Sep 19, 2005 12:00 AM,

EBAY PLACES VoIP'S BIGGEST BET

By Tim McElligott

The world's most successful online auction house, eBay, caused quite a stir last week by announcing it would acquire voice-over-IP start-up Skype for $2.6 billion plus incentives. The deal may ultimately prove to be pure genius from an e-commerce point of view, but most telecom industry experts have been left scratching their heads.

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eBay CEO Meg Whitman made a decent case for how Skype, a global provider of free voice-over-the-Internet service, can make eBay a better business.

“eBay, PayPal and Skype are the leading brands for three of the most important areas on the net: e-commerce, online payment and voice communications,” Whitman said. “By combining Skype with eBay and PayPal, we can create an unparalleled e-commerce and communications engine for buyers and sellers around the world.”

But if Whitman said it once, she said it numerous times: Skype also is a great stand-alone communications business. She identified three reasons why Skype was a good acquisition: a large and growing market opportunity, a strong market leadership position and a sustainable competitive advantage.

It is on this last point that Whitman may be questioned most. Telecom experts who consider how this acquisition will affect Skype's ability to compete as a stand-alone company in the VoIP space know that in VoIP's nascency, any claim to a sustainable leadership position may be premature.

Current Analysis held nothing back in its evaluation of the acquisition, saying eBay vastly overpaid for Skype. Analyst Brian Washburn wrote that regardless of the synergies, $2.6 billion or more is an outrageous sum of money to pay for a PC-to-PC VoIP company with just $7 million in revenue in 2004.

eBay Chief Financial Officer Rajiv Dutta saw it differently. “eBay has always been a financially conservative company, and this transaction was no exception,” he said.

Skype projected revenue for 2005 to reach $60 million and jump to $200 million next year. And the company claims to have 54 million subscribers and is adding 150,000 per day, or, as Whitman said, “Skype is adding a Vonage a week.”

Still, that's no guarantee of long-term sustainability. Washburn cited the fate of another PC-to-PC VoIP specialist, Dialpad, which despite accumulating 14 million subscribers in two years, went bankrupt and had to be rescued by Yahoo.

As for its leadership position in the VoIP market, Washburn said Skype is just one more voice-substitution technology joining dial tone VoIP, wireless, e-mail and instant messaging.

“The pennies-per-minute saved by using Skype over conventional dial tone do not make it a very serious new threat domestically,” Washburn said.

Patrick Kelly, an OSS Observer analyst, agrees with the threat assessment in light of the acquisition. “To some extent, Skype has been fairly impressive in the users they have been able to sign up in two years, but I don't think there are any big implications here for other VoIP providers,” he said.

The biggest threat to carriers — and still the most disruptive force in the residential voice market — is the cable companies, Kelly said. “Being able to get all your entertainment and communications service from one provider at a comparable price point or less is pretty compelling.”

Others on the telecom side are not so fast to dismiss the synergies of Skype and eBay. Level 3 Communications' chief marketing officer, Charles Meyers, seems to agree with Washburn that voice is an application just like e-mail, instant messaging and online gaming, but in a statement, he said he sees the combination of eBay and Skype resonating much deeper in the VoIP market.

Meyers cited brand bridging, simplicity of use and a broad demographic of customers as three attributes the combined companies can leverage.

The eBay brand (with the help of PayPal) is known for ease-of-use and secure and reliable transactions, Meyers said. And the Skype brand is perceived as cutting edge.

“Merging the perceived values of these brands may hold a powerful impact on consumer adoption of VoIP,” Meyers said. He added that all three attributes and Skype's VoIP service will help eBay expand the mass consumer marketplace for VoIP.

“That's something no single VoIP provider has been able to do and something the industry must learn how to do if it is to grow beyond … to tens of millions of users,” Meyers said.

Level 3 has a partnership agreement with Skype for VoIP call termination.

In a sign that eBay really does plan to let Skype run as a stand-alone business, the company has included the implications of telecom regulation in its evaluations. “We take it as a given that there is going to be an element of regulation of this business,” Dutta said. “We have built into our projections reasonable and conservative estimates for the cost of various surcharges and taxes and [are] combining that with what will be regulatory compliance, not just in the U.S., but around the world.”