eBay has agreed to acquire Internet phone company Skype for $1.3 billion in cash and $1.3 billion in stock and could pay up to $1.5 billion more if Skype meets financial targets by 2008 or 2009.
Since Luxembourg-based Skype released its first product in August 2003, the company has become the premiere voice over Internet Protocol (VoIP) provider with 54 million registered users after two years, according to the company. Using peer-to-peer architecture, Skype offers software-based PC-to-PC telephone service for free to tens of millions of people. It makes money on roughly 2 million people who pay a few dollars a month for a service that lets them reach landline and cell phones.
JPMorgan analyst Imran Khan said the acquisition was "strategically positive."
"We believe eBay will leverage Skype's products to improve both customer service and buyer/seller communication. Also, Skype has various products in its pipeline which we believe will add more efficiencies to eBay's platform (e.g., video, which could be used for product demos)," Khan wrote in a research note on Monday.
Other analysts said buying Skype is a pre-emptive move for eBay in a consolidating business highly focused on voice services. Major portals and telecom companies are all frantically trying to replicate the rapid success of Skype. eBay merely jumped on a merger before its rivals.
For example,recently announced Google Talk, which features voice chat. Yahoo is , and Microsoft is .
"Skype has made very good progress as a first mover in this market, and the question will be if this will be a market that will evolve around new standalone players, or will the network effect that exists for an instant messenger network like AOL, Yahoo or MSN, and now Google, prevail?" wondered David Edwards, an analyst at American Technology Research.
Will Stofega, manager of VoIP services research at analyst firm IDC, said the purchase "absolutely turns up the heat on Yahoo, Google and others."
"Beyond adding an application for eBay customers, Skype entails a new revenue stream for eBay and another way of getting beyond the portal. They wanted to get into the game to become a more full service portal," Stofega said.
What's more, eBay's acquisition of Skype illustrates how little difference there is between commerce and information marketplaces today. The gap between traditional search engines and portals, such as Yahoo, Microsoft's MSN and Google, and online shopping centers, such as Amazon.com and eBay.com, is rapidly shrinking.
When eBaythe online auction house showed that owning the payment system that customers used could prove profitable and smart. Now, eBay and others want to own the communication channel, too.
"It's not just about the services, it's about the information acquired from the user that can be stored and used by the company," Stofega said. "Amazon, for example, knows exactly what you buy to recommend things in the future. They get that by owning a customer profile. That information more than anything is what's valuable."
Skype has the makings of a cult brand ala Apple or Google. For one, it has an active developer community that has created plug-ins like Iscoot. For $4, people can download the plug-in to forward Skype calls to a mobile number, for example.
"A voice portal at eBay or Amazon, it changes the nature of how people communicate--you can pick up and do a voice call just using a Web browser or while shopping. It adds another dimension to mobility," Stofega said.
Other analysts said the PayPal buy made much more sense for eBay at less economic risk.
"I think there were much closer synergies between eBay and PayPal than Skype and eBay," said Edwards of American Technology Research. "This is definitely a significant risk and a longer-term play."
The acquisition exposes eBay to the uncertainties of the telecommunications market--specifically the emerging Internet voice market, said Vimsi Sistla, an analyst at ABI Research.
"VoIP quality of service is still a concern, and regulators are still on the wall with regard to how they want to go ahead with tariffs and fees," he said. "I feel it is too high a price tag to buy a VoIP service company."
Sistla said eBay should consider buying a search engine company instead, which he said would fit in better with its core business.
"From a big-picture perspective, it is still unclear how big this (VoIP) business will get," Edwards said. "VoIP providers are still dependent on the telephone providers in order to connect to the revenue source today. That's when you bounce off the Internet onto a wireless phone."
Mark Mahaney, a Citigroup Internet analyst, said the deal was eBay's largest to date, and quite possibly its riskiest.
"The return on investment here will be uncertain for a long time to come," he wrote in a research report. "The near-term potential for improved communications among eBay buyers and sellers...is a positive, but not one worth $2.6 billion."