Skype and eBay: Insights into the Deal

EBay has recently announced (Sep-05) its purchase of Skype for up to $4.1 billion ($1.3 billion in cash, $1.3 billion in eBay stock and $1.5 billion in 2008 or 2009 if certain performance targets are met). Several analysts questioned the price tag for a company with revenues of $7 million in 2004 and expected revenues of $200 million in 2006. Was it too expensive?

Price setting is always difficult and sometimes means extracting the maximum value from the buyer. Because Skype fills an important hole in eBay’s capabilities and creates new service and revenue opportunities, the price makes sense. What void Skype fills and what new opportunities and synergies it creates will be discussed later. But first, what is Skype?

Skype is a Luxembourg-based company founded by the creators of Kazaa, one of the most downloaded software programs ever. The Company’s sole product is an instant messaging software also called Skype. Skype is based on proven technology and has a team with a track record of developing successful products. Ebay did not make an investment in a company “of the future” but in a going concern.

According to Skype’s website, its goal is to provide a simple, reliable and friendly communications tool that just works. And, boy, does it work! Skype software has earned several awards and is considered the best option for voice communications over the Internet (or VoIP for short). Operating since 2003, Skype already has 50+ million users and 2+ million users connected at any given time. Unlike other VoIP services such as Vonage; Skype does not require sophisticated hardware to work. All a new user has to do is download the software, install it, and use it with a regular microphone and speakers or a headset. Skype software works with any operating system.

Calls between Skype users are free. To create revenue, the Company developed fee-based services such as SkypeOut (to call any phone in the world from your computer), SkypeIn (to allow a user to have a phone number in another country), Skype VoiceMail, SkypeZones (a custom version of Skype for use in Wi-Fi hotspots), and downloadable ringtones. Because Skype’s calls are carried over the Internet, it can be used from any kind of Internet connection, such as hotspots and even dial-up connections. Skype software also allows users to exchange text messages or files, just like America Online’s AIM Messenger, Microsoft’s MSN Messenger or Yahoo’s Yahoo! Messenger.

The big deal for eBay is that Skype can make eBay talk. We have grown so accustomed to e-mail and the Internet that we forgot how much interaction is involved in the shopping experience. Most transactions still occur with some type of voice interaction between people. It is interesting to note that sophisticated stock traders still talk to each other. Buyers and vendors still negotiate using their voice at street fairs, carnivals and even at farmers’ markets. Strangely enough, voice was absent from eBay and no one seemed to notice. Voice communication got us out of the “cave”; and, it is still important.

EBay’s CEO, Meg Whitman, says the straight forward application for Skype is to improve communication between buyers and sellers. This decreases the time it takes to close a transaction. And, more transactions mean more revenues for eBay.

Enabling voice is very important for transactions involving high ticket items, such as cars (eBay motors), apartment or home renting (Rent.com) and even capital equipment (eBay Business). With several items going for $50,000+, no sane person will want to close such deals without talking to the seller. In the context of an eBay listing, Skype is a one click call. Getting more of these big deals closed will become a growth engine for eBay.

Skype can also promote eBay’s international growth. Skype has users in 225 countries, whereas eBay has operations in just 30 countries. This is very significant, since recently the largest growth in eBay’s revenues has been overseas. EBay’s international operations grew from $29 million in 2000 (6.7% of revenues) to $1.2 billion in 2004 (46.4% of revenues). Skype helps eBay become a complete global marketplace.

EBay’s new global reach will create a need for translation services. Most cultures are not comfortable doing business in a language they do not know well. Translators solve this problem. Because Skype already has time counters embedded into its software, it makes it easy for professionals that charge by the hour, such as translators, to keep track of their time and charges. This means a whole new category of demand for eBay.

Last but not least, Skype opens the door for eBay to conduct live auctions, competing with Sotheby’s, Christie’s and other auction houses. Skype already has video capabilities, so users can see goods in real time and make their bids using Skype’s text messaging. Because Skype has limitations on the number of people that can be simultaneously connected to a chat or conference, users may need to bid for the right to attend a live auction. With broadband use increasing all over the world, these video capabilities could transform eBay into an Internet QVC, with several live auctions or shows going on at the same time.

In the first half of 2005, eBay has already had a little over 800 million listings. Even if my suppositions about future revenues do not materialize, eBay can generate some revenue from Skype usage. If eBay is able to capture $0.10 in Skype revenue from every listing, it could generate at least $160 million per year in new revenues. Not bad!! Not bad at all!