Monday, September 12, 2005

EBay to Pay at Least $2.6B for Skype - WHY???

I am sure you all read the headlines and articles about EBay buying Skype.

I have attached two below.

Though the immediate reaction is that eBay is looking to voice enable their auctions, letting a bidder talk to the seller, brining into light the ability for the transaction to be taken 'out' of the eBay environment. I actually think there is probably more to this. eBay are much smarter than this and to add voice to their service they could have bought or developed in house for a lot less.

If we follow a few of their past take-overs or investments we will find that they buy a product or service which will enhance their existing offering/process and expand their user access.

Buying was obviously to reduce their processing costs as most purchases were already using the paypal service, but, also to gain access to the paypal community.

When they bought, a deal recently completed they were buying a great catalog technology to clean up their mess, but, also to gain access to the user community and its global reach.

It must be the same here, obviously voice enabling their auctions might bring another type of experience which will attract bidders and sellers looking for the live touch. This can be a great way for them to invigorate their liveauctions business. However how about tapping into the Skype market. How about employing similar technology are employing in their google mail offering? Scan the voip calls and pop up adds and offerings based on keywords in the conversation? How about a shop now button on Skype directly into ebay? How about an eBay driven Skype notification for end of auctions? Maybe it is all of these together that are worth the billions.....

what are your thoughts?

eBay to Pay at Least $2.6B for SkypeMonday
September 12, 10:04 am ET
By Mattias Karen, Associated Press Writer
EBay to Pay at Least $2.6B for Skype Technologies, Total Value of Deal May Climb to $4.1B

STOCKHOLM, Sweden (AP) -- Online auctioneer eBay Inc. agreed Monday to pay at least $2.6 billion for Internet-telephony company Skype Technologies SA, a deal that confounds many analysts not just for the lofty price tag but also for what some consider the companies' dubious compatibility.
The total value of the deal may climb to $4.1 billion based on whether Skype meets a series of performance targets over the next three years, San Jose, Calif.-based eBay said. It said the acquisition would create "an unparalleled e-commerce and communications engine" for Internet users worldwide.
Low-cost Internet phone providers like Skype are creating upheaval in the telecommunications industry. That's because Voice over Internet Protocol technology, or VoIP, breaks calls into data packets that get routed over the Internet, which is much more efficient and cheaper than the traditional circuit-switched phone system.
Skype -- founded by the creators of Kazaa, the free music-sharing program that riled the music business -- gives away software lets people talk for free over the Internet using computers and microphones. A paid version, SkypeOut, allows those calls to be connected to regular phones.
Some analysts have been skeptical about eBay's needs for a VoIP provider.
EBay buyers and sellers can communicate with each other via e-mail before a transaction is complete, and presumably Skype would give eBay a way to add voice to such chats. But eBay traditionally has been guarded about such communications out of fears that deals might get taken offline to avoid fees.
EBay said Skype would "strengthen eBay's global marketplace and payments platform, while opening several new lines of business."
"Communications is at the heart of e-commerce and community," said eBay's chief executive, Meg Whitman, who had won praise for avoiding deals beyond eBay's core, marketplace-based strategy, especially during the late 1990s Internet craze. "We will create an extraordinarily powerful environment for business on the Net."
EBay shares dipped 73 cents, or 1.9 percent, to $37.89 in morning trading on the Nasdaq Stock Market.
Niklas Zennstrom, Skype's CEO and co-founder, will retain his position and will join eBay's senior executive team. He said the deal will help advance his company's goal to "revolutionize the ease with which people can communicate through the Internet."
But Ovum analyst Mark Main said he considered the deal "far-fetched" and said eBay could have found cheaper ways to improve its Internet communication abilities.
"EBay could have developed its own sophisticated messaging and communications platform, or even bought one, for far less money than it is paying for Skype," Main said. "And if eBay is mainly paying for Skype's user base and brand, that makes this a risky investment."
Skype has 53 million registered users and the company says more than 2 million people use Skype at any given moment. Since it was introduced in 2003, the company's free software has been downloaded more than 164 million times.
In 2004, the company generated about $7 million in revenues, which it projects will snowball to $60 million this year and more than $200 million in 2006.
EBay recently trounced analysts' expectations by reporting it earned $291.6 million, or 21 cents per share, for the three months ended in June, a 53 percent increase from last year. Revenue totaled $1.09 billion, a 40 percent increase from last year's $773.4 million.
Overall, eBay's community spanned 157 million registered users, up 10 million from March. Its online payment service, PayPal, also is becoming more pervasive, with 78.9 million account holders who exchanged $6.5 billion during the quarter.
But bringing Skype into the fold is expected to cut eBay's earnings, at least in the short term. EBay projected that the acquisition will bring down earnings per share by 4 cents in the fourth quarter of this year and by 12 cents in 2006.,15704,1103966,00.html

