September 13, 2005

Why Ebay Bought Skype

Looks like I was wrong about the reasons why Ebay-Skype deal would make sense and why Skype should cost so much. I contended that it's because Ebay wants to enter the internet telephony business and that the deal had nothing to do with auctions. Well, turns out it's about both - the Ebay marketplace as well as Skype as a standalone business.

While I'm kicking myself for not seeing this, I'm also extremely glad because this is a terrific, terrific deal. If Ebay can make this work in both the above areas - the price is indeed a bargain. By integrating Skype in the marketplace Ebay intends to remove what it calls a key friction area in categories in which a simple webpage listing isn't enough to make the sale (how do you expect someone to buy a car or expensive jewelry from a simple listing?) and expand globally in countries where trust is an issue (countries like India have a "Culture of haggling").

I see two other big reasons why this is a great deal:

1. Ebay will suddenly acquire millions of new members. Skype will have 57 million subscribers by end of Q3 2005 and apparently, there's only 1% overlap between Skype's US subscribers and Ebay's members.

2. Paypal will help Skype monetize its business of internet telephony.

If you're still skeptical, take out some time to go through the Ebay's news release presentation of the deal and your skepticism will evaporate. The presentation is divided into four sections 1. description of Skype, 2. how Skype can be applied in Ebay's marketplace, 3. Skype as a standalone business and 4. Skype's financials.

The complete Ebay+Skype presentation. (3.5mb PDF)

I've listed highlights from the second section, on how Ebay intends to apply Skype in the marketplace:

1. Create a new way to monetize e-commerce
  • Transaction AND lead-generation monetization. New Pay-Per-Call feature enables monetization of new marketplaces. Example shown: Pay Per Call button on Local Classifieds. (no details on how it will work but here are some interesting ideas)

2. Remove a key friction
  • Communications can accelerate categories that are: High involvement, Expensive and Complex. Examples: autos, business and industrial products, jewelry and watches, sporting goods etc.

  • Skype allows superior access to categories that Require significant communication and Are less suited to transaction-based monetization. Examples: new and used cars, travel, services, real estate.

  • Expanding the global footprint

    • Emerging markets (India, China, Poland, Brazil, Russia): Large grey markets, Limited trust on Internet, Culture of haggling, Culture of IM/mobile, Price sensitivity

    • New markets (Japan, Nordic countries): Limited eBay presence, Large growth in Skype users

    • Cross-border trade: Limited trust, Buyers need more interaction and information from sellers

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