Monday, October 17, 2005

eBay and Skype logic

Why did eBay pay billions for Skype? Because it was a great deal. Here's why:

The most expensive elements of putting together a telecommunications network are 1) capital investment for infrastructure 2) customer acquisition costs and 3) a billing system. Now let's consider each of these elements for Skype under the eBay umbrella:

Skype customers use their own computer an internet connection to make calls, so there is essentially zero capital investment required to create the network. Nice. eBay is great at identifying projects with high return on very little capital.

Skype ID's look a lot like eBay ID's --in fact they are essentailly the same. If you have an eBay ID, you already entered the data you essentially need to have a Skype account--thus, eBay is one mass emailing away from establishing the largest telecom network in the world---at NO COST to eBay. Very nice.

Skype users can use Paypal for their bill payment. Convenient that eBay owns Paypal--maybe thats how eBay became aware of Skype in the first place--the guys at the paypal division gave Meg a call, and said, "Check out the guys at Skype, because their Paypal billings are going through the roof". Now that they are one big family, Paypal becomes the deFacto billing system for this new global telecommunications service---at ZERO COST since it has already been built and integrated. Does it get any better than this?

In fact it does, because aside from the value of the business itself, eBay gets the derivative benefit of now connecting it's users for free via voice. Voice communications build trust more easily than email. Trust it the basis for the eBay economy. Skype will further enhance the value of the eBay network and increase already impenetrable barriers to entry. They already have Skype Me buttons you can add to your website--or your eBay listing.

2 comments:

Techbuz said...

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lotz said...

Ray, Your article is as good as I have seen on this topic. The Ebay / Skype merger is brilliant as Ebay should guarantee that Skype becomes the "de facto" standad in the VOIP space. I think the street assumes this market will be fragmented with MSFT, AOL, Yahoo, and Google all grabbing their fair share. Then along comes Ebay they buy Skype and now every person who wishes to transact business on the world's greatest marketplace needs to have a Skype account. It's fast, it's easy and it just made my Google and Yahoo VOIP accounts a lot less essential.

Once the position is establisted I think you could then look to a Qualcomm type licensing model. This is a model that allowed Qualcomm to realize a 91% profit margin on 1.33 billion in licensing revenue last year. Or take a look at Apple. The IPOD which has become the "de facto" standard in the personal music player market, has an accessory market of 2 billion dollars and growing. It was recently reported that Apple will raise the licensing fees on accessories from 2 to 10 percent with all of that money flowing directly to the bottomline.

Cisco has not commented on the recently announced Linksys phone but I would guess 5% on a $130 phone. Siemens, Plantronics, and others are already on board as well.

Time will tell as to how this plays out but 4 billion dollars to control the next standard of communication seems like a small price to pay.