September 09, 2005

Ebay Wants to Buy Skype? Makes Sense

Fred Wilson, VC at Union Square Ventures and prolific blogger at 'A VC' blog wrote about a WSJ article that speculates that Ebay might be considering buying Skype. Fred wonders why eBay would want to do that. The WSJ article isn't free to read but here's another story that says Skype could be priced as high at $5 billion.

My first thought when I read Fred's post was, could it be because Ebay feels threatened by Google's growing stature? Let’s face it, until a few months ago, Ebay was the largest internet pure play business around. At around $55 billion in market cap Ebay is three times the size of Amazon and significantly larger than Yahoo. Now, all of a sudden here comes Google and before Whitman could even blink it races past Ebay to reach over $80 billion in market cap. Now that Google is poised to launch an online payment mechanism, possibly threatening Paypal (even though Google denies they would compete) - it makes eBay all the more insecure.

Another reason is the huge opportunity that VoIP presents today. Ever since the release of GoogleTalk I've been itching to write about the untapped, languishing elephant of an opportunity that all the bigwigs - Yahoo, Microsoft, AOL have ignored so far and those that haven't, namely Skype and Vonage, have been unable to capitalise on. Now when Google is all set to make the most of this opportunity, it makes perfect business sense for Ebay to want to have a share of that cake.

Sure, this has nothing to do with Ebay's auction business but it does represent a big market and a perfect vehicle to enter it. Amazon too had nothing to do with search prior to launching A9. It entered the industry by about the same time Microsoft woke up to the fact that there's big money to be made there. Now that Microsoft has bought Teleo and when Yahoo is probably already revving up Dialpad, why would Ebay want to be left behind?

I must clarify here why I think Sype and Vonage missed the bus before I get mowed down by the cult of Skype. I know I know, everyone who uses, loves Skype. But this isn't 2000. Lets make a distinction between a business that makes big profits and one that has a big user base that expects free lunch. To have a 50 million subscriber base and not to be able to make good money out of it in two years in a way that keeps everyone happy is, to me, a disgrace. The SkypeOut business model is so ridiculous that even the most voiceferous supporter of Skype tries to avoid it as much as possible, which explains Skype’s measly revenues per subscriber. Vonage? Well, here’s the simple math: divide the number of Vonage subscribers with the households that have a broadband connection and multiply with 100. That's the percentage of market that Vonage has tapped so far.

The question in my mind is not whether Ebay would buy Skype if it could. The question is would Skype be interested in being bought by Ebay? If you ask me, they should. To me, if Skype was actually offered $3 billion by Murdoch, as the media has been speculating, it made a mistake by refusing the offer. GoogleTalk is about to take over the world's telecom business. Now’s the time to exit! But more on that soon.

Updates
13-Sep: I was wrong! Ebay has announced the acquisition and the reasons aren't the ones I cite in this post. See, my final analysis and comments on Skype's revenues, which are now public.

9-Sep: Another reason why this isn't about Ebay's auction business - Skype's inherent value is its large subscriber base. If it was only about enabling communications in the auction community or making support easier, any VoIP service would do. Ebay is willing to pay in billions for the established distribution that Skype brings to the table. Sure, it may find some applications of the service in the auction business but this is clearly about taking a lead in the internet telephony business. (Meanwhile, the Wall Street doesn't like the idea much. Ebay's stock took a beating today over the news of Skype buyout.)

See Also
my thoughts on Skype's high valuation

2 Comments so far      

Blogger Ash:

Excellent Post, Manu.

However, I think the link between ebays interest in Skype's subscriber base, and its potential to drive liquidity in ebay's marketplace. Will it be an attractive acquisition? Sure. Is it worth $3billion...I am not convinced. How many unique participants (subscribers of skype who are not members of the ebay marketplace) can ebay acquire from the skype subscriber base? 10%, 15%. Lets say 50%. Are 25 million unique subscribers, worth $3 billion?

12 September 2005 07:49:00 GMT+05:30 link  
Blogger Manu Sharma:

Ash, I'm not convinced that Ebay is acquiring Skype for enabling communications between the buyer and seller community. I believe this is not about Ebay's auction business. This is about VoIP. Ebay's growth is slowing down and it needs new pastures to grow. The high growth that lies ahead of the VoIP sector makes it an ideal market for Ebay to venture into. Re valuation, see my next post.

12 September 2005 14:28:00 GMT+05:30 link  

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