Editor's Corner: Defending EBay?

eBay's recent acquisition of Skype for $2.6 to $4.1 billion (depending on Skype's financial performance) left a lot of us scratching our heads. Since the announcement nearly every analyst, pundit, and blogger has stepped forward with a wide range of opinions on the deal. Here's an attempt to answer some common questions about the acquisition.

Why didn't eBay build its own solution or buy a cheaper solution?

According to Bob Cringely, building a VoIP solution would likely have taken the same two years it took Skype to develop their product. And any homegrown solution or acquired technology would have the unenviable challenge of going up against Skype's claimed 52 million users. Fortune's David Kirkpatrick suggests another reason: Skype was already on the block and eBay didn't want any competitors to take it. He likens the Skype acquisition to eBay's 25 percent stake in Craigslist--a move that most analysts agree was designed to keep competitors like Google and Yahoo away from the popular online classified site.

What is eBay going to do with Skype?

eBay will likely use Skype to connect would-be buyers to eBay's 430,000 "professional" sellers and, no doubt, many amateur sellers as well. Some analysts believe this click-to-talk technology is likely to be a very lucrative market and eBay now has the potential to be a major player in it. eBay claims that VoIP will also help it expand into markets where trust and communication are an issue. For example, countries like India and China have a tradition of haggling of goods and services.

It's not all about auctions, either. eBay will likely offer pay-per-call classified ads and other VoIP-based lead generation services for many types of businesses. Some analysts believe entirely new markets will form around the technology, perhaps eBay-based consulting companies that operate on a per-minute or per-call basis. Blogger Manu Sharma also points out two other material benefits for eBay: tens of millions of new users, and millions of new PayPal transactions (for SkypeOut and SkypeIn).

And, of course, eBay insists that Skype will be a profitable stand-alone business, though that hardly justifies the price tag by itself.


I still can't get past the fact that eBay paid at least $2.6 billion for a company that made only $7 million last year and only expects to make $60 million next year. At 52 million downloads of the Skype software, that works out to about $50 per download. Couldn't eBay have bought a cheaper solution and then just thrown in $20 of free calls to every new user? According to Om Malik, eBay is paying roughly $20 million per Skype employee--ten times what Cisco was paying for startups at the height of the bubble. -Eli