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

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.

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.