eBay & Skype by munificent Blog entry

Blog: Spirit of Money, Financial Fluidity
by munificent

eBay & Skype

VOIP Communication- was just a fledging in 2000 when the communications industry had it's first major set back, since then there have been several more...WorldCom,Avanti, Lucent (what is Lucent doing now?)

Date: 9/13/2005 10:37:48 PM ( 19 y ) ... viewed 1339 times

eBay Believes the Skype

By Scott Moritz
Senior Writer
9/13/2005 7:00 AM EDT

Take the Internet, add some communication services and you've got a new growth industry.

At least that's some of the thinking behind the stunning $2.6 billion deal between eBay (EBAY:Nasdaq - news - research - Cramer's Take) and Skype. And that's not all.

The concept that the Net is about to turn communications into a hotspot was the motivation behind Yahoo!'s (YHOO:Nasdaq - news - research - Cramer's Take) June purchase of Dialpad, and it was the brainstorm behind Google's (GOOG:Nasdaq - news - research - Cramer's Take) August decision to introduce GoogleTalk, its call-capable IM. Even Microsoft (MSFT:Nasdaq - news - research - Cramer's Take) has gotten into the voice-over-Internet-protocol, or VoIP, game with its buy of Teleo.

If you follow that logic, it wouldn't be too much of a stretch to see other giants like Amazon (AMZN:Nasdaq - news - research - Cramer's Take) jumping on the Net calling craze soon as well.

As with any speculative leap, to focus merely on the thin revenue from VoIP is to miss the bigger picture. Skype racked up $7 million in sales last year, and expects to reach $60 million by year end. And the mostly free international calling service also adds 150,000 new users a day.

That sort of growth is intoxicating to a wheezer like eBay, which is expected to boost its projected $4.4 billion top line a mere 25% next year.

Wall Street, originally tepid on the idea, seemed willing to go with the Hail Mary strategy Monday when the stock closed up 32 cents at $38.94.

eBay does have some Net credentials, and has defied some of its critics in the past on its way to dominance.

Its PayPal unit, for example, started as a dodgy money holder trying to instill trust in an unreliable marketplace. Today it's the biggest threat to credit cards on the Internet. And eBay itself, which began as a curiosity, now stands as a nearly peerless commerce success.

Some observers think eBay can pull it off for a third time with Skype, given that most of Skype's 54 million users are overseas, with half in Europe and a quarter in Asia -- two major markets eBay would love to conquer.

Voice will be a natural extension of everything we are already doing on the Net," says Yankee Group analyst Kate Griffin.

eBay sees Skype as a way to provide buyers and sellers of big ticket items like cars and property with a way to instantly communicate. eBay will presumably set up a cheap Skype call and allow users to flash their PayPal at the toll like EZ-Pass.

It's not likely that founders Niklas Zennstrom and Janus Friis had an e-commerce tool in mind when they started Skype, but they were certainly singing the praises of the global marketplace Monday.

"Our vision for Skype has always been to build the world's largest communications business and revolutionize the ease with which people can communicate through the Internet," said Skype CEO Zennstrom. "We can't think of any better platform to fulfill this vision to become the voice of the Internet than with eBay and PayPal."

Fortuitously, eBay's timing suited Skype. The VoIP market was starting to heat up, and as Google and Yahoo demonstrated that it didn't take a Skype to get into the business of voice on the Net.

"Skype's growth has been extraordinary, but they had no proven business model," says Yankee's Griffin. "And there's limited potential for standalone VoIP companies just offering phone service."

Clearly Skype found deeper pockets and a much broader operation to attach itself to. And eBay's chief Meg Whitman was happy with the purchase on a conference call Monday.

Skype's "technology is generations ahead of others," said Whitman. And when people use your "brand name as a verb, that's incredibly powerful," she says, referring to the ability to be Skyped instead of called.

But with the cost of the deal running to as much as $4.1 billion if performance targets are hit, some analysts say the price tag is a tad steep.

"This is a big leap in logic. Maybe they can convert some of Skype's customer base into users of other services," says one analyst. "But you get the feeling there's too much money sloshing around with these Internet players."