E-Bay & Skype (Part I & II)

Even the thought that E-Bay is evaluating the possibility to buy Skype is somehow unsettling.

Given the discernible lack of complementarity between what E-Bay and Skype have been about, one is left wondering what the synergies might be? Or maybe E-Bay, after an extensive international expansion, is simply running out of steam as far as economies of scale are concerned. After acquiring Pay-Pal, one would expect further developments from E-Bay towards economies of scope--since the shopping experience there is far from perfect (e.g. trust or item return issues).

By comparison, one can see a much better rationale behind Amazon.com's A9 efforts. Often times, somebody searches something on the internet with the prospect/possibility of buying something.

... unless E-Bay's rationale is to counter what Yahoo! and Google have recently done in the VoIP area. Indeed, considering that these two are its direct competitors, E-Bay may fell it needs to mirror their actions. However, this would be a wrong move; check out historical precedents!

09/26/05 Addendum:

Following the completion of a project evaluating opportunities for other players in the telephony and data services sector, here are some considerations as they relate to the rationale behind the recent acquisition of Skype by E-Bay:

  • "We believe that you should not have to pay for making phone-calls in future, just as you don't pay to send email." Niklas Zennström, Skype cofounder and CEO
  • So far, Skype's cost of acquiring a customer has been $5, compared to $200-$400 for Vonage;
  • Skype adds about 150,000 users a day to its member base of 54 million in 225 countries and territories. It does so without a dollar spent on equipment, or marketing--zero marginal cost.
  • "We want to make as little money as possible per user, because we don't have any cost per user, but want a lot of them." Niklas Zennström
  • VoIP is driving the price and cost of VOICE to zero;
  • Cost sensitive customers are adopting Skype in droves. In short term, this increases average revenue per user (ARPU) for the providers of traditional telephone services. In the end, they would have to offer telephony services for free, and part of a larger data services package.
  • "When Yahoo! and Microsoft buy companies, they typically disintegrate them." Niklas Zennström
  • E-Bay plans to leave Skype alone, as a brand and business.
  • Skype is one of the top brands on the internet. Its brand alone could be worth over $1Bn of the $2.6 E-Bay has paid for it.
  • The rest of the purchase price (up to $1.6Bn) could also be justified by the "reduced friction" Skype will enable E-Bay's transactions with. Cross-pollination between the customers of the two entities, and "pay-per-call" (analogous to Google's pay-per-click), are further justifications.

Still not convinced Mrs.Whitman's spent well E-Bay's dollars? Consider this:

The picture on the minds of the EBay-Skype dealmakers becomes so much clearer now, and sense has been blown into it anew. This deal is a keeper.

Watch for major transformations in the telephony-services market; subscribers will become consumers!


Anonymous said...

The acquisition you're talking about is happening. According to Financial Times.

Ebay deal for Skype challenges Google and Yahoo
>By Richard Waters in San Francisco and Paul Taylor in New York
>Published: September 12 2005

Ebay on Monday laid out plans to move beyond its core e-commerce business, potentially putting it on a collision course with Google and Yahoo, as it confirmed its acquisition of internet voice company Skype for up to $4.1bn.

The auction company's executives said that adding a voice calling feature to its existing online network would let it charge fees to merchants for generating sales leads the internet's fastest-growing business, currently dominated by the two biggest search engine companies. It could represent the most important in a series of recent initiatives by Ebay to extendinto new areas of online activity.

However, the high price for the transaction and the young nature of Skype's business prompted scepticism among some telecommunications industry executives and analysts, who questioned Ebay's ability to generate significant revenues from its new acquisition.

For followers of Ebay, a sense of déjà vu hung over Monday’s news that the world’s biggest e-commerce company had agreed to pay a large premium to buy Skype, which carries voice calls over the internet.Go there
“Ebay has no related presence in the online personal communications market (no instant messaging, chat or e-mail services) and we do not see immediate synergies from such a move,” said Mark Main, Senior Analyst with Ovum, the leading telecoms consultancy.
The online auction company said it would pay $2.6bn for Skype, half of it in cash and half in stock, with up to $1.5bn more to be paid if the company meets certain performance targets over the next three years.

