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

Many companies have thought seriously about acquiring Skype, but eBay and the VOIP provider have made public plans to close a deal by the end of next year. The proposed deal has everyone scratching their heads in confusion. In this internet littered with stupid business ideas, will this one stand out for its questionable foresight and nonexistent synergy?

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?

{mospagebreak title=Business Possibilities for eBay Auctions}

There are two ways that eBay could use Skype. One of these might be worth the cash that the dot com is willing to throw down, the other is rather frivolous.

Let’s look at the nearly worthless way first: allowing fast and easy communication between buyers and sellers in their auctions. Currently, buyers can post questions on message boards for auctions, allowing everyone to see the seller’s answers. This makes sense. Buyers can also ask questions via email. However, eBay currently does not have their own realtime communications network.

But does it need one? How many sellers list their telephone numbers on auction pages to let buyers question them? Are buyers and sellers at any loss for instant messaging services use? What advantage is eBay branded service over established, third-party options?

To make it simple, I imagine some buyers wouldn’t mind calling up sellers long distance to ask trivial questions about a video tape for sale. However, do many sellers want to hear their phone ring every time somebody in the country wants to ask a question, one that is probably answered clearly in the ad? (“Uh, can you tell me how old is that 1975 8 track player you listed?”) Those who sign up for the service may soon tire of it. One of the advantages of using eBay over a yard sale is that you don’t need to tend to customers, not to mention the relative anonymity. Some “professional” sellers who have eBay stores might see an advantage to this, and I grant that it could be nice for them to have a cheap way to talk to buyers long distance. But this misses the point.

There is no way that purchasing Skype for this purpose will enhance auctions any more than a business partnership with Skype (and is only a marginal advantage over adding a “Seller Phone Number:” field in their listings). It will provide an obvious way for eBay to make more money from an auction than if they got a little kickback from Skype for providing links. Also, eBay branded instant messaging between buyers and sellers will show no benefit at all over simply listing an AIM or MSN screen name on an auction. In fact, it may make people angry to have to download another messaging client.

{mospagebreak title=Skype for Outsourcing and Globalization}

The more interesting avenue to use Skype will shatter both eBay’s and Skype’s business models. It’s more of a melding between Skype and PayPal.

It costs a lot to set up call centers. You need a building, hundreds of phones, hundreds of pieces of office furniture, hundreds of employees, and a lot of phone lines. What would a business owner say when faced with a choice: pay to set up an entire call center, or pay the employees wages and cheap-as-dirt phone bills. Yes, this could be the next and worst step of outsourcing.

Let me back up. The SkypeIn service attaches a standard telephone to a Skyper; the Skyper can choose almost any area code or country for that number, and it allows people on normal phones in that area code to call a Skype user as if it were a local call. So the call is free for the caller, and it costs very little to the Skyper. It is much less than using an 800 number or paying long distance overseas. Now look at eBay’s PayPal. PayPal payments and currency conversion are available in many countries, and the scope of PayPal’s aspirations is global.

Put this together, and you can have a person sitting anywhere in the world providing customer service to anywhere else, all for the same trivial rate. The only stipulation is that Skype has to have established local numbers available for the caller to dial, and the person paying the phone bill needs to have PayPal in their country.

Of course, you realize this makes call centers unnecessary. So long as the support reps have internet access and Skype, a much smaller office staff could manage and monitor the support calls. The company’s employees could span the globe, and wages could even be handled via PayPal. Let’s say we have are providing Dell support calls from an office in Seattle. A guy in India with broadband could visit the website of our Dell call center. He signs up to work for Dell on through the site’s forms, and the next day he gets an email that directs him to a webpage full of Flash or Quicktime training videos. The Indian guy watches the videos and downloads Skypal (our Skype + PayPal software), gets a database login is connect to Dell’s troubleshooting documentation, puts his headset on, and starts taking support phone calls. The Dell office could monitor the calls for quality and not have to pay for office space and equipment. The cost of broadband and the space the employee occupies is all paid for by the work-at-home employee. There are already call systems that let work on call lines from home, but nothing nearly this elaborate or cheap.

Even if employers stick to the traditional office setups and draw from local talent only, this still saves a ton of money for phone service. It saves even more for those who outsource American calls to the other hemisphere.

And if some random dude thinks he’s a psychic or a relationship expert or a computer guru, he could start a similar business. He will just need a PayPal option to charge the caller’s phone bill like a 900 number, or some similar charge system. He can buy local numbers in areas he will advertise, then sit at home taking calls. His biggest obstacle will be getting people to call him.

Like I said, this use for Skype breaks both business models, but it pull from them both as well. It would be a great undertaking, cost a lot to adapt Skype to work in this model, and be a noteworthy risk for eBay.

Of course, both ways to use Skype are heavily overshadowed by the possibility that eBay could build their own VOIP network. Even if sellers demanded eBay-branded VOIP in auctions, or even if eBay was willing to undertake the endeavor of combining VOIP and PayPal, this does not mean they need Skype. There is the distinct possibility that it would not cost $4.3 billion to start a new VOIP service, or even $1 billion. It would cost much less to start with something completely new. The only thing the start-from-scratch price would not include is Skype’s user base. So how much will eBay pay for a few heads?

{mospagebreak title=Skype’s Expensive User Base}

So eBay could make their own VOIP cheaper. Maybe eBay is paying for Skype’s user base and brand name. Well, aside from the Skype name being meaningless to an average consumer when compared to eBay’s name, the user base probably won’t be a rewarding factor either. eBay says that they have 100 million subscribers. Skype claims 54 million registered users, and is growing by the thousands daily. That’s a lot, but how well would the user bases combine?