FAST FORWARD Why Skype? EBay's Still Thinking BigWhether or not the online auctioneer overbid for VoIP company Skype, the deal does make sense.Sep 12 2005By David KirkpatrickFortune.comLast week's rumor became this week's reality when eBay announced Monday that it would buy Internet phone company Skype for between $2.6 and $4.1 billion, depending on Skype's financial performance over the next two years. A lot of us in the tech community—even senior executives at major tech companies I've spoken with—are still scratching our heads. If all eBay wanted to do was to add voice capabilities to its online transaction platform, there would have been better ways to do it than to spend several billion dollars for another company. Yet if you think of eBay as a collector of communities, several rationales for the marriage start to come into focus.First, there are more similarities between the two companies than many have noted in the initial coverage. Both are essentially hubs which enable their member/customers to initiate and complete transactions on their own over the Internet, without much intervention by the company. Ebay facilitates merchandise sales; Skype facilitates voice calls. Keep in mind that one of the biggest changes now happening in business is the empowerment of the individual. It's all about power being dispersed by the intrinsic equalizing force of the Net. You might say that eBay seems intent on creating the first genuine conglomerate of what I have called the Contribution Economy.Indeed, Pierre Omidyar—eBay's founder, chairman, and largest shareholder—is one of the world's most passionate apostles of the notion that the way the Internet puts power and control into the hands of individuals is a fundamental, society-altering force. Here's something he recently wrote on his blog: "EBay has helped people pursue their individual passions and discover their own power to make good things happen…they've become empowered by participating in an open and honest marketplace, in a level playing field, meeting and working/trading with people who share their interests." This is what most excites him about the company he created, and I'm convinced this kind of thinking still plays a big role in its internal deliberations. Similar things can be said about Skype. The company did not invent Voice over the Internet. But it has created the largest community of users for such a service. Just as with eBay, every incremental user makes Skype more valuable for everyone, because there are more partners available to transact—or communicate—with.But as the company has said, its ability to sell the for-pay version of Skype (which connects an Internet call to regular telephone lines) to the 157 million registered users of eBay, will reinforce the viral growth of all these businesses, as will parallel efforts to market the services of eBay (and especially its payment subsidiary PayPal) to the 52 million registered users of Skype.While eBay emphasized in its announcement that it believes Skype is a strong stand-alone business, the online auctioneer might gain so much growth for its own user community that the purchase ends up making sense for eBay, regardless of Skype's own revenues. Perhaps Skype will be free for eBay users, which might also drive people into eBay. And the ability to talk easily and semi-spontaneously to a seller could make the experience of shopping on eBay even more comparable to offline purchasing, which could attract more buyers.Then there's growth. EBay's growth in members and revenues has slowed recently. But eBay is overwhelmingly an American business while only one-eighth of Skype's users are in North America. Both companies thus get a quick way to broaden their user base.Still, this deal is best compared to eBay's much-smaller purchase last year of a 25% stake in Craigslist is an online local classified service that is growing wildly; it's also, like most of Skype's services, absolutely free. But by affiliating with both services, eBay keeps attractive online communities out of the hands of its competitors, notably Yahoo and Google, and gains access to a growing group of active Internet users whose business value it can, if necessary, figure out later. If eBay wants to be the first real conglomerate of the Contribution Economy, it will need as much of that economy's true currency—empowered users—as it can get.So we might expect to see more acquisitions by eBay of companies that meet a basic philosophical criterion: They give individuals great power they never could have had before the Internet came along. Those businesses don't have to be directly connected to eBay's online marketplace; I'm suggesting that eBay may see itself as not just an online intermediary between buyers and sellers but a nexus of personal Internet empowerment.I'm not sure that the huge price eBay is paying in the Skype deal is justified, but I think I do see why the company was willing to pay it. With Google and Yahoo growing exponentially and beginning to tower over the Internet scene, eBay is under pressure to keep up. Its basic vision—better living though online communities—is the same as Skype's; that's a key factor to consider when evaluating this deal. It may be just the latest of many more to come.