Meg Whitman, Ebay's chief executive officer, said that by integrating Skype's voice calling technology into Ebay's markets, making it easier for buyers and sellers to communicate, the company would be able to lower the “friction” in online transactions and increase the overall value of its services.

She also laid out a plan for Ebay to charge fees for generating sales leads, with merchants paying every time a potential customer clicks on a link in an online listing to initiate a voice call.

Some advertisers might beprepared to pay between $2and $12 for each call, she added.

Ebay's millions of visitors could represent a valuable audience for such a service, said Youssef Squali, an analyst atJeffries, a New York investment firm, since they usually visitthe site intending to make a purchase.

Based on conventional measures of valuation, such as its current revenues, the Skype purchase looked expensive, analysts said. The company generated $7m of revenues last year, with $60m expected this year and more than $200m in 2006, eBay said.

Rajiv Dutta, Ebay's chief financial officer, said this represented a faster pick-up in revenues than either Ebay or PayPal, its online payments service, had experienced in their first years of charging for their services, suggesting that Skype would prove a valuable money-earner for the company.

fCh said...

I do share the skepticism of those who question the assumptions of Mrs. Whitman. Even if she's got a great derivative plan to make money out of a communication tool like skype, what anticipated returns could justify the purchase price?

She also laid out a plan for Ebay to charge fees for generating sales leads, with merchants paying every time a potential customer clicks on a link in an online listing to initiate a voice call.

Some advertisers might beprepared to pay between $2and $12 for each call, she added.

I could see an international buyer placing a phone call to a seller willing to pay that much (probably they are already paying some when EBay shows up with whatever listing when you search on Google), but how many of these could we be talking about?

How about 1-800 seller numbers or simple chat/IM technologies?

fCh said...

Motley Fool seems to think there is a rationale behind this acquisition.

And it does. Skype got eBay's interest because it was generating buyout interest elsewhere and because all of the major portals were rolling out their own Skype-like audio features on their instant-messaging platforms. Exchanging goods? Exchanging words? It may seem like a stretch, but eBay couldn't afford to let the other Internet giants grow unchecked.

The path to prominence for eBay was dictated by having the masses at the ready. Buying Skype was about securing eyeballs -- and eardrums -- and making sure that even more online users stayed well within the reach of Meg Whitman's marketing whims.

Is it?

Anonymous said...

Motley Fool plays contrarian and is looking for a contorted way out of this. For $4Bn even I could have come with a better suggestion for E-Bay to acquire.

The Net’s New Odd Couple
CoupleWhy eBay is buying Skype.
Tuesday, September 20, 2005
By Adam Lashinsky and Daniel Roth

Even for a business built around oddball purchases, the decision by eBay to acquire the free voice-over-Internet company Skype—for as much as $4.1 billion— in mid-September appears at first to be pretty goofy. Consider the strained business rationale. While most deals come packaged with one easy-to-digest line about synergies, eBay needed a 78-page PowerPoint presentation to explain its purchase, offering a hodgepodge of suggestions on how it could build Skype into its business. At the same time, CEO Meg Whitman made sure to point out repeatedly Skype’s value as an incredibly fast-growing stand-alone phone business. (In early 2004, Skype had 2.4 million registered callers worldwide; that number is now over 54 million.) “I would characterize it as an effort for us to continue to keep expanding the eBay marketplace,” tried out Whitman over breakfast a few days later.

Making the two businesses work well together is sure to be a challenge, even for a management star like Whitman. eBay has long since joined the establishment. Skype rejoices in taking on the established. Founders Niklas Zennström and Janus Friis made their name creating Kazaa, at one time the single best way to steal songs on the Net. (They still don’t enter the U.S. for fear of being subpoenaed.) The pair built Skype using Estonian computer geeks and chose tax-haven Luxembourg as their base.

Whitman was introduced to Zennström by a mutual friend in Beijing this past May while she was attending the FORTUNE Global Forum and he was trudging through Asia hammering out partnerships. Zennström isn’t worried about a culture clash. “The plan is business as usual,” he insists. “We’re getting a big brother now, and we can use a lot of their toys.”

