Skype Journal: eBay and Skype: Back to basics
September 12, 2005 07:20 PMTwo weeks ago, I explained how Google needed Skype to move Google up the value chain from when an advert is clicked. I noted that eBay was Google's real competition for connecting consumers to merchants, and eBay has a structured transaction environment. They don't just do the search, they also help complete the transaction, including payment.
So, a fortnight later, and eBay buys Skype. What does it mean?
Companies like Dell, eBay, Google, etc. got big by thinking big. They picked a unique business model, and drove it to completion without losing focus. To understand this transaction, you need to look for where the big prizes are.
The obvious one is the wrong one. Google and eBay are already in the business of generating sales leads. The Skype community, for all its size and vibrancy, is not being bought because they can be pitched to and turned into eBay users. Or if it is, this story will have a nasty ending where all the heroes get bumped off and the princess just grows old and ugly.
There are two conveniently located stones under which to look: transaction revenue, and the freefone number business.
Banking is big, slow, cartel-like and lacking in innovation. eBay is unbundling part of the transaction chain using Paypal, and re-intermediating the settlement process. Remember that Paypal is largely a virtual payment mechanism, used to front other payment services. Communications services are a natural generator of the small transactions that Paypal thrives on due to its low comission fee structure compared to credit cards. Skype and Paypal also have an international footprint, leaving many parochial banks struggling to offer a competing product. They fit together nicely.
This is classic Innovator's Dilemma stuff. Eat your way up into the big boys' businesses by starting with the small stuff.
So the first big prize is to suck some of the profit out of the banking payments system. This is a big pool, and Skype is just a small straw. That makes the eBay/Skype transaction interesting, but not critically important.
Guess what? Telecom is big, slow, cartel-like and lacking in innovation. And it has some big prizes ready for snatching. Almost all of current retail VoIP plays are abount disintermediating high end-user toll charges. It's a massive race to the bottom, where you get your monthly talk time by cropping three coupons off your Shreddies packet.
There are other puddles of money in telecom, though. One is the 800 number revenue bucket. I don't have the figures to hand, but this isn't a small deal. And because Skype is a child of the "stupid network", it can evolve quickly to integrate new transaction-supporting functionality making the profit pool bigger.
I suspect that eBay's ambition is to become the mediator of 800-number style interactions between consumers and merchants. The www.eBay.com web site is their text distribution channel, and Skype is the audio one. Each will have different sets of merchants, buyers and transaction structures. So don't look for "eBay" functionality to appear in Skype, because they're addressing strategically similar but functionally different needs.
One last thought. If you're a telco, now is a great time to cross your chest and start saying your Hail Marys. Someone with deep pockets is about to give away telephony to support their adjacent transaction business. Browsers are free — as long as enough people tip Bill G., search is free — as long as enough people leave a few cents in Larry, Sergey and Eric's pension plan. And telephony will be free — as long as you click the "pay here" button on your Skype-powered eBay telephony device often enough.
PS - eBay still hideously overpaid given the size of the effort needed to claim the prizes.
TrackBack (3)
» Why did Ebay buy Skype? from Dennis Forbes
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Tracked on September 12, 2005 9:09 PM
» TECH TUESDAY: MERGERS AND ACQUISITIONS from EGO
I wonder what business leaders at eBay have in mind with the acquisition of Skype. Will the business venture become a "powerful ecommerce and communications engine"? [Read More]
Tracked on September 13, 2005 9:40 AM
» A note to reporters doing the odd Skype story from Skype Journal
There will be a thousand stories today about eBay buying Skype - One Year Later. From a year ago: The original announcement. Man on the Skype Interviews: What does the eBay-Skype deal mean to you? Skype - Chapter 2. eBay and Skype: Back to basics. Sold... [Read More]
Tracked on September 11, 2006 11:02 PM
Comments (4)
Jeff Pulver's view isn't as rosy. Could this deal kill Skype's need to rock the telcos?
Posted by: Mike at September 12, 2005 11:35 PM
You seem to over simplify the 800 market. Skype is woefully simplistic in that it provides no scale for an enterprise that wants to use it as an interaction channel to their customer base. The technology and infrastructure that lies behind 800 services is one of the most sophisticated and advanced around.
With Skype you can not even transfer, let alone queue to multiple agents behind 800#s, track those agent statistics, etc, etc. Skype would need a fundamental rethink and redesign in order to move into this space and the philosiphy to date has been the consumer and SMB, not the enterprises that play in the large scale revenue of 800 minutes.
Grasping at straws to find value in the acquisition, as there is nothing in the eBay presentation to investors to indicate such a radical shift in the Skype strategy to date.
Posted by: MuppetMaster at September 13, 2005 1:33 AM
Actually, in my earlier article I did mention that this was a stiff challenge. Therefore they need to do an Innovator's Dilemma and target the SMEs who would be just as happy deploying an instant-on Skype/PC/handset solution as a PBX or centrex. Particularly the millions one-(wo)man shops out there.
Then eat your way upwards. By the time the termites come through the floorboards, it's too late to do anything.
Posted by: Martin Geddes at September 13, 2005 11:00 AM
In 2004, eBay had 56 million active users in 32 countries producing about $2.5 billion in annual net revenue (excluding PayPal) or about $44 per user for the year.
In one acquisition (vs. 3 or more years of marketing effort), eBay picked up 54 million mostly foreign registered users in 225 countries - about half in Europe, another quarter in Asia, with only 13% in the U.S. By comparison, it took Radio 38 years, TV 14 years, Cable 10 years, eBay 10 years, and tne Internet 5 years to reach 50 million users.
So in effect, it bought Skype for 1 years worth of eBay net revenue excluding the earnout. If it converts Skype users to eBay & PayPal at its present margins it will generate at least $1 billion in incremental annual cash flow and would have its money back in just 3 or 4 years. Although, I certainly don't expect a 100% conversion rate any deficiency should be offset by new revenue streams.
For example, if they execute well, the "power of three" should create a very strong network effect of 40x (i.e. Metcalf's Law) and allow them to enter and lead new service vs. product markets including business "pay per call", both domestic and offshore, that will be more profitable than products and make this acquisition look brilliant and "hiddeously cheap" by traditional standards. It's time to put some eBay stock in the Henshall & Geddes pension funds.
Posted by: Dwight Beazley at September 13, 2005 12:48 PM