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Monday, September 12, 2005

eBay Wants Skype

eBay has agreed to buy fast-growing Internet start-up Skype for up to $4.1 billion in cash and shares, in a move to tap new sources of growth and add free Web telephone calls to its online auctions.

eBay said on Monday it planned to pay $1.3 billion in cash and $1.3 billion in stock for the online communications company. It will make a further payout of up to $1.5 billion if certain financial targets are met.

The deal will cut eBay's earnings by about a cent per share until the end of 2006 before beginning to boost eBay's profitability, Chief Financial Officer Rajiv Dutta said.

Its shares fell 1.81 percent to $37.93 in early trading on the Nasdaq exchange, after falling 4 percent last week when investors became concerned that eBay might pay too much, giving eBay a market capitalization of about $52 billion.

eBay is renowned for its Internet marketplace linking more than 150 million buyers and sellers, who currently exchange about 5 million emails per day. It hopes that offering free Skype calls within eBay will smooth the way for more deals to go through, and let the company charge merchants for calls that lead to sales.

Skype already leads the booming voice-over-Internet (VoIP) market, which is seen as a threat to traditional phone companies and is being aggressively targeted by online powerhouses such as AOL Yahoo, Google and Microsoft.

Chief Executive Meg Whitman said that Skype had a considerable head start.

"We think Skype has an enormous lead -- 150,000 new users a day, and technology that is generations ahead of where the new entrants are," she said. "And when people are using your brandname as a verb, that is incredibly powerful."

Skype expects revenues of $60 million this year and more than $200 million in 2006, but has yet to turn a profit. In two years, Skype has attracted 54 million members to its free and low-cost Internet-based voice service and is on track to roughly double in size within a year.

Luxembourg-based Skype offers a free service when users make computer-to-computer calls to other Skype users. Charges apply when Skype users make calls to, or receives calls from, regular phone numbers.

eBay said its merchants would be able to use Skype software to allow buyers with last-minute sales questions to "click to talk" to a customer service agent.

"Once we integrate communications into e-commerce, we think that Skype is going to remove considerable friction" from the buying and selling process, Dutta told Reuters by telephone.

Skype would be the biggest acquisition yet for 10-year-old eBay and analysts said the price tag looked hefty without more details about the strategic rationale.

Nearly half Skype's users live in Europe, a quarter are in Asia and an eighth are in North America, providing eBay with a large audience as it seeks to expand outside of its core North American market.

As of October 2004, Skype had raised $24 million from several private equity firms including Mangrove Capital Partners, Draper Fisher Jurvetson, Bessemer Venture Partners and Index Ventures.

The deal provides a major payout for Skype founders Niklas Zennstrom and Janus Friis, who also created the controversial peer-to-peer file-trading network Kazaa.

Zennstrom and Friis, who have touted Skype as a "killer" application that could threaten entrenched players in the telecom sector, will keep their positions at the company.

Earlier this month, a local unit of a Chinese telecom company moved to block some Skype services amid reports that a broader crackdown on VoIP services was in the works.

"This is largely a rumor, and I think it's not nearly the size of the issue that was first reported," Whitman said.

69 comments:

Anonymous said...

Interesting to see that Ebay have paid $4bn for Skype. I have seen an auction on Ebay of a company that could offer the exact same technology for about £10,000!

http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=5807543926

web_merchant said...

eBay has agreed to buy fast-growing Internet start-up Skype for up to $4.1 billion in cash and shares, in a move to tap new sources of growth and add free Web telephone calls to its online auctions.

Skype expects revenues of $60 million this year and more than $200 million in 2006, but has yet to turn a profit.
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wow, sounds like good but don't understand, can really skype whose be interest & revenue $60 million this year and more than $200 million in 2006, sell his company or it's only e-bay take the service of skype.

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Lina said...

I am a student at the American University of Sharjah, and I am currently taking a course in Strategic Management, which is a requirement for my Bachelors Degree in Business Administration. My professor recommended this blog entry that you have made for a class assignment my group mate and I came up with the following conclusions:

As we read this particular article we wondered which one of the frameworks were applied (Porter, Hamel, Baron, or Barney). Could it be Porter's threat of entry or was Ebay creating barriers to entry through product differentiation? Or is it one of Hamel's core strategy changes that Ebay was pursuing? Can't it also show an indication of how the resources the Ebay has are enabling it to take a new opportunity in the market, possibly one in which VOIP will be dominant in the future? Our problem here is that we do not know the true intent behind what Ebay is doing. However, no matter what Ebay's intent is, the Hamel framework is the best representative of what is going on.

First of all, we think that Ebay's intent to suit Skype means that there has been a change in Ebay's core strategy component of the business concept. That is, Ebay is choosing to compete differently by trying to adapt to new technologies at an early stage. For example, as one source at Ebay indicated, they are aware of the fact that in ten years, people will not be accessing the internet through a keyboard. In addition, it has been explicitly mentioned that, with Ebay buying Skype, it is setting "itself apart from rivals by offering low-cost voice services exclusively to customers." Therefore, these actions are, in Hamel's language, a basis for differentiation, in which Ebay is competing differently.

Second, Ebay possesses strategic resources giving it a competitive advantage. With regards to core competencies, we can see that Ebay knows something that might be unique, valuable to customers, and transferable to new opportunities. This thing is VOIP, which is a new technology that will change many things in ten years. Therefore, we can see Ebay trying to gain a strategic asset, which is Skype in this case, in order to create a business concept innovation. Moreover, Ebay is offering a large amount of money as a price for Skype, and this can be encompassed in the core process component of strategic resources, according to Hamel.

Third, we think that there could be customer interface in the future because Ebay wants to reach out to the market in a different way… through VOIP. However, we do not see any "information and insight" that Ebay might be providing its customers or its surrounding environment with, especially that no one knows what the true intent of Ebay is with regards to going after Skype and offering such a large amount of money for a company that has not been existent for a very long time in the market, keeping in mind that we heard from various sources that VOIP can be bought at a much cheaper rate from somewhere else. Why is Ebay after Skype then!?

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