EBay Admits To Bad Call On Skype

MaineCoasts writes "The Times online reports that two years after buying Skype for 2.6 billion, Ebay yesterday warned shareholders that they may have made a mistake. In essence, they vastly overpaid for the company. ZDNet offers analysis of the announcement: 'Clearly, the current business model is not enough to satisfy eBay in light of how much the company spent on Skype. And the reason is simple. Even though Skype has done a very good job of getting users to download its software client, most people who use the service do so to make free Skype-to-Skype phone calls. The only way that Skype makes money from its subscribers is when people use its Skype-In or Skype-Out services. Skype-In allows users to pay to rent a phone number, which people on regular phones can call. Skype-Out allows users to call traditional phones or cell phones for a fee.'"

Comments

Bubble

[Artimaeis]

Hmmm... smells like the bubble could be collapsing.

Re:Bubble

[Lord Ender]

Hmmm... smells like the bubble could be collapsing.

When one company (and, of course, its shareholders) buys in to a risky, unprofitable business, you call it a bad investment.

A bubble is when EVERYONE buys unprofitable assets. That's a pretty important distinction you are overlooking.

You're Going to See a Lot of Criticism

[eldavojohn]

You're going to see a whole slough of articles on this because it's now very easy for everyone to criticize after the facts are in. But, I caught this in The New York Times Blogs yesterday and I found these lessons learned to be quite accurate:

1. Just because a company has a huge and growing audience doesn't mean it can find a huge revenue source. Skype's appeal is that it offers services free or very cheap. That limits its ability to raise prices. And it turns out that there are limited opportunities for advertising or add-on services.
2. It's almost impossible to pay for a deal through "synergies." EBay executives talked about how Skype would be useful to connect buyers and sellers in its marketplace. This always seemed to be hooey. The eBay market is already full of chatter, mainly by e-mail, and sometimes by phone. Sure, some of that might well be handled by Internet phone, but how much and what value was created by eBay owning its own voice chat system? Not much, it turns out.

I think the second point is the most important. This deal was easy to criticize because they didn't know what the hell they were going to do with it. They had no forward plan. Where were they taking Skype? What were they going to do with it? How was it going to make money? Nobody knew. And, most importantly, eBay didn't either.

So why did they make the deal? Maybe they felt pressure. Maybe it looked like easy cash. One thing is for sure, it never came to fruition whatever they saw in the company. I personally liked the tool but once you start asking for cash, you can expect to see your user base taper off. You're competing with something that is already incredibly cheap in the states. If it ain't free, you're going to have problems operating in the black. If it is free, you better have some mad advertising revenue or market data stuff to sell ... I don't know but that's why they over paid for it.

Google knew where they were going with the YouTube purchase. It's now pretty clear eBay didn't know exactly what they were going to do. But, hey, they could treat it like Microsoft's original Xbox venture, "We lost a lot of money but fsck it, we've got a ton to lose and I'm bored with being the top dog in a single market!"

Re:You're Going to See a Lot of Criticism

[kebes]

Excellent post.

Skype's appeal is that it offers services free or very cheap. ... once you start asking for cash, you can expect to see your user base taper off.

I think it's further worth noting that Skype has had some unfortunate technical issues. The business model behind Skype is something along the lines of "get people interested in the product by offering free Skype-to-Skype calls, but charge for calls to/from conventional phones." I think many users, including businesses, seriously considered using Skype for their international calling needs. It seemed like a good fit.

However Skype has certain stability problems. In my own usage, I've noticed that it can sometimes be a bit flaky. Moreover, the entire Skype network went offline for many days. As a result, businesses stopped thinking of Skype as a serious, reliable option.

My point is that things could have turned out differently if the Skype technology had become mature and stable enough to be a viable option for reliable international calling. They could certainly have gathered a large, paying customer base if the system was bullet-proof. But, as is, many people are (rightly) dubious of the reliability. I think Skype's business model has merit, and the program is very useful. But, eBay certainly overpaid in as much as they paid as if they were buying a mature technology/solution, when in reality there are still many growing pains left in that technology sector.

Re:You're Going to See a Lot of Criticism

[kebes]

I see the same issue coming around the corner for Google/YouTube. ... Provided videos.google is still around, I personally feel Google mad err there

The Google acquisition of YouTube makes much more sense than eBay/Skype. Google has a solid business model based on advertising, and YouTube fits with that. YouTube has a huge userbase, so the ads that are now running (selectively) on YouTube are undoubtedly generating income. Of course I don't know if the income is enough to offset the bandwidth (and legal!) costs, but I suspect Google is still confident that they can turn it into a profit center, since they are continually de-emphasizing Google Video in favor of YouTube (e.g. nowadays most of the "related" links in Google Video point to YouTube).