Cultural fit or not, eBay felt it had little choice but to act: This summer its biggest challengers—Google, Microsoft, and Yahoo, all of which offer avenues for buyers and sellers to find one another—acquired or launched technology allowing their users to call each other online. eBay was falling behind and decided to buy the best-known brand in the business. “Keeping up with the Joneses is a good way to explain it,” says Yankee Group analyst Patrick Mahoney. The market is unimpressed: eBay’s stock is down 7% since merger rumors broke.

But if the reaction on Wall Street has been muted, observers in Sweden and Estonia have virtually declared a national holiday. Under the headline zennström has made history, Stockholm business magazine Affärsvärlden wrote that the Swede “deserves his own chapter in Swedish business history books.” If eBay can figure out the best way to monetize its own fast-growing new toy, he may get his own book.

fCh said...

Since you've made it this far, let me say that I have given a lot of thought to this issue on behalf of a customer. Watch this space, chances are that I'll be posting an addendum soon! In essence, this acqusition could prove a very smart move...

Anonymous said...

On 31 August 2005, the online payment service PayPal announced new micropayment pricing for
online goods. (Gartner defines “micropayments” as the transfer of funds from the buyer to the
vendor for transactions under $5.)
PayPal’s move into the micropayment market was a sound business decision, and one that is
likely to lead to market domination. PayPal can beat credit card pricing because it blends credit
card, bank account transfer and stored PayPal account value funding on the payer side, lowering
PayPal’s overall cost of funding any payment. PayPal encourages repeat payer customers to
keep money in their PayPal accounts (the company’s lowest-cost funding method), and to use
credit cards (the most expensive funding option) as a last-option funding method.
PayPal has long had the capability to service the micropayment market. However, the company
waited until it had amassed enough customers (it claims 78 million accounts) and enough
opportunity to earn profits from merchants who sell goods and services priced under $3. The
move to micropayments was simply a matter of changing PayPal’s pricing model and offering
online merchants a rate of five cents plus five percent of the total cost for transactions under $3.
For example, PayPal’s micropayment fee reduces the merchant fee from 35 cents to 15 cents on
a typical $2 transaction — roughly the price of one ring tone or single online greeting card.
PayPal’s expansion is bad news for countless startups around the world that have tried to enter
the micropayment market. Although credit/debit card companies could enter this market simply by
lowering merchant transaction fees, these companies don’t have the PayPal advantage of
funding payments from PayPal stored accounts, as well as traditional bank accounts.
• Vendors in the micropayment market: Offer value beyond payment processing to
compete with PayPal. (For example, a vendor serving the vending machine market
could also manage vending machine maintenance and inventory.)
• Banks, card issuers and other vendors: Consider reselling PayPal payments to
merchant customers, instead of devising ways to compete with PayPal.
Analytical Source: Avivah Litan, Gartner Research
Recommended Reading and Related Research
• "Federal Reserve Conference Highlights Impasse on Card Interchange Fees" — U.S.
regulators and Department of Justice officials should enable merchants to collaborate on
implementing card payment alternatives and force more disclosure and transparency in
interchange rate setting. By Avivah Litan
• "Online Bill Payment Is Finally Ready for Prime Time" — Providers and billers need to
determine which long-term competitive and service strategies to pursue via the
promotion of online bill payment, and develop alliances and marketing programs that
enhance these goals. By David Schehr, Avivah Litan and Mike Cruz

Anonymous said...

fch, i've seen you are a smart guy. however, how can these profs not see what you saw in your addendum?

eBay Calling Skype: Is It a Good Connection?

When online auctioneer eBay announced its intentions last week to buy Internet communications services provider Skype in a potential $4.1 billion deal that will consolidate three of the biggest Internet brands -- eBay, PayPal and Skype -- under one roof and eliminate e-commerce "friction," the questions began.

What, people are asking, is the rationale behind the acquisition, and isn't $4.1 billion a bit steep? After all, it takes some imagination to see how eBay's e-commerce activities -- auctions and payment systems -- will be combined with Skype, a Voice over Internet Protocol (VoIP) and PC-to-PC calling company that has signed up 54 million users globally in a little more than two years.

