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.”
“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.”
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S&Ps Scott Kessler wrote in BusinessWeek Online that eBay believes the acquisition of Skype will “enhance its existing businesses by enabling greater and better communications among its current users. It also foresees new Skype offerings. We see such benefits aiding growth, particularly in emerging markets where telecommunications services are more expensive and less accessible. But, given Skypes 2004 revenues of only $7 million, we believe the price is too high. We expect the planned deal to close in the fourth quarter, pending necessary approvals.”
Forresters Michael Goulde said that “there are open source attempts to duplicate the Skype service. It will be worth watching to see what the net value is of what eBay acquires.”
Skypes user base has grown from 4.1 million users to 44.1 million users since the first quarter of 2004, while the companys user base has increasingly used the service, from 300 million minutes to 3.9 billion minutes during the same period—an increase from 73 minutes per user to over 88 minutes per user during the period.
Skype will continue to offer its for-fee services, such as the services program, which would offer the merged eBay-Skype a cut from both the content provider as well as the user. Estonia-based Skype chief executive Niklas ZennstrÖm will report to eBay CEO Whitman and join eBays senior executive team, the two companies said in an early morning press conference.
Although it has grown quickly in two years, Skype hasnt been without some setbacks. Only last week, the government of China moved to ban the use of Skype software—in fact, all VOIP software—because it undercuts the two state-sanctioned phone companies. According to Shanghai Daily, China Telecom is collecting the identities of those who attempt to use SkypeOut to call regular phone numbers from their PCs.
“Under the current relevant laws and regulations of China, PC-to-phone services are strictly regulated and only China Telecom and (the nations other fixed-line carrier) China Netcom are permitted to carry out some trials on a very limited basis,” said a China Telecom official, quoted by Reuters.
Skype already has announced a partnership with Tom Online in China and in Germany with E-Plus. “China is a very important market for us,” Skype co-founder Janus Friis told Forbes recently. “Broadband [penetration] in China is growing very quickly. Weve had extremely good growth there, and we plan to launch many additional products in China. Tom has been a partner of ours for quite a long time—and a very good partner. So we are just continuing in pursuing that successful partnership.”