Shades of 2000

[Valdrax]

Honestly, this was another classic case of someone with money looking at a wildly successful and completely unprofitable business and snapping it up without some serious thought to how to make it profitable or more importantly if it was possible to make it profitable.

None of these businesses that provided expensive service for free and whose selling point was that it was free have ever managed to become profitable. eBay should've known better when buying a business in 2005.

And thus the second dotcom bubble bursts

[Fross]

In exactly the same way as the first. "Old money" companies (as 1st generation dotcom companies like eBay are now, in comparison) paying way too much money in speculation, for a piece of the "next big thing". Next Big Thing fails to materialise as a sustainable business enterprise, money is wasted.

3 years ago, it seemed like everyone and their mom was getting into VoIP. I remember asking someone writing one, how are they going to make any money? He answered, get bought out by a big corporation.

Well, it worked for Skype, I guess.

Re:Pretty obvious, wasn't it?

[apdyck]

I personally use the Skype Out service. I have one contact in Skype that is a Skype user, and he uses it for work (that'd be my father). I paid $17.50 CAD for a year of unlimited long distance, and I tell everyone what a great deal it is and how they should sign up for the service. As of yet, not a single person I've told about Skype has even downloaded it, let alone used the service. Perhaps people are just afraid to try something new?

That said, there is one thing I have noticed. I get great call quality with Skype when I call my parents in Ottawa, or my friends nearby, but when I call my in-laws (up in the Northwest Territories), I have anywhere from 3-10 seconds lag, and the quality of service is poor. It would seem that the quality of service is limited by the available bandwidth - they just got 768K 'high speed' Internet there a few months ago! After all that, I plan to continue to use Skype Out, and when they finally start offering more Canadian phone numbers, I may even consider using Skype In.

Don't be short-sighted

[GreyPoopon]

Clearly, the current business model is not enough to satisfy eBay in light of how much the company spent on Skype. And the reason is simple. Even though Skype has done a very good job of getting users to download its software client, most people who use the service do so to make free Skype-to-Skype phone calls.

Don't be too hasty. There are two avenues that open up huge potential for revenue:

1. Corporate presence. I know several large companies that informally use Skype. For security purposes, they would probably be willing to pay for internally operated Skype networks and collaboration software add-ons. There's a huge potential there. The large company that I work for has black-listed Skype from our computers because Skype is very tight-lipped on the protocols and "phone home" cases that are used by the application. Opening up some of the "secrets" to potential customers and supporting intranet-only implementations of the software open up a revenue stream.
2. Vonage replacement. With yet another loss in patent lawsuits for Vonage, the future is looking bleak for them. My cable company keeps sending me offers for VoIP, but frankly the thing that has kept me from switching is the much higher rate schedule for international calls. I need 5 cents per minute or less to Europe. Skype could either provide a hardware-based client to replace Vonage installations, or partner with cable companies to provide reasonable rates for long distance. Furthermore, they could start providing video conferencing capabilities.

In short, there is a HUGE untapped market out there. If EBay would stop trying to milk their investment and would start investing more into it, they could really get some substantial returns.

bubbles and such

[phantomfive]

And I'll tell you another company that is waaay overvalued.....facebook. $10 billion? Even $1 billion is too much. There will always be hype and over priced companies in the technology industry......mainly because every once in a while a technology comes along that really is worth it. The question is how do you know?

Business people have trouble with this kind of thing because they don't understand the technology. As in this case, they thought 'skype will be super-popular' which may be true, but they didn't see that once everyone has Skype no one will need Skype out.

Tech people and engineers tend to have trouble with it because they tend not to understand marketing, business prospects, or what people want. They say things like, "Less space than a nomad, no wifi. Lame" or "This is the year of linux on the desktop" and don't understand why most people aren't interested in open-moko or the gimp.

If you DO happen to understand both of them, it will be a competitive advantage that can make you a killing in the stock market. As anyone who invested in nintendo a year ago knows.

Re:Pretty obvious, wasn't it?

[Fizzl]

When I was working in sweden for couple of months, I actually used both skyp-out and skype-in to call my relatives. The international call prices are ridiculous between Finland and Sweden, even when me and the other end are on the same companys network! (TeliaSonera)

Shades?

[Chineseyes]

This IS 2000 all over again. Wait until the social networking sites that are being valued in the 2-10 billion dollar range yet only bring in a couple of mill a year in revenue start collapsing then it will really get ugly.