SkypeOut for the count

Industry Watch

Auction company eBay buying Internet telephony company Skype for $2.6 billion has stirred memories of the dotcom boom, but rather than strengthening Skype’s assault on the telephony market, eBay looks to be taking it in a new direction. Stewart Baines explains. The shock of the recent $2.6 billion acquisition of Skype by auctioneers eBay hit the telecoms industry in three waves. The initial surprise was that a third portal giant should enter the Internet VoIP fray within two months. It looked like Microsoft, Google and eBay – as well as the existing AOL and Yahoo! activities – would present an almighty blow to fixed line telecom operators who were already facing a daunting challenge everywhere they looked. With eBay buying Skype, Microsoft’s MSN assimilating Internet telephony application developer Teleo, and Google launching its first VoIP and instant messaging application, it was suggested that Internet VoIP was about to go stratospheric. The second surprise happened when commentators realized just how high Skype was being valued. With 53 million active users generating just $7 million revenues in 2004, it caused painful flashbacks to the dotcom nightmare, but this time the bubble was being blown up with a pneumatic pump. Granted, the end of year revenue projection for Skype is $60 million, but no-one, not even the managers at Skype, expects revenue to continue growing year on year at 850%. Skype looked very expensive at $2.6 billion let alone the $4.1 billion it could cost if it reached its performance targets. And then a third surprise: rather than the acquisition fuelling the threat to telcos’ voice revenues, Skype does not appear to be targeting that market. eBay has presented its plans for Skype to the analyst community. Skype, it appears, is going to be a tool for drawing more people to eBay’s advertising rather than becoming the incumbent operators’ nemesis. It’s not even clear that Skype will remain a standalone application. Skype will be positioned as a way of connecting buyers and sellers on eBay’s auctions. Got a query about an auction? Call the seller. If it’s off-net, we can simply charge your Paypal account, also owned by eBay. Extending customer base eBay are also buying into a new customer base, but not one that necessarily fits well with its legion of auction addicts. “If eBay is mainly paying for Skype's user base and brand, that makes this a risky investment. Let's not forget that Skype is mainly about cheap or free phone calls,” said Mark Main, a senior analyst with Ovum. “To date, most of its customers have never paid Skype anything, and we suspect that many never will. We would question just how many Skype customers use the service with any regularity.” It seems that eBay views revenues from putting adverts in front of Skype users’ eyes as more profitable than asking them to make toll-rated calls for breaking out onto the PSTN. SkypeOut could be, well, on its way out. Now, as quickly as it has risen, it appears that Skype will be gradually absorbed into another firm’s business plan. It’s not that eBay is unaware of Skype’s fee-based services – called SkypeOut. But it is unlikely to go toe-to-toe with low-cost voice providers in a saturated market with razor-thin margins. Threat alleviated There’s a sense of disappointment for those who trumpeted Skype’s meteoric rise, and a feeling of being let off the hook for those telcos who faced a serious attack from another front. eBay is not a telephone company and unlikely to think like one. That may just be to its advantage. Perhaps companies like eBay, Microsoft and Google can bring a fresh approach to telephony. eBay, for example has been very successful with Paypal and has promoted online payment more successfully than the credit card companies. The challenge eBay faces is keeping the users that Skype's bloated evaluation is founded upon. According to Skype, 25% of its 50+ million users are business users. They, and the many consumer users, were attracted to the Skype simplicity and uncluttered nature. If by becoming part of an online überbrand, Skype looses its cool, underdog status, its users will move on. If its users are being force fed too many adverts, they will simply move to an alternative Internet VoIP provider with more kudos or less ads. Or both. “There are a lot of question marks over the deal. Will there still be a standalone version of Skype, will it be swamped by advertising?” asks Sandra O’Boyle, senior analyst, Current Analysis. “It could easily lose as many users as it gains if it diverges too much from what made it attractive.” Even if eBay and Skype prove a match made in a Las Vegas wedding chapel, the prospect of Microsoft, Google, Yahoo! and AOL offering free Internet telephony to their millions of users, will mean telcos still have to watch their back. Few will contemplate matching them with free on-net calling, but they will certainly lose some revenue to those that will countenance it.