Mossberg Does Skype; Ebay Looks Smart

WSJ's gadget titan Walt Mossberg reviews Skype 2.0 and predicts it is ready to blast into the mainstream.  Along these lines, I spoke with an experienced Internet CEO yesterday who runs two small companies, both of which are Skype-only, neither of which has a single land-line phone.

Skype is doing what it needs to do to keep VOIP synonymous with Skype (a strategy whose wisdom is nicely illustrated by the power of the equations "Google = search," "Kleenex = tissue" etc), and as long as it can keep doing so, eBay looks smart.  What most observers missed about the Skype acquisition, in fact, was that the price eBay paid was irrelevant. 

The outcome for Skype is likely to be binary: home run or bagel.  In the bagel scenario, eBay will lose 100% (or 5% its market cap).  Although not inconsequential, companies have made riskier bets (Time Warner, for example). 

In the home run scenario, meanwhile, eBay will make at least 10X.  (I don't want to rush to hyperbole here, but this is not a small market opportunity we're dealing with, and the idea that the leading global VOIP player could someday be worth 1/5th of Google's current value, 1/3rd of Verizon's current value, or 1/2 of Yahoo!'s current value is not far-fetched.)  Quibbling about whether eBay should have paid $1 billion, $2 billion, or $4 billion, therefore, is a waste of time.

Disclosure: As of today, I own some eBay stock.  I didn't buy it.  It got "distributed" to me.  It turns out that one of the funds I greedily shoveled money into in early 2000 (thirty seconds before the bubble burst) managed to invest in Skype, and the fund just distributed the Skype gains.  Hats off to the fund firm!  And hats off to me for, in aggregate, losing slightly less than 90% of my invested capital. 

Comments

[Dave Evans]

Nice article, thanks Henry. I'm not familiar with the revenue model for Skype. Is it primarily call out costs? In which case, at first glance this seems self defeating as the more people who use skype, the more calls will be free. I imagine there will also be additional revenue from sale of headsets etc.

Thanks

Dave

[Travis Reeder]

Dave, they also have SkypeIn which allows you to purchase a phone number (with voicemail) that allows people to call your computer like it's your home phone. Very cool. And the best part is, you can buy a number in any city that they have numbers for.

That's an interesting point Henry makes about it being a name akin to Kleenex for tissue. There is a lot of value in that. I already use it, "I'll skype you.".

[Brad]

No way this has ever been a binary bet...I just don't believe it. It was smart of Bessemer and others to exit when they did. http://gigaom.com/2005/12/07/for-skype-one-more-headache-called-yahoo/
Ebay just needed into the game...the game being social networks, but I don't think this was the right way. The scary thing about it all is that big business doesn't get how its really going to effect everything. Even more frightening, the only real big business mind who really really gets it is Rupert Murdoch... that gives me the gibblies!

[theloniousspheremonk]

skype will be a huge dud. it is another commodity with a cool name. my grandma setting up voip company called bubbi phone. hb: being a moral relativist i could care less that you lied to public for your own gain. but more central to your current cicumstance, why should i listen to anything youve to say if you lost 90% of your money. i should be listening to people who make money. perhaps is time for you to find another topic. do you fish?

[Steve D]

Let’s speculate a little bit about how Skype and PayPal can be integrated. It’s recent news that two manufactures (Netgear and Accton) announced WiFi Skype phones. Now let’s also recall that the future of credit cards is moving towards tight integration into cell phones or more generally into handheld mobile devices. Skype phones are one class of such devices. It’s not too stretched to foresee that in 2-3 years, many more very cool gadgets will hit the market like more advanced WiFi/WiMax phones and dual CDMA/WiFi or GSM/WiFi phones (already selling in Europe) and it’s reasonable to assume that Skype will be installed on at least some of them to enable WiFi calling. Now, if PayPal is integrated into Skype, it’s likely that any device that has embedded Skype will also feature PayPal. Do you see where it’s going? Skype might be PayPal’s ticket to reach mobile payments –huge enormous market.

The size of this opportunity along can make the purchase price Ebay paid for Skype negligible. Add the potential of paid-per-call classifieds:
http://www.internetoutsider.com/2005/12/reader_bob_estr.html#comments ,
royalties from hardware makers, benefits to the core Ebay marketplace and it seems that the decision to buy Skype can propel Ebay into new growth.

The future of Internet is mobile – there are already 2 billion phones on this planet and only 1 billion computers. Many of the current phones are not based on Internet, but on closed proprietary networks with Internet access added as an afterthought add-on function. This is changing – slowly, but surely. Every device – be it mobile or not – will be built around Internet as its core and not as add-on afterthought feature. PayPal will, no doubt, want to be there and it’s so much easier to achieve with having the most widely used telephony client which enjoys the widest support from device makers. Mobile payments might even add competitive advantage to Skype as compared to Y!Messenger or MSN Messenger.