Guy's Economics and the Internet Blog

Communication, communication, communication

Last week eBay, the Internet auction company, paid $2.6 billion (about £1.4 billion) to acquire Skype Technologies, the Luxembourg based Internet telephone company. Indeed if certain performance targets can be met over the next three years eBay will have to pay an additional $1.5 billion to Skype. Several market analysts have questioned the wisdom of the deal, trying hard to figure out the logic of the acquisition and suggesting that eBay may be paying out more than it should have done.

Exactly why did eBay buy Skype? Are they trying to expand their range of services to come into more direct competition with other Internet giants like Google and Microsoft, or can we accept at face value eBay's own explanation that the move was all about improving communication between eBay buyers and sellers?

First, some background. Skype Technologies was launched in 2003 by Niklas Zennström, and Janus Friis, who had already been successful in creating the peer-to-peer (P2P) file-sharing program KaZaA. With their new company they set about providing another P2P system that would permit simple web-based telephone calls built on the Voice over the Internet Protocol (VoIP) technology. With Skype calls made from PC to PC have been completely free. Calls from PCs to ordinary telephones (landlines or mobiles) have to be paid for, but are much cheaper than through the usual telephone companies. Skype has been the market leader in the Internet telephone sector and, according to a BBC News report, it currently has 53 million registered users worldwide. The Seattle Post reports that Skype earned $7 million in revenue in 2004, predicted to rise to $60 million this year and over $200 million in 2006. However Skype as yet has not become profitable.

Two other big digital technology companies have been focusing on Internet telephone services: Microsoft has recently bought Teleo Inc, while Google has developed Google Talk. Perhaps eBay feels that all the big players will have to have an in-house Internet telephone service and it needs to diversify a bit? The official reason being given by eBay executives is that the voice communications technology will make it easier for eBay users (buyers and sellers) to communicate with each other, especially for very highly priced products or services such as cars, houses and valuable paintings and furniture. I think there is probably some truth in both explanations. It will be interesting in future months and years to see exactly how eBay, Amazon, Google, Yahoo!, Microsoft and AOL develop their range of services and compete with each other. I am particularly interested in the Microsoft-Google competition right now. That will be one to watch!


Sources:

BBC News
eBay to buy Skype in $2.6bn deal
12th September 2005
http://news.bbc.co.uk/go/pr/fr/-/1/hi/business/4237338.stm

Mark Ward, BBC News
Portal bid drives eBay Skype deal
12th September 2005
http://news.bbc.co.uk/go/pr/fr/-/1/hi/technology/4238258.stm

Yahoo! Finance
Skype Technologies SA Company Profile
http://biz.yahoo.com/ic/133/133264.html
Page accessed 13th September 2005

Seattle Post-Intelligencer
EBay to pay $2.6 billion for Skype Technologies
13th September 2005
http://seattlepi.nwsource.com/business/240394_ebayskype13.html

Ken Belson, New York Times
EBay to buy Skype, Internet Phone Service for $2.6 billion
http://www.nytimes.com/2005/09/13/technology/13phone.html

Andrew Ross Sorkin, New York Times
Are the latest big deals really a big deal?
http://www.nytimes.com/2005/09/13/buisness/13place.html

Skype web page
http://www.skype.com
Page accessed 13th September 2005

Alexandru Macovschi
Google Wanted Dead Or Alive. Better Dead
Softpedia news
4th September 2005
http://news.softpedia.com/news/Microsoft-Google-Wanted-Dead-Or-Alive-Better-Dead-7612.shtml

BBC News
Microsoft-Google battle heats up
4th September 2005
http://news.bbc.co.uk/1/hi/business/4213466.stm

posted by Guy @ 10:24 PM