eBay & Skype: A Done Deal

By Greg Galitzine

Looks like eBay is going ahead with their plans to buy VoIP service provider Skype in a move purported to add free Web telephone calls to its online auctions and fuel growth.

According to news reports, eBay said it plans to pay $1.3 billion in cash and $1.3 billion in stock for the Web communications company. It would make a further payout of up to $1.5 billion by 2008 or 2009 if financial targets are met, giving the deal a total value of up to $4.1 billion, executives of the two companies said.

$4.1 Billion? Excuse me, but that’s insane.

The report quotes individuals associated with the transaction explaining the merger as a move to strengthen the bonds between eBay buyers and sellers. eBay merchant sites will also be encouraged to use Skype software to allow customers with last-minute sales questions to click to talk to a customer service agent.

Executives of the two companies justified the combination by saying that the power of so-called "click-to-call" services to convert shoppers into buyers represents a far more lucrative form of selling proposition than advertising can. Skype also plans to add video calling and other features to its software.

Maybe they should have purchased Xten, a public softphone maker, who they could have had for a few tens of millions. Heck they could have paid double that company’s market cap and still received a good deal. Partner with a service provider, and take a penny or two off the traffic generated with eBay’s universe and voila!

The deal is expected to complete in the fourth quarter.

Skype expects to generate $60 million in revenue this year and more than $200 million during 2006. The company has yet to post a profit.

In a post last week, I questioned if this merger was the best use of eBay’s money. I’m still not convinced it’s such a good idea. In an exchange with a former colleague of mine, he tried to convince me of all the potential upside to this deal. He reminded me that “…eBay also owns 25 percent of Craigslist; imagine the social-networking prospects if every posting Craigstlist had a VoIP call button!”

He continued: “So you've got eBay, Craigslist, and Skype all together. What do online auctions, a bulletin board, and VoIP have in common?  They all connect people.  I hate myself for saying this, but there's a "synergy" there — smart mobs, information analytics, online democracy, power to the people, all that good stuff. Imagine the "platform" they could build with these three companies. Then imagine what would happen if they open-source that platform and run applications on top of it.”

I can’t argue with logic, and frankly, it’s not my dime, but rarely do the best laid plans work out the way they were intended. Think AOL Time Warner. I hate to be such a cynic, but frankly I think the only people making out on this deal are the founders and investors of Skype. God bless ‘em too! Their greater good was helping to place VoIP more firmly into the mainstream.

In talking with my friend, I mentioned that since I don’t see the real benefits to this partnership, it must mean that it’s definitely going to happen. He called me an “anti-visionary.”

Time will tell how wrong I was. Then again, when it comes to pass that eBay spins off Skype for a couple hundred million to Chinese conglomerate with a penchant for real estate and/or shipping, maybe people will remember one cynic who predicted it.

And oh the irony…

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