Ebay's Skype acquisition called logical but costly

$4 billion acquisition will add revenue stream

September 13, 2005|By Jon Van | Jon Van,CHICAGO TRIBUNE

The purchase of Skype Technologies SA by eBay Inc. yesterday makes strategic sense to analysts as more consumers embrace broadband services on the Internet.

But the price tag - which could top $4 billion in cash and stock - seems spectacularly high for an Internet telephony service that mostly gives away its software. The software allows people to talk for free over the Internet.

EBay is positioning itself as a commercial portal with a broad suite of services to attract users rather than sticking to its origins as an online auction site. It wants to become more competitive with the likes of Yahoo, Google, America Online and Microsoft, said Andrew Belt, a senior vice president with Adventis, a Boston-based technology consultant.

"This isn't about generating revenues from voice service," he said. "It's about helping [eBay] tap into the advertising and transaction revenue streams that Google and Yahoo enjoy."

To acquire the Swedish-based Skype, eBay will pay $2.6 billion in cash and stock now and could add another $1.5 billion in cash and stock if Skype's growth meets certain future goals.

"Those numbers certainly give you pause," Belt said.

Meg Whitman, eBay's chief executive, said providing eBay's users with voice communications will make it easier for them to buy goods online.

But there may be a downside to the enhanced communications, said Paul White, chief financial officer of Deltathree Inc., a New York-based Internet phone service. "When buyers and sellers talk directly with each other, you may see more of them going around the system and making private deals that avoid paying eBay's commissions."

Whitman believes Skype will help eBay's buyers and sellers increase their levels of trust. Moreover, privately held Skype has attracted a broad international following that eBay hopes to leverage, especially in countries where eBay has little or no presence.

Technology that enables voice conversations online, often called Voice over Internet Protocol, has already seduced Yahoo, Google and Microsoft. In recent months, each of the online giants has bought into the VoIP space, although at prices far lower than what eBay paid.

The public is still baffled by VoIP. A recent survey by Harris Interactive commissioned by Verizon Communications Inc. found that 87 percent of respondents didn't know what VoIP was. Twenty percent thought it was a European hybrid motorcar and 10 percent said it was a low-carb vodka.

Confusion may arise because people try to think of VoIP in terms of traditional phone calls, when it is really more akin to a voice form of e-mail or instant messaging, said Terry Manning, sales vice president of Zoom Technologies Inc., a Boston-based firm that supplies VoIP equipment and services.

"VoIP is far more powerful than just a phone service replacement," he said.

Jacob Guedalia, chief of iSkoot, a company that brings VoIP services to cell phones, said "voice used to be an infrastructure service, but now it's a software application. It's become a logical extension of every Internet portal, whether it's Yahoo, Google, AOL or whatever."

Internet phone service is driving down the price of voice service, said Raul Martynek, chief of Eureka Networks, a provider of telecommunications services to businesses.

"We offer VoIP today," Martynek said. "It's part of a package of services. Large carriers are offering voice in bundles at a point where it's nearly free. It's happening right now."

But even granting the new technology's value and the branding power of Skype, which had more than 30 million unique visitors to its Web site in July according to comScore market research, the multibillion-dollar price tag still seems high to many observers.

"They certainly paid a much higher multiple than they paid for PayPal," said Tim Melton, a Chicago attorney with Jones Day, in a reference to eBay's purchase of an online payment service.

Whitman compared Skype with the 2002 purchase of PayPal, the online payment company eBay bought for $1.5 billion. Before buying PayPal, eBay unsuccessfully tried to compete against it with Billpoint, its own payment company.

"We worked hard to build up Billpoint," Whitman said. "In the end, PayPal had the technology lead, they had already built the ecosystem. Skype is in the same position. It has a global footprint and is already a well-known brand."

The Chicago Tribune is a Tribune Publishing newspaper.

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