Making the Skype Investment Work

Analysts say eBay could use the VOIP infrastructure to enhance communications among its customers but will face fierce competition for new users from Google and others.

With its announced 10-figure acquisition of Luxembourg-based Skype Technologies, online auctioneer eBay Inc. is now squarely in the battle with Google Inc., Yahoo Inc. and Microsoft Corp. for a share of the burgeoning VOIP market.

Just how "burgeoning" is the market? Analysts disagree. Forrester Research estimated the number of U.S. households using Voice over Internet Protocol to be 900,000 in 2004 and 2.78 million in 2005. It projects to number to swell to 12.25 million by 2010. IDC said it expects the VOIP market to explode to more than 27 million U.S. users by 2009. Others see the worldwide market ballooning to more than 100 million users by the end of the decade.

Skype Technologies, which originated in Estonia, provides free, downloadable software that enables callers to make free-of-charge voice calls over the Internet. Although Skype has an estimated 54 million members in 225 countries and territories, growing by an estimated 150,000 users per day, Skype has based its revenue growth on services like SkypeOut and SkypeIn, which enable people to use the Skype service to connect to traditional landline and cellular networks. Skype users can talk to each other for free over the Internet.

Despite the fact that Skype made only about $7 million in 2004 and is expected to earn $60 million this year, analysts generally were positive about eBays strategy and intentions in the acquisition of two-year-old Skype. eBay reportedly will pay $2.6 billion for Skype plus additional performance-based payments of up to $1.5 billion.

"First of all, thats an awful lot of money (for eBay) to pay," Stephen OGrady, an Internet software analyst with Denver-based RedMonk, told eWEEK.com. "Its not clear from an income perspective what kinds of numbers Skype will generate for eBay. But what Skype absolutely does have is volume—50 to 70 million users, most of them very active.

"The questions for eBay are these: Can it leverage that active community by building services around it? And can eBay become more than a virtual marketplace—one that includes voice and perhaps other interactive services?"

The Skype deal is eBays seventh major acquisition of the past year. Paypal was one of those acquisitions. The online auctioneers sales growth has slowed markedly from 51 percent in 2004.

Gartners Charles Abrams told eWEEK.com from his London office that he sees eBay as "building itself a platform for new Web services that individuals—and small to medium-size businesses—can use to make themselves competitive with larger companies. With Skype, eBay can now verify online bids, for example, with voice messages left via Skype calls. We cannot think of everything eBay will be able to do with these new Web services, once theyre in place and working."

/zimages/3/28571.gifStakes are high when the Red Cross uses VOIP. Click here to read more.

"Skype will provide eBay a communications platform for the other half of its market—the conversations," said analyst/venture capitalist Ross Mayfield in his Weblog. "eBay will enhance the liquidity of its spot market, gains a business with great fundamentals, positioning for yellow pages business, further infrastructure for billing, payment and—identity.

"Today I would venture that most of the communication on eBays transactions are out-of-band. Other communities with emergent liquidity, such as Craigslist, succeed by enabling even further out-of-band communication."

Independent analyst and former Digital Media Editor Mitch Radcliffe noted in his Weblog: "Big, big deal, though it doesnt change eBays core business the way some are arguing. Like PayPal, which focuses on a financial transaction, Skype will focus on a voice interaction that a.) supports eBays core business (youll be able to call a vendor from within a product listing), and b.) the Skype service will be sold to eBays vast audience as a standalone voice service, as well. Collectively, it is a big win for both sides."

"Skype is a great potential company," IT business analyst Melanie Hollands told eWEEK.com. "I do think this market will be huge, though itll be hard to measure its impact over the next year or two. But itll be difficult for Skype to attract potential users if Google Talk, Yahoo, and Microsoft (via the recent Teleo deal) offer similar functionality. I am a huge fan of the Skype interface, though, so maybe (eBay CEO) Meg Whitman is thinking of it purely as the next level of eBay member interaction, and not really as the way most are viewing the market today."

"This is more likely to be less about eBay integrating its auction business with Skype and instead, about them creating a new market using Paypal," said London-based developer-analyst Phu Ly in his Weblog. "Im not necessarily talking about moving from a free service to a low-cost, topup service using Paypal as micropayments—though this would be viable. The reason this is risky is because of the upcoming increasing competition from open systems as well as from the powerhouse of Google (via Google Talk)

"The more likely scenario would be eBay utilizing its Paypal infrastructure and tying that in with Skype to create a low-barrier service for small businesses. With nothing more than a Paypal account and Skype, any person can set up a paid-for service without any cost; eBay would simply take a cut similar to what they do in their other businesses."

Next Page: Acquisition opens door for better service and new offerings.

Chris Preimesberger

Chris Preimesberger

Chris Preimesberger is Editor of Features & Analysis at eWEEK, responsible in large part for the publication's coverage areas. In his 12 years and more than 3,900 stories at eWEEK, he has...