Skype Buy: A Mixed Bag for eBay

Online marketplace eBay (Nasdaq: EBAY) paid too much for the Internet phone service Skype, but its head was in the right place when it made the buy, according to a report released Tuesday by a major technology research firm.

"eBay's September 2005 acquisition of telephony vendor Skype was overpriced by any direct measure: technology value, user base and revenue," writes David A. Willis for Gartner (NYSE: IT), of Stamford, Conn.

"However," he adds, "eBay was correct in its vision of interconnecting the worlds of business applications and communications capabilities."

Hit to Bottom Line

The Gartner report comes on the heels of eBay's announcement this month that its books will be taking a US$1.4 billion hit in its third quarter, most of it due to writing down the value of Skype, which made $90 million for eBay in the company's second quarter.

That write-down could be a positive thing for eBay, contends Tim Boyd, an analyst with American Technology Research in Greenwich, Conn.

"The market has been discounting the Skype acquisition ever since eBay made it," he told the E-Commerce Times. "It's been a negative overhang for the company."

With this write-down, he continued, eBay is finally admitting that they overpaid, cleaning up the remaining costs of the deal and moving on.

A phone call to eBay by the E-Commerce Times asking for comment on the Gartner report and the Skype write-down was not returned.

What eBay Got Right

In its report, Gartner cites several things that eBay "got right" with the US$2.6 billion buy of Skype. One of them was the realization that communication applications could be used to reduce friction in online business transactions.

However, the expected synergies from the Skype buy never materialized, according to Boyd.

"Part of eBay's initial justification for the purchase was that it would reduce friction between buyers and sellers on the platform," he explained. "I don't think it's had much of an impact on that.

"Most of the sellers that I've spoken to have implied that they don't have time to talk to every buyer who's interested in their items so they don't offer a 'Skype-me' button on their listings," he added.

Indeed, Gartner maintained that the Skype buy was premature.

"The market was not ready to adopt Skype as a means to integrate commerce," it says. "Users see its service as an inexpensive or free calling option, not a means of accelerating their business as an eBay buyer or seller."

Growing Demand

Another "got right" by eBay, according to Gartner, was its recognition of the growing popularity of integrated communications among Internet users.

Skype subscribers are doubling annually, Gartner reports, and the service claims 220 million subscribers with more than 7 million of them frequently on line at the same time.

"Many are attracted by cheap or free voice calling," the report observes, "but many also appreciate the convenience of instant messaging client integration, conferencing capabilities and other productivity applications."

Not Worth $2.6 Billion

Gartner also points out where eBay went wrong with the Skype deal, such as what they paid for the technology.

"As similar acquisitions have proven, Skype's basic technology could be purchased elsewhere for 1/100th of the price," Gartner maintains.

"Is Skype a viable entity, is it a valuable?" asked Will Stofega, research manager for VoIP services at IDC in Framingham, Mass.

"Yes," he told the E-Commerce Times. "Is it worth $2.6 billion? Probably not."

Flat Support

Nevertheless, he argued that eBay hasn't done much to build its value since it purchased the technology.

"There hasn't been any real effort to take control of this thing and put some wheels under it so it becomes a premiere piece of software," he said.

"That's what it really is," he continued. "You can talk about it being a service, but at the end of the day, it's a piece of software that resides on a client somewhere.

"Getting that client onto mobile phones, onto PCs and into the enterprise in a legitimate way is something that could really start to energize the product," he opined.