eBay to nab Skype for $2.6 billion

eBay plans to buy Net telephone provider Skype in a move aimed at boosting its sales volumes and supplying seamless voice communications to its consumers.

Company executives said Monday that eBay plans to pay $1.3 billion in cash and $1.3 billion in stock to the global communications company. It has agreed to hand over up to an extra $1.5 billion, for a total payout of more than $4 billion, if Skype meets certain financial targets by 2008, according to a presentation to investors on Monday morning.

The move, expected to be complete by the end of the fourth quarter, marks the biggest acquisition in eBay's 10-year history. In another big-time merger, eBay acquired online payments company PayPal in 2002 for about $1.5 billion. It more recently picked up Shopping.com for $620 million in cash.

Luxembourg-based Skype, founded in 2002 by Scandinavian entrepreneurs, offers free computer-to-computer voice over Internet Protocol (VoIP) calls and low-cost connectivity between computer and landline or mobile phones. It is considered the market leader in nearly all of the 225 countries and independent territories where it does business, according to a company press release. The company expects revenue of $60 million this year and more than $200 million in 2006, a Skype representative confirmed Monday. Skype has not yet posted a profit, an executive told Reuters.

Analysis
Can eBay continue to defy gravity?

Wharton experts say there's no need to get too worried about eBay's prospects right now. But in the future, things may get interesting.

Skype generates nearly half of its revenue base in Europe, about a quarter in Asia, and about an eighth in North America. The fast-growing company said it has 54 million subscribers and adds 150,000 users each day. There is currently about a 1 percent overlap among Skype and eBay users, according to the eBay investor presentation.

eBay CEO Meg Whitman told investors in a conference call that she hoped a power trio of eBay, Paypal and Skype would deliver an "unparalleled e-commerce and communications engine" by "removing a key point of friction between buyers and sellers."

"Communication is at the heart of community and e-commerce, making Skype a natural fit for eBay," Whitman said.

When the deal is complete, eBay hopes to integrate the service with its e-commerce operations, allowing buyers and sellers to communicate through VoIP. The auction site would likely collect fees from sellers on a "pay per call" basis, wherein sellers would pay each time a customer called them via Skype, or through a flat amount paid in exchange for a link to the merchant's Skype contact information on his product's page, said eBay spokesman Hani Durzy.

Related commentary
eBay's scary Skype purchase

Skype and its voice services
give the auction giant no
sustainable advantage in
communications or communities.

In a sample screenshot shown during the presentation, the username of a Skype-enabled seller would display whether he or she was online. The buyer could click on the name and contact the seller without having to leave the eBay site and without either party having to reveal a private phone number, Whitman said. Right now, e-mail is the primary means for such communications. eBay users send about 5 million messages each day in total.

Whitman said she hopes the service will accelerate sales in categories--such as cars, business and industry equipment, and collectibles--that generate a lot of inquiries. "Imagine searching for an Audi Quattro," she said. "You have a lot of questions about previous repairs, but the listing ends in three hours, which is probably not enough time to e-mail and get a detailed response. Wouldn't it be nice to Skype link?"

eBay also plans to preserve Skype's standalone products, including a new video conferencing feature slated for release later this year, said Skype spokeswoman Kelly Larabee.

eBay Chief Financial Officer Rajiv Dutta told Reuters that the acquisition will cut eBay's earnings by a penny per share in each quarter until the end of 2006 before it begins to positively contribute to its profitability.

Meanwhile, news of the merger had industry analysts scratching their heads.

"I'm really skeptical, I'm surprised, and I'm not recommending the stock," said Scott Kessler, an analyst with Standard & Poor's, adding that he questioned why eBay would want to add Net telephony services--and why Skype in particular--when its users already seem comfortable with e-mail.

Kessler noted that eBay has probably made more acquisitions over the past 12 to 18 months than it did in the prior eight or nine years, and that's often a sign that growth will be slowing. Unlike the PayPal merger, which Kessler supported back in 2002, it is debatable whether eBay will derive the same growth in sales simply by adding voice features to its service, he said.

"It reminds me of the days of the Internet bubble," said Maribel Lopez, an analyst at Forrester Research. "Who buys a company for $2.6 billion anymore that has a miniscule revenue stream?"

Lopez questioned why, given the abundance of VoIP companies in the market, eBay would buy Skype in particular--and how significant a revenue boost the auction company would actually see. "It's not clear to me that you couldn't get three bright engineers in a garage to build the same thing for $200,000," she said.

But Saikat Chaudhuri, a professor at the University of Pennsylvania's Wharton business school, took a different tack. He said eBay's move was little surprise given the recent activity in the VoIP sphere, including the unveiling of Google Talk and start-up acquisitions by Yahoo and Microsoft.

eBay is "acquiring all capabilities and market presence through this acquisition in that space," Chaudhuri said. "It sends a very strong signal to the market that they're no longer satisfied being confined to a very specific domain. I don't think they had much choice, to tell you the truth; either do this thing in a big way, pay a lot of money for it, or leave it."

Reuters contributed to this report.

[Earl Benser]

Nice Reward ...

... for Skype shareholders, but it doesn't bode well for Skype users.
Ebay is the wrong kind of company to get into VOIP (maybe Ebay is
the wrong kind of company to get into anything) and much of what
Skype is today will shortly be going down the tubes.

But, it will be nice while it lasts.

[Earl Benser]

Nice Reward ...

... for Skype shareholders, but it doesn't bode well for Skype users.
Ebay is the wrong kind of company to get into VOIP (maybe Ebay is
the wrong kind of company to get into anything) and much of what
Skype is today will shortly be going down the tubes.

