eBay and Skype (continued)

My two previous posts on this deal were two of my most popular posts in the past 30 days.

I have no idea why people chose this blog to discuss, comment, and link to a deal that I had no part of (other than being a user and fan of both services).  But the fact is I had 19 trackbacks, 28 total links (according to Google), and 40 comments to my original post.

I had 5 trackbacks, 2 links (according to IceRocket), and 10 comments to my follow up post.

That's a fair bit of discussion for this blog anyway.

So, after reading Tom Evslin's complete trashing of the deal (from eBay's perspective), I figured it was time to weigh in once more.

Tom says that eBay could have gotten IP voice talk technology for way less than what they paid for Skype.  Tom was one of the first guys in the VOIP space, so he knows what he's talking about on this count.

He also says that while Skype does have a large user base in the developing world, its the availbility of payment systems (ie PayPal) that matters in those markets, not the ability to talk to the seller.  I am not sure that is entirely true, but again, they could have gotten voice IP voice talk technology to build into eBay for a tenth of the price.

His final point is that Skype is not a great standalone business. 

There is where I sort of disagree with Tom. Skype has amassed an enormous user base and its growing every day.  It's either Metcalfe's law or Reed's law, not sure which, but we are seeing serious non-linear value creation going on in the Skype network.

Tom calls Skype an asset, not a business. I guess the distinction is one has value, the other has cash flow.  If that's the distinction, I agree with Tom.  But I would be willing to bet that Skype will (and would have if it had stayed independent) generate significant cash flow in the coming years.

My first instinct is to Skype someone if I can.  I only reach for the phone if I have to.  Skype offers me presence detection, the ability to initiate a chat first to set up the call, and then one click and I am talking.  That is a much better user experience for me.  When Skype appears on a mobile device, that's going to be great too.

The big thing Skype needs to do is open its network to other networks.  I want to be able to Skype someone on AIM, Yahoo, or MSN.  That's when it will get really interesting.

But back to Tom, I agree that the eBay deal was kind of nutty. And have felt that way since my original post.

But I don't agree that the $2.6bn was necessarily an overpay.  Maybe for eBay, but not for the asset itself.  It's a jewel of a business.

Comments

[Manu Sharma]

> Tom calls Skype an asset, not a business. [...] But I would be willing to bet that Skype will (and would have if it had stayed independent) generate significant cash flow in the coming years.

I couldn't agree more. Funny that Tom completely discounts the value of the 'asset.' Having 54 million subscribers of a service that's soon going to explode... that's a damn good asset. Skype isn't a 'business' yet becuase the SkypeOut business model is inherently flawed... but that can be changed. If Ebay innovates with Skype's internet calls business, a lot of money can be made there in the coming years.

[Marina Architect]

I was surpised, this post is a classic VC Cliche of the Week in disguise: "I don't agree that the $2.6bn was necessarily an overpay," followed by empty rhetoric and silence. I know you must expect more from your in house analysts: if applicable.

Skype is a phenomenal service but if you were an Ebay Financial Analyst or Adviser, how could you justify a $2.6B number considering the stand-alone business comprises over $2.5B of the value not to mention incentives drive the deal to $4.1B. Wouldn't Vonage be a better standalone business?

Looks like we've caught you in a lazy let the tide raise the pack scenario. I don't blame you. I imagine you are in a tough spot and it's starting to slip into your day to day. It's "tough to be a mother" and it's even tougher to be a VC unless you inflate valuations wrapped in perceived opportunity. As a consumer, the deal works for me but as a VC, I expected more insight from you.

Skype's user base is substantially lower than what is indicated in the pdf presentation in my opinion/speculation. Redundancies, inactive and non re-recurring decay accounts probably account for over 50% of any number they use in media kits. It's still a great service. We'll see: the competition is going to be fierce in this area. It's getting exciting with GoogleNet, don't lose your edge.

Cheers.

[Randall Newton]

You mentioned Skype mobility ... there's a download for PocketPC at the Skype website.

[Atul Arora]

I think most people are missing one piece of the eBay/Skype picture. Google makes a lot of money using AdsSnse using the pay-per-click model but it has not entered in the pay-per-call market. Dollar for dollar, pay per call is much more lucrative. eBay's strength is making a cut of the transaction between the buyer and the seller. Its weakness is that it that is not very effective in generating a lead. Google makes billions here. I think the Skype will be used by eBay to make a big push into the pay-per-call market and compete with Google's ambition to do the same using Google Talk.

[Russel Harvey]

People don't get the deal eBay bought Skype. But how about Skype itself, I dont' get it at all. "Chat the a click away to call", how is MSN or Yahoo messenger any different? MSN messenger's quality is on par with Skype, both are more popular that likely you will find someon has either MSN or Yahoo. Skype can talk to a phone, but if you are sitting in front of your computer and looking for your friend, how likely you would call your friend's phone? Otherwise you probably would already pick a phone dialing instead of check on IM? Is this true?

[Rob Hyndman]

I think the value of the asset is seriously exaggerated. At the first sign of fees for Skype to Skype, the userbase will evaporate and flee to the next entrant to the market. This userbase is distinctively monetization-resistant, almost as a matter of pride. It's a useless userbase unless it can be monetized, and it can't be - not really.

And it makes no sense to acquire the userbase to acquire new eBay customers - everyone on the planet who wants to be an eBay customer now is already a customer. And the brand is trong enough to attract all the new customers it needs without the likes of a Skype.

And (as Tom quite rightly points out), as a technology buy it's simply insanity. If eBay wanted to be a VoIP play it could have invested one tenth the price, 6-12 months, and it would have had as good an asset. Or whatever. But not this - never this.

This deal makes no sense, IMHO.

[David Gibbons]

I think eBay had no option - that's all the analysis that's relevant regarding the actual price itself. If you think Meg had an option other than Skype once she decided to "buy VOIP", then you don't get VOIP.

The question should be ... why did eBay "buy VOIP", not why did they buy Skype - ask why VOIP is worth $2.6Bn, not why Skype is. I VOIP will more than pay for itself at eBay ... I stick by my day 1 analysis ...

Q-What's the spending category served via the voice channel?
A-Professional Services

Q-What's the largest consumer spending (and peer production) category not represented on eBay today?
A-Professional Services

SkypeBay will pay for itself as a Professional Services marketplace - monetized on the pay per call basis that Atul mentions (and eBay hints at in the press release). SkypeBay's products & producers, unlike eBay's, aren't constrained by geography - this could make offshore outsourcing look tame.

[Jianu Razvan]

I am new to this blog but as this is this article is about Skype and related stuff I wanted to point out that after Skype opened its API it is also becoming a serious competion to AT&T and MCI and other POTS (Plain Old Telephone System) phone companies in the 1900/1800 numbers (pay for service numbers). The big companies have had a quasi monopoly in the States and similar companies in other countries but with the launch of 1900SkypeChat.com they will certainly be loosing even more business to The VoIP applications on the net. Vonage has been cropping of their business through the last years but this will certainly take an even bigger business from them ....

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