Column: eBay tries a Hail Mary

by Mathew on September 13, 2005

Here’s a column I posted at globeandmail.com about the eBay takeover of Skype:

“There’s only one real question that springs to mind in the wake of eBay’s takeover bid for voice-over-Internet provider Skype — which could cost the on-line auction company up to $4-billion (U.S.) — and it is this: Is the dot-com bubble back, or has eBay chief executive officer Meg Whitman lost her mind?

As is typical with such deals, there was plenty of talk on Monday about the “synergies” between the auction provider and the VoIP company started by Swedish entrepreneur Niklas Zennstrom — who also co-founded the notorious Kazaa file-sharing network. Ms. Whitman, for example, talked about “leveraging” Skype’s software and services along with eBay’s on-line payment service PayPal to create an “unparalleled e-commerce engine.”

Even if you agree that there are synergies between the two companies, however — and that takes a little thinking outside the box, not to mention a few leaps of faith — $4.1-billion is a lot of cash to pay for benefits that remain purely theoretical. Does eBay have so much money that it can afford to bet $4-billion on a company that has less than $100-million in revenue and no profits? Or is it so desperate for growth, and so afraid of losing ground to competitors such as Google, Yahoo and Microsoft, that it is willing to mortgage its future on such a deal?

EBay has already spent more than $1-billion over the past year buying companies such as Shopping.com and Rent.com, in what analysts have said is an attempt to bolster sales, which have been slowing from the glory days when eBay regularly reported revenue growth of 70 per cent every quarter. That has raised the possibility that buying Skype — a company whose services aren’t even remotely related to its core business — is a kind of “Hail Mary” pass, an attempt to buy growth at almost any cost. That’s not to say providing VoIP services to eBay sellers and buyers isn’t a good idea. It probably is. As Ms. Whitman noted, the ability to pick up the phone (or a headset attached to a PC) and call a vendor about something instead of just sending an e-mail makes sense. So does the idea that eBay could make money on a per-call basis from such a “click-to-call” service.

Even if you assume all that, however, how many users are likely to do so, and how much is that likely to be worth? Is it enough that $4-billion — or even $2.6-billion, the “base” price for Skype — looks reasonable? Only if you use some pretty huge numbers. eBay may have about 160 million members, and tens of thousands of “power sellers,” but how many of them will want to pay for voice services? Many eBay sellers are individuals who likely can’t afford to staff the phones (or PCs) in case someone wants to call.

As for Skype’s business itself, it’s true that the company has about 55 million registered users, and that number is growing at an astronomical rate (150,000 a day according to some estimates). But it’s also true that it only has about 2 million users who pay money, and will have sales this year of between $70-million and $100-million. The vast majority of its users never pay Skype a cent, and given that the main appeal of the company’s service is that it’s free, it’s hard to see that changing any time soon.

Could eBay make money based on services and features that piggyback on Skype? Possibly. It could sell advertising around the call somehow, it could charge vendors for placement, and so on — but even if you assume that those businesses will continue to grow rapidly, you have to look two or three or even five years down the road before $2.6-billion looks like a good deal. And if buying Skype is such a great idea, why did Google, Yahoo and Microsoft all reportedly pass on it? It would make far more sense as an add-on business for Yahoo than it does for eBay.

One of the reasons Google probably didn’t want to buy it is that the company has effectively built its own VoIP service with its recently launched Google Talk software. Not only is that likely to provide competition for Skype, but it also raises the question of why eBay would pay billions for something similar.

“If eBay really wanted some VoIP technology it could have bought it cheaper or built it itself,” said John Delaney of telecom consulting firm Ovum. He said the eBay deal reminded him of the dot-com era. “The whole thing about the dot-com era was that company valuations were justified by the number of people that visited their sites, not the revenues they made,” he said.
So far, no one is saying that eBay is pulling a Time Warner — an allusion to the $160-billion or so that the cable and entertainment company obliterated by buying America Online at the height of the tech bubble. But the auction provider is still paying an awfully large sum of money for a deal whose theoretical benefits are still far in the future, and that is a very risky game to play.”

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