Under the terms of the deal, eBay will pay $2.6 billion in stock and cash plus "potential performance-based consideration" that could make the deal worth $4.1 billion over time. The acquisition of Skype is eBay's largest ever (PayPal is the second largest at $1.5 billion). With Skype, eBay gets a way to enter the voice communications business, integrate Skype with its auctions and payment systems, and deliver sales growth. Skype gets the resources to compete with rivals ranging from Google, Microsoft and Yahoo to Verizon, Vonage and SBC.

"We have evolved over the years and our goal is to grow faster than [the rate] of e-commerce," said eBay CEO Meg Whitman on a September 12 conference call with financial analysts.

While that goal sounds fine, Wharton professors are struggling to nail down the reasoning behind the deal. "I understand it from the Skype perspective," says marketing professor Xavier Dreze. "Skype gets money and more visibility. It's less clear for eBay." Business and public policy professor Gerald Faulhaber was more direct. "I don't understand it at all," he says. "I see Internet voice as a natural adjunct to IM (instant messaging). It would have made sense if Google had bought Skype, but I just don't see the synergy" in the eBay-Skype deal.

Whitman begs to differ. She sees eBay integrating Skype with its auction and payment systems to enable faster communication between buyers and sellers and allow the completion of more transactions.

Among the benefits highlighted by Whitman:

Skype is a fast-growing business that will fuel future growth for eBay properties as a stand alone business. Skype is currently adding about 150,000 users a day to its member base of 54 million in 225 countries and territories. Skype generated about $7 million in revenues in 2004, and is expected to have $60 million in revenues in 2005 and more than $200 million in 2006.

The combined networks of eBay, PayPal and Skype will cross-pollinate and create more paying users. Skype's basic service, which will remain free, will be integrated into eBay and PayPal with the possibility of additional pay services. Skype's popularity internationally will also help eBay increase its presence abroad.

Skype's video and voice communications software can be used to develop additional commissions for eBay, say through a phone lead on a real estate purchase. "Some categories don't fit with our model," says Whitman, citing new cars, travel and real estate as examples. "These markets are very interesting to us."

According to Kevin Werbach, legal studies and business ethics professor at Wharton, it would be foolish to count eBay out. "If you think eBay is a big auction house and Skype is just a phone company, then the deal doesn't make sense," he says. "Does real-time communication play a role in e-commerce? The answer is clearly yes. If that's the case, do you rely on a phone network or build a new communication platform that can be integrated with e-commerce? eBay is betting that next-generationn communications will be an important sector over the next 10 years."

Werbach acknowledges that the price tag for Skype could be viewed as high, but also notes that there "was only one VoIP company with the brand and the user adoption out there." Wharton marketing professor Barbara Kahn adds that Skype could make international transactions easier for eBay and help buyers and sellers iron out complicated transactions with real-time communications. "The argument is that the ability to talk to each other easily will help e-commerce," she says.

A Tough Sell?

Werbach predicts that eBay's acquisition of Skype will be closely watched. "Given what eBay paid, investors will expect a lot from the deal," he says. "Whitman and her team in short order will have to show some synergies." Indeed, Wall Street is closely scrutinizing the Skype acquisition. Many analysts, such as Christa Sober Quarles at Thomas Weisel Partners, note that Skype would need $1 billion in revenue with 25% operating cash flow margins to justify the price eBay paid.

Meanwhile, Quarles adds, it's not clear that Skype will hold up as a stand-alone business. "While we believe the company does have a competitive advantage by offering low-cost phone calls, we do not feel that this is a sustainable strategy to generate revenue over the long run," she writes in a research note. "For example, in the United States there are many low-cost, fixed-price phone plans from most cell phone companies, some cable providers and VoIP competitors such as Vonage."

Faulhaber agrees that Skype faces intense competition and that eBay may be overestimating the acquisitions' potential. When America Online acquired Time Warner, Faulhaber says, the deal just didn't make sense on the surface. "From a business perspective, it was a dumb merger." Likewise, he adds, the eBay and Skype deal "is an egregious example of something that doesn't make sense."

