September 12, 2005

Wow... I don't care if Skype has patterned a process for spinning flax into gold, it isn't worth 2.6 billion dollars. I guess the nu-dot-com days are at our doorstep, and I couldn't be happier. I miss the two hour paid lunches.

Now, if I could only find an angel investor for my new online pet food e-tailer....
posted by SweetJesus at 10:43 AM on September 12, 2005

More stuff from PaidContent: Some metrics and a link (pdf) to a PowerPoint presentation on the Skype/eBay move.
posted by rzklkng at 10:45 AM on September 12, 2005

I like the slashdot analysis. Paypal's recent fee structure modification (re: micropayments) allowing for a web of experts to be able to charge low per/minute fees to anyone willing to pay (for advice, expert computer help, sports picks...etc) seems perfectly in tune with the buying the very technology that can make that happen.
posted by jikel_morten at 10:51 AM on September 12, 2005

I've had Skype for months and I've never used SkypeOut, the for-pay feature to make calls to regular phone numbers. If eBay is thinking it can generate revenue from me, they're sorely mistaken. If the $1000/Skype user metric is correct, and there is a significant number of people like me, then this was a very poor investment. Of course, if they make it an all-pay service, then perhaps not quite so bad, but users like me will be long gone.
posted by tommasz at 11:33 AM on September 12, 2005

They will probably just start charging for regular Skype use. That is bad for me.
posted by jb at 11:35 AM on September 12, 2005

Watch for Vonage to sell at $2,500 per subscriber or more, with a much slower growth rate. EBay will ultimately have gotten a great deal.
posted by MattD at 11:39 AM on September 12, 2005

what is sort of wearying, for me, is that ebay and skype's business models aren't very similar. this really is one of those bizarro dot-com deals of the 90s, and in that regard it's very haunting.
posted by moz at 11:59 AM on September 12, 2005

I think it is worth noting what Skype did right to make themselves this attractive in this arena. Ignoring the no-brainer part about making a product that works well, they made it work well with Windows, Mac and Linux.

I have no idea whether they are worth what eBay paid (or ever will be) but I'm much happier to see the buyer be someone who wants their product to work on all platforms than I would be if Skype was purchased by Apple or Microsloth.

The question is, where will Skype go now with eBay development dollars behind it?
posted by spock at 12:03 PM on September 12, 2005

As one who's used eBay often, I can't imagine wanting to talk to those people. Many of them can barely write.As one who's used eBay often, I can't imagine wanting to talk to those people. Many of them can barely write.
posted by QuietDesperation at 12:54 PM on September 12, 2005

There's an echo in here.
posted by spock at 2:26 PM on September 12, 2005

And they repeat themselves a lot.
posted by kindall at 2:36 PM on September 12, 2005

Skype also spreads virally - to call somene else, they also have to have skype.

Not true. I use SkypeOut almost exclusively. I live in China, my 83 year old grandmother is not about to install Skype. I am still able to call her twice a month at rates I can't get locally and from the convenience of my home.

I have also paid for SkypeIn so that friends can call a local, (for them), number to reach me if I am near my computer but with voicemail if I'm not.

As a non-E-Bay user I hope this has minimal effects on my service.
posted by geekyguy at 5:38 AM on September 13, 2005