After Skype Sells, Will eBay Suffer Buyer`s Remorse?

The two companies have startlingly little in common. eBay, a website where people hawk used items, attracts bargain hunters and collectors. Skype, which provides VOIP (Voice Over Internet Protocol) telephone service, is a cheap way to make long distance phone calls. If you are unclear on what Skype is, check out our article “Why all the Hype about Skype.” Besides being websites and helping people find cheap stuff, there’s no obvious way these business models mesh.

This isn’t eBay’s first questionable acquisition. When eBay bought PayPal for $1.5 billion, some people criticized the move. However, PayPal was providing the monetary transfers for many of eBay’s auctions before the acquisition. The payment processor was already an obvious part of an auction business model. There is some logic in eBay controlling both ends of their business, from the auction to the payment. People complained, pointing out it did not improve eBay’s website and service any more than making an ordinary business partnership. Regardless, at least the two companies looked like two cogs in the same machine.

On the other hand, Skype sounds like an impulse buy. The purchase price right now is set at a grand total of $4.1 billion (Yes, I said billion) if the VOIP provider performs well over the next couple years. The deal will initially give Skype $2.6 billion when it closes in the last quarter of 2006, and the rest is an incentive to come later.

Let’s put this in perspective. Last year, Skype made a total of $7 million, and it is expected to earn $70 million this year. Skype optimistically speculates that its annual revenue will rise to $200 million by the time the deal goes through. That kind of growth is possible, but eventually Skype’s competitors and market capacity may slow it's growth to a crawl. Let’s say Skype reaches $200 million per year, but its user base stagnates. It will take 20 years for Skype to pay for itself. If Skype continues growing exponentially (as a lot of hyped up articles claim) and averages $400 million in revenue over the next decade, it will take more than 10 years for the deal to break even. Does this sound a little pricey to anyone else?

Of course, the purchase could pay for itself sooner if eBay profitably integrates the service with auctions and PayPal. They must think this is possible, because eBay says that Skype is a perfect fit for their business model. What exactly are they seeing, and is it profitable to be worthwhile?