But Whitman sees no reason that having Skype in the family can't be successful. Skype is focused on one goal -- making communications easy; all the great web brands, from eBay and Yahoo to Amazon and Google, have identified a singular mission. "Focus matters," says Whitman.

For his part, Skype cofounder and CEO Niklas Zennström says eBay provides Skype the best platform to make "talking over the Internet the most natural thing in the world." Zennström notes that Skype's business will continue as a standalone entity and be integrated with eBay and PayPal to smooth out e-commerce delays that come with e-mail, the primary way eBay users communicate.

To understand the Skype acquisition, Werbach adds, you have to look at it from eBay's perch as an Internet giant. "It's a clash of the titans. eBay sees itself as one of the Internet's behemoths along with Google, Yahoo and Amazon. This was a preemptive strike."

Skype-fueled Commerce

The payoff from the deal -- assuming eBay is successful -- will be the ability to generate a phone call lead to land a sale. Werbach says eBay would couple contextual links -- a buyer searching for an Audi with a link to a local auto dealer, for example. That link could then launch Skype to generate a call to the auto dealer and potentially close a sale. eBay would take a commission on the phone call for the lead.

To Whitman, this "pay for call" model would help reduce "friction" in e-commerce. Say, for instance, that a buyer wanted more detail on an antique collectable or a car. With email, a response could take hours and the buyer could change her mind. With Skype, there would be instant communication to work out any concerns and cut down on the 5 million eBay email messages sent every day. "Communication is the fabric of commerce," says Whitman.

Despite her skepticism about Skype's ability to survive on its own, Quarles is receptive to the integration possibilities. "We believe that eBay's experience in advertising, e-commerce and search could be paramount in shaping Skype's future business outlook," she writes. "Specifically, we believe a lead generation model in the form of a pay-for-call model could present a compelling opportunity for Skype." She adds that Skype could increase conversion rates for sales of big ticket items such as automobiles, real estate and high-end jewelry and launch new businesses for eBay. For instance, the online auctioneer could offer financial, legal and healthcare services.

Quarles estimates that some of these services, say an eBay referral to a lawyer, could command price-per-call rates as high as $10. This capability could be integrated with a classified advertising site such as Kijiji, an international eBay site that resembles the popular Craigslist.

Yet while those possibilities are enticing, eBay's rationale for buying Skype may have a fundamental flaw, Dreze suggests. "PayPal clearly filled a hole for eBay. This deal is like eBay saying, 'Let's add the ability to talk' without asking the user base. I don't want to talk to anyone on eBay. I make my listing and want the transaction done so I don't have to worry about it." If eBay users refrain from chatting their way through transactions, Werbach speculates that Skype as a stand-alone business could fuel growth.

One big challenge for eBay will be adequately juggling its acquisitions as it tries to maintain growth. It has purchased nine companies in the last 18 months. "We believe management time and company resources could be thinned out, making execution more difficult," writes Quarles. Indeed, eBay bought Shopping.com for $634 million on August 30, just a few days before acquiring Skype.

Werbach acknowledges the challenges. For instance, Skype is a small international company that will be combined with a relatively established eBay. "Culturally, Skype is rebellious," says Werbach. "eBay is mature." That said, this merger isn't complicated like the Hewlett-Packard-Compaq combination. "Given the size of Skype, the actual integration will be easy." Indeed, integration may not even occur. Although it had a number of suitors, Skype chose eBay for the deal because of assurances that eBay would basically leave the company alone.

Despite the challenges and naysayers, the eBay and Skype integration will be interesting to watch. If eBay, PayPal and Skype users feed off each other, there could be some interesting revenue possibilities. Dreze wouldn't be surprised if eBay has a master plan that will play out, but until Whitman and her crew deliver he will reserve judgment. "I could see Skype being used for high-end auctions like they have at Sotheby's," says Dreze. "I wouldn't rule out the possibility that eBay may have another plan, but I'm still waiting. I haven't heard anything that makes me think this deal is outstanding."