But, it will be nice while it lasts.

[mobiman]

Why is skype not profitable?

They claim minimal cap ex, huge revenue growth, no customer acquisition cost, yet also say that they are not profitable now, and do not expect to be through 2006. On the conference call, they flubbed around, explaining in 2006 they were going to spend more on brand.... but I thought they said they were profitable already?
What have I missed?

[mobiman]

Why is skype not profitable?

They claim minimal cap ex, huge revenue growth, no customer acquisition cost, yet also say that they are not profitable now, and do not expect to be through 2006. On the conference call, they flubbed around, explaining in 2006 they were going to spend more on brand.... but I thought they said they were profitable already?
What have I missed?

[Mendz]

eBay and Skype?

I don't get it! I like Skype. Hope it flourishes...

[Mendz]

eBay and Skype?

I don't get it! I like Skype. Hope it flourishes...

[Rusdude]

Inconvenient to sellers

With all due respect to eBay, I just can't understand the benefits of buying Skype. If purchase of Paypal was more or less understandable, this doesn't make much sense to me.

I've sold on eBay for four years and am currently a PowerSeller. Their argument about integrating voice communications and allowing buyers to talk to sellers is not a very strong one. Most PowerSellers aren't very big and do everything to maximize efficiency (auto-responders, template emails, auto-feedback, etc.). If I understand eBay's goal correctly, we would have to have someone present to answer calls from potential buyers which isn't normally possible if you run dozens of auctions.

At least, they could've done what one analyst suggested in the article -- license Skype and try it out. If you recall, Paypal was working with eBay long before it was bought out...

[Stating]

re: Inconvenient to sellers

I agree that small Ebay vendors probably don't have the time to answer a lot of live phone calls. But Skype does offer voicemail, so at least your potential customers can leave a message. Conversely, if the customer has Skpe voicemail then you can leave them a message as well. And Skype supports conference calling (think the limit is 5), which might come in handy. So on balance, it does offer sellers some new options for managing their business.

One thing I am concerned about is just how many buyers are going to go to the trouble of downloading, installing, and setting up the Skype client software. There are technical issues related to microphones, volume control, firewall, etc. It's more complicated than just picking up a phone to make a call.

[Rusdude]

Inconvenient to sellers

With all due respect to eBay, I just can't understand the benefits of buying Skype. If purchase of Paypal was more or less understandable, this doesn't make much sense to me.

I've sold on eBay for four years and am currently a PowerSeller. Their argument about integrating voice communications and allowing buyers to talk to sellers is not a very strong one. Most PowerSellers aren't very big and do everything to maximize efficiency (auto-responders, template emails, auto-feedback, etc.). If I understand eBay's goal correctly, we would have to have someone present to answer calls from potential buyers which isn't normally possible if you run dozens of auctions.

At least, they could've done what one analyst suggested in the article -- license Skype and try it out. If you recall, Paypal was working with eBay long before it was bought out...

[Stating]

re: Inconvenient to sellers

I agree that small Ebay vendors probably don't have the time to answer a lot of live phone calls. But Skype does offer voicemail, so at least your potential customers can leave a message. Conversely, if the customer has Skpe voicemail then you can leave them a message as well. And Skype supports conference calling (think the limit is 5), which might come in handy. So on balance, it does offer sellers some new options for managing their business.

One thing I am concerned about is just how many buyers are going to go to the trouble of downloading, installing, and setting up the Skype client software. There are technical issues related to microphones, volume control, firewall, etc. It's more complicated than just picking up a phone to make a call.

[Stating]

Maybe Other Reasons For The Buy

Perhaps Ebay has other, unspoken reasons for buying Skype. At its core, Skype is a peer-to-peer network. Maybe Ebay plans to use the underlying technology for some other things besides just voice (and video). Skype's founders created Kazaa, they may be kicking around other ideas that they don't have funding to develop right now. We've seen companies like Microsoft buy other companies for the underlying technology.

eBay and Pay Per Call

Connecting buyers and sellers, while an interesting feature, I believe is not why eBay bought Skype (company's like thinkingVOICE have been offering buyer/seller communication services for auctions for over a year.)

With Shopping.com and Rent.com, eBay moved into the PPClick business. With Skype, they also see PPCall as the next frontier.

Even though Pay Per Call is early, Microsoft's acquisition of teleo, 'GoogleTalk', Yahoo's acquisition of DialPad and current players in the Pay Per Call space like thinkingVOICE, show this new frontier is being settled quickly.

[Stating]

Maybe Other Reasons For The Buy

Perhaps Ebay has other, unspoken reasons for buying Skype. At its core, Skype is a peer-to-peer network. Maybe Ebay plans to use the underlying technology for some other things besides just voice (and video). Skype's founders created Kazaa, they may be kicking around other ideas that they don't have funding to develop right now. We've seen companies like Microsoft buy other companies for the underlying technology.

eBay and Pay Per Call

Connecting buyers and sellers, while an interesting feature, I believe is not why eBay bought Skype (company's like thinkingVOICE have been offering buyer/seller communication services for auctions for over a year.)

With Shopping.com and Rent.com, eBay moved into the PPClick business. With Skype, they also see PPCall as the next frontier.

Even though Pay Per Call is early, Microsoft's acquisition of teleo, 'GoogleTalk', Yahoo's acquisition of DialPad and current players in the Pay Per Call space like thinkingVOICE, show this new frontier is being settled quickly.