Ebay is for Winners – Skype

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In the last part of this series, we explored eBay's valuable payment service, Paypal, and touched on its growing global market share. It turns out that eBay has a hand in the communications business as well.

In 2005, eBay purchased Skype in a half-stock, half-cash transaction with the Scandinavian founders for $2.6 billion. An addition $1.5 billion may be paid out if Skype reaches certain financial targets which eBay has yet to disclose.

What does Skype have to offer?

  • free computer-to-computer Voice over the Internet Protocol (VoIP)
  • low cost connectivity fees between computers and land/mobile phones
  • currently serves 7% of the global long distance market

Why did eBay buy Skype in the first place?

To realize the potential power of Skype, we must first realize the potential power of eBay. eBay simply excels because it creates a medium between global buyers and sellers, allowing them to conduct business under one site. eBay is now a global giant, but many people avoid the site due to the rising numbers of fraudulent members.

I have an eBay account but have cut back on my purchases because of some ugly run-ins with sellers. Without a more sophisticated way of contacting a buyer/seller than e-mail, eBay will continually gain and lose its members. So what can Skype provide eBay users?

Skype could allow buyers and sellers to connect over the phone straight from eBay.com

Imagine the ability to shop over the net and contact other members without leaving your computer, typing in a different url, or barely lifting a finger. If CEO Meg Whitman can find a way to integrate Skype within eBay pages, buyers and sellers will no longer have to speculate about fraudulent transactions. Though fraudulent users will continue to abuse eBay, Skype will help members identify those “bad users.”

On top of making communication between buyers and sellers easier, eBay plans to charge users for each and every Skype call made on their eBay account. This will add up quite nicely on the balance sheet once eBay makes the integration. From eBay's point of view, a future integration looks almost certain.

“Communication is at the heart of community and e-commerce, making Skype a natural fit for eBay,” Whitman said.

eBay holds an “unparalleled e-commerce and communications engine” by “removing a key point of friction between buyers and sellers.” (Source: News.com)

Now the real question is will Skype be profitable over the long run. Let's take a look at the numbers and see how Skype has done after the eBay buyout. Since eBay purchased Skype:

  • Registered Users has grown 58% CQGR (compounded quarterly growth rate)
  • Registered Users has grown from 44 million in 2nd quarter '05 to 113 million 2nd quarter '06
  • Total minutes served has grown 42% CQGR to 7.1 Billion
  • High User growth in Europe and Asia

The Eastern Hemisphere has strongly embraced Skype, probably due to its low costs and vast range of compatibility. It works on nearly every computer platform and is a very cheap alternative to frequent long distance callers.

It may not be eBay's most valuable asset, but Skype possesses the most potential. Once successful integration into eBay's shopping network, buyers from the US will finally be able to talk to sellers from China without paying out 3 bucks a minute.

eBay continues to add valuable assets to its portfolio which will reward shareholders in the long run.

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