EBay Buys Skype in Deal Valued up to $4.1 Billion

Some market watchers said the deal may open a new can of worms for both firms. “I see this as being part of a continuing cycle and I don’t see how eBay’s well equipped to manage or grow this business or what they bring to the table in any other way,” said Frost & Sullivan analyst Max Engel. “What I see in a broader view is we have a lot of Internet companies buying other companies to increase their growth and to expand the area of their market. But we've tried that before and it never worked in the past.”

Other analysts said that as Skype’s interconnection with the public switched telephone network (PSTN) grows, which is essential for its revenue to grow, so does the risk it will be subject to charges the PSTN-interconnected VoIP community faces: “While regulation has not yet hampered Skype’s growth it is a future risk in our view,” Legg Mason analysts said. Skype isn’t a telephony replacement service, and isn’t now regulated under existing E-911 laws, the Communications Assistance for Law Enforcement Act, or universal service taxation.

However, investors reacted favorably to eBay’s announcement as did analysts at Citigroup and Legg Mason, who reiterated buy recommendations on its stock, which rose 1.42% to $39.17 per share mid-afternoon Mon. on the Nasdaq following the announcement.

“It demonstrates that voice, presence, text messaging and other IP-based applications will be essential for the company of the future,” said Pulvermedia Chmn. Jeff Pulver, a prominent VoIP enthusiast. “Until today, we looked at building communications networks and applications differently. Telcos never were the developers of applications; innovation happens at the edge. Now we have an example of how communications will be swallowed by the edge.”

EBay said it will buy Skype for $2.6 billion split evenly between cash and stock. But with earn-outs that exist through 2009, the deal’s valued could reach $4.1 billion. EBay said the deal will be dilutive to pro forma and GAAP earnings per share by 1 cents and 4 cents respectively for its 4th quarter this year. For full-year 2006, eBay expects the transaction to be dilutive to pro forma and GAAP earnings per share by 4 cents and 12 cents.

EBay CEO Meg Whitman said Skype “will allow eBay to accelerate existing categories, expand into new categories, monetize new marketplaces and expand its global footprint.” The company can move beyond transaction-based monetization to transaction and lead- generation monetization, Whitman told reporters at a news conference: “We think it has a real opportunity to expand eBay’s share of ecommerce and eBay’s share of great standalone businesses.”

Skype in 2004 had revenue of $7 million, expected to hit $60 million for 2005. EBay told reporters it expects Skype’s revenue to more than triple in 2006, to $200 million. Skype had more than 54 million registered users and over 164 million downloads through Sun. evening. In July it had 6.9 million active users, or a 2.4% active reach, in the 10 nations where it’s used most, NetRatings said. It had a high of 1.3 million unique users in the U.S. in July, with year-over-year user growth of 178% in Aug., NetRatings added. The company’s base service, which is free, generates revenue via premium services such as calling from PC to phone, voice mail and a dedicated phone number for users to allow outsiders to call. Legg Mason analysts said Skype will provide a voice communication device for buyers and sellers, access to the pay-per-call advertising market, the possibility to translate languages via voice communication across eBay’s worldwide network, and the ability to sell voice services to the more than 700,000 merchants in the U.S. who run business on the site.

Skype’s acquisition could strengthen competitor Vonage’s stock price should it file an IPO, as expected, officials said. Market watchers said the fact that Skype fetched such a huge price may give investors more confidence in Vonage stock.

“EBay’s recognition that a peer-to-peer communications company has value should shine a spotlight on the other IP-based communications technologies, networks and applications,” said Pulver. “Others might follow eBay’s lead, see the value of peer-to-peer and IP- based communications products, and acquire competing IP- based communications companies.”

Jupiter Research analyst Ian Fogg called the acquisition “a courageous move by eBay,” on par with its PayPal acquisition. But he warned telcos not to “breath a sigh of relief that this deal is final confirmation that Skype is… not a threat” since it appears to be further confined to the Internet realm. Fogg cited eBay’s $379 million 2nd quarter profit: “If Skype’s telephony features do continue to improve, eBay’s size will also boost Skype’s marketing, as Skype’s benefits are evangelized to eBay’s 157 million registered users.”

Some analysts said eBay is making a big mistake in the long run. “There are clearly strong pressures to grow in the short term and not the long term, which I see this as being,” Engel said. “It will bump their value up now, but in the long run I don’t think it’s the best immediate model.”

Market watchers also cautioned that Skype will face more competition from voice, video and data bundles by Bells/ILECs and cable, with voice revenues diminishing in importance as part of that bundle. “Skype will also face increasing competition from other community-based voice services, such as those offered by Yahoo, Microsoft, Google and AOL, all of which as building on significant assets of their own,” said Legg Mason analysts.

The NetChoice Coalition, which includes eBay, lauded the acquisition, but urged govt. not to treat the expansion of a software-based VoIP provider the same as managed VoIP providers such as Vonage. “While it is clear that many policy areas must be addressed for VoIP, government should allow the technology to continue its evolution into new business models that benefit e- consumers,” said Exec. Dir. Steve DelBianco.

Tech bloggers were split on the arrangement’s wisdom and merit. PaidContent.org said Skype “clearly priced itself out of rational reach for most companies, seeing more potential in an e-commerce component than as a complement to other services offered by media and search companies.” Wired founder John Battelle said the deal was natural. EBay is among the top paid search advertisers because it is “a mature business which has reached the stage of paying well for acquiring customers,” he wrote on his blog: “Skype has tens of millions of potential customers, AND a way for folks who are buying and selling to talk to each other for free.” Gadget review site Gizmodo.com joked the acquisition will let “millions of weird ashtray collectors… call each other immediately when they see a rare, near mint Snoopy acrylic for sale in Illinois” and “stalk each other, thereby turning eBay into the world’s largest flea market/speed dating site.”