First of all, the user bases are largely separated geographically. “Almost half of the users of Skype live in Europe and a further quarter live in Asia. Only an eighth of them are in North America where eBay has its biggest chunk of users.” (Source) eBay could try to bring American buyers and sellers to Skype service, but this gives them no more advantage than starting their own VOIP service from scratch. It’s doubtful that the Skype user base overseas would care to start using eBay because the service switched hands. How can eBay make a person in Germany, who is looking for a cheap phone, want to browse auction pages for things mostly being sold in America?

I’ll give a little credit to a few current Skypers liking the outsourcing possibilities of SkypeIn. People in some places could make money by offering a help/call line like I mentioned before. But how many current Skype members feel like being entrepreneurs? Additionally, entire outsourced call centers do not rely on a current user base, because they are set up by recruiters and not users.

But I haven’t even gotten to the real trouble. The simple fact is that the Skype business model is not designed to be a revenue churning machine. Sure, things can change. However, the very business that attracted 54 million users is primarily a free business. I download a program, and you download a program, and we talk for free. Niklas Zennström, one of Skype’s co-founders, says, “We don’t count on all our users being paying customers. We count on only a few being paying customers.”

How true this is. It’s free for those 54 million people to talk, if they call other Skypers. Earlier this month, Zennström bragged to Swedish Business Weekly of having 2 million customers who pay for Skype services. This represents less than 4% of the user base. Doesn’t this mean 96% are hanging around because it’s free?

That tiny piece of the pie includes many who signed up for Skype just to call themselves or their buddies and say, “Hey dude, I’m talking to you on the internet! Rock on!” Those users will tire of the novelty rather rapidly, go back to their free-long-distance cell phone plans, and not refill their Skype points. If Skype has more than 1 million active users, I would honestly be amazed. Even though a hundred thousand people sign up daily, most of them are not putting down any money for SkypeOut and SkypeIn. I’m not saying Skype is a bad service, but eBay is definitely not buying a revenue-providing user base.

To try to make sense of this, I will grant for a moment that Skype has 2 million paying and active customers (which, frankly, is ridiculous). And for the moment, I will pretend that Skype continues to grow and has 3 million die-hard customers by the time of the acquisition next year. Using this purely hypothetical figure, eBay is paying $1,433 for each one. At the current SkypeOut rate of 2 cents per minute, each currently paying user will need to talk for 71,650 minutes to pay for themselves. Personally, it would take me 12 years to use that many minutes on my cell phone.

In reality, forces are working against Skype. Those signing up for the novelty will disappear. Newer and cheaper VOIP services are already beginning to fragment the market and steal users willing to pay. Some Skype customers will be unhappy with value added Skype services and stop paying. Worst of all, Skype’s dedicated users will pay less and less as their friends sign up for Skype. The friends will not need to use SkypeIn and SkypeOut to contact each other anymore; this means an expanding user base could create a lower percentage of customers and decrease how much each customer pays. If VOIP takes a bigger role in the marketplace and we see more Skype phones (maybe some Skype cell phones), this could easily tip the scales back to Skype’s favor.

{mospagebreak title=Making Sense of a 3 Stage Business Plan}

If this all sounds absolutely crazy, you probably understand it well enough. Most people have no idea why an auction and payment company would need to buy a VOIP company. A partnership might be an interesting idea, but an acquisition? And at $4.3 billion?

Maybe eBay’s forward-thinking exceeds mine and everyone else’s, but I’ll keep my doubts until I hear a surprising announcement from eBay. In fact, I have a suspicion that eBay has a three stage business plan that looks a bit like this:

1. Collect Skype

2. ???

3. Profit!

(Underpants Gnomes)

The internet is full of weird buyouts. As mentioned before, eBay buying PayPal was criticized by some since the two could have just as easily partnered. AOL’s strange merger with Time Warner may soon become weirder, considering rumors of parts of the ISP joining up with MSN. Plenty of other companies have tried expanding simply by buying. Not long ago, AOL bought Winamp, a free and ad-less media player. Before that, they bought Netscape. Microsoft has a series of internet companies they bought, including webmail freebie Hotmail.

Not all of these mergers and acquisitions are bad. Buying to expand sometimes works, and sometimes doesn’t. If the business models work together, you may have a cohesive combination that furthers both companies. Adding Skype to any cable internet provider like Comcast would provide a great bundle for people who hate the phone company. Bellsouth and Verizon could have integrated the VOIP into their telephony offerings. There are many possibilities.

eBay, on the other hand, seems willing to part with a lot of money to buy a business that needs to be pushed and crammed into its plans for world domination. Skype is a round block being shoved into a square hole. Furthermore, the buyout and pending “transition” destroys the natural evolution of the Skype business. We will need another VOIP to show us how it’s done.

If eBay is going to expand by buying Skype, I may not be so surprised with future business deals. Apple Computer could purchase Betty Crocker, and it would seem reasonable next to this. I could even hear Steve Jobs saying, “Well, some folks who buy iMacs use the internet to look up recipes. This acquisition is our way of bringing a Better Crocker cookbook to everyone’s desktop, with or without internet access.”

After almost every internet related business has considered buying Skype, this is the one that looks the most likely. Skype even has a news page about how great the deal sounds. Of course it sounds good to them; eBay is overbidding! After receiving Skype and plugging it in, will eBay want to leave negative feedback for it not working